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EMEA Morning Briefing:U.S. Rally, Steadying Powell to Buoy European Shares

06/22/2021 | 12:31am EDT

MARKET WRAPS

Watch For:

Eurozone Flash Consumer Confidence Indicator; U.K. Public Sector Finances, CBI Industrial Trends Survey; Italy Industrial Turnover/Orders; updates from Vivendi, ING, Coca-Cola HBC, DS Smith, Telenor

Opening Call:

Wall Street's rebound and calming words from Jerome Powell should ensure Europe opens higher on Tuesday. In Asia, stocks climbed, the dollar and Treasury yields were little changed, while commodities were mixed.

Equities:

European shares should extend gains on Tuesday, buoyed by Wall Street's rally and reassuring comments on the U.S. economy from Jerome Powell.

The Dow surged nearly 590 points on Monday, booking its best day since March, as stocks rebounded after their worst week since October. Investors focused on strengths in the U.S. economy heading into the summer months, as domestic Covid restrictions fade.

"There was a bit of a selloff last week, with concerns about potentially higher interest rates and a more aggressive Fed," said John Carey, director of equity income at Amundi U.S. "It seems that maybe was overdone."

Carey said "people remain optimistic about the economy" in the U.S. as more households emerge from lockdowns, despite lingering concerns about the global pace of vaccinations and as 30 U.S. states looked poised to fall short of the Biden administration's July 4 vaccination goals.

Meantime, Jerome Powell said Monday that job growth should pick up in coming months and temporary inflation pressures should ease as the economy continues to recover from the effects of the pandemic.

"The economy has shown sustained improvement," Mr. Powell said in testimony prepared for delivery Tuesday on Capitol Hill, noting progress on vaccinations and vast stimulus efforts by Congress and the Fed.

Mr. Powell is set to appear before the House Subcommittee on the Coronavirus Crisis to discuss the Fed's efforts to shore up the economy since the start of the pandemic. He also is likely to field questions on the Fed's monetary policies, which aim to support the economic recovery.

Forex:

The dollar was steady in Asia, buoyed by Jerome Powell's comments.

JPMorgan said the Fed's hawkish pivot is a bullish watershed for the dollar after an indecisive first-half.

"The Fed has removed the assurance of multi-year policy inaction that has been pivotal to the market's dollar-bearish conviction ever since the switch to average inflation targeting....The shift in the Fed's reaction function is most clearly bullish for the dollar vs. low-yielding reserve FX, whose monetary policy is firmly anchored by historically weak inflation."

Meantime, Goldman Sachs said the Fed's latest dot plot was a meaningful surprise. In a scenario where markets continue to move Fed pricing in a hawkish direction, the bank could envision five-year overnight index swap rates reaching 1% from 0.75% currently, and EUR/USD falling roughly another 2% if European rates remain about unchanged.

"That being said, we do not think this is the start of a sustained Dollar rally. Our own Fed forecasts remain dovish relative to market pricing," said Zach Pandl, adding that many other countries are seeing activity rebound from depressed levels, and other central banks will need to consider policy normalization over time. He still sees dollar depreciation over the medium-term.

Bonds:

Long-dated Treasury yields continued to stage solid post-Fed climbs in Asia, after a volatile New York session. Strategists didn't offer a clear reason why yields turned lower and then popped up on Monday, but some attributed it to bearish positioning, with investors forced to unwind bets that prices would head lower, pushing yields higher.

Inflation-themed "trades such as a bear-steepening of the curve and a weaker dollar depend on the Fed remaining dovish, with the implication that a hawkish Fed would move markets in reverse," wrote Alex Pelle and Steven Ricchiuto, U.S. economists at Mizuho.

"Our view is that Powell remains solidly on the dovish end of the FOMC, but he is a Chair trying to manage an increasingly factious committee as incoming inflation data surprises to the upside."

Oxford Economics said the Fed's massive footprint in the Treasury market is not likely to wane even when it starts paring back on asset buying at some point in the future. The firm noted that in the first quarter the Fed owned 24.7% of the outstanding Treasury market, a slight decline from 25.1% in the final three months of 2020. "That share is likely to remain near 25% until well after the Fed begins tapering purchases."

Oxford also said foreign investors are still a bigger player in the Treasury market relative to the Fed.

The yield on 10-year U.K. benchmark government bonds is likely to trade in a narrow range, barring a renewed selloff in Treasurys and fresh inflation concerns, said Althea Spinozzi, Saxo Bank's fixed income strategist.

"[10-year] gilt yields will continue to trade rangebound between 0.70% to 0.85%," she said. "If U.S. long-term yields resume to rise and inflationary pressures continue to grow, we can expect gilt yields to increase fast to 1%."

Energy:

Oil prices were mixed in Asia, after they rallied on Monday to their highest finish since 2018, thanks to a weaker dollar and improved risk appetite and as traders monitored developments in Iran.

CBA said crude is likely to remain resilient as additional Iranian supply may take longer to materialize, after a sixth round of talks to revive a nuclear deal with Iran ended without an agreement.

Oil's relentless rise has continued with "positive news in all directions," said Manish Raj, chief financial officer at Velandera Energy.

"Continued economic recovery after the pandemic and robust demand growth have resulted in a tight physical market," he told MarketWatch. The recent Iranian election results, meanwhile, "indicate that a nuclear deal with Iran, and hence Iranian supply growth, remain elusive."

Metals:

Gold futures were higher, extending Monday's modest gains, with investors likely to focus on Jerome Powell's testimony, said OCBC. It expects gold to trade within a broad range of $1,750-$1,850 for now.

Base metals were little changed, regaining a more stable footing after last week's selloff. Recently, the three-month LME copper contract was flat at $9,182.00 a ton, while aluminum was 0.2% higher at $2,408.50 a ton.

A weaker greenback on Monday helped support the belief that a global economic recovery won't be derailed even if monetary policy is tightened, improving investor appetite for risky assets such as base metals, said ANZ. Demand for copper appears strong, it added, citing a 4.5% fall in inventories of the red metal held in LME warehouses, the biggest drawdown since January.

TODAY'S TOP HEADLINES

Economy Is Showing Sustained Progress, Powell Says

WASHINGTON-Federal Reserve Chairman Jerome Powell said Monday that job growth should pick up in coming months and temporary inflation pressures should ease as the economy continues to recover from the effects of the pandemic.

"The economy has shown sustained improvement," Mr. Powell said in testimony prepared for delivery Tuesday on Capitol Hill, noting progress on vaccinations and vast stimulus efforts by Congress and the Fed.

Fed's Williams Not Ready to Pare Aid, but Other Officials Talk Tapering

Federal Reserve Bank of New York leader John Williams said he isn't ready for the U.S. central bank to dial back the support it is giving the economy amid uncertainty about the recovery from the pandemic.

"It's clear that the economy is improving at a rapid rate, and the medium-term outlook is very good," Mr. Williams said in a virtual appearance Monday. "But the data and conditions have not progressed enough for the [Federal Open Market Committee] to shift its monetary policy stance of strong support for the economic recovery," he said.

Bitcoin Price Extends Drop After China Intensifies Crypto Crackdown

The price of bitcoin and other cryptocurrencies slid Monday after China's central bank ordered the country's largest banks and payment processors to take a more active role in curbing cryptocurrency trading and related activities.

The People's Bank of China on Monday said it summoned representatives of multiple institutions-including state-owned commercial banks and Ant Group Co.'s Alipay-and told them to "strictly implement" recent notices and guidelines from authorities on curbing risks tied to bitcoin and cryptocurrency fundraising activities. It was the latest sign that Beijing is intensifying its crackdown on unregulated virtual currencies.

Long-Dated Treasurys Win Favor on Receding Inflation Bets

Investors have rushed into longer-dated Treasurys in a bet that the Federal Reserve will act more quickly against inflation, leading to slower growth and lower interest rates in the longer term.

Yields on shorter-dated bonds have risen and their prices fallen in recent days, reflecting higher rate expectations after the Fed's policy meeting last week. Meanwhile, longer-dated yields dropped because higher interest rates in the near term would likely mean slower growth and lower interest rates further into the future. These shifts, which reversed course slightly during Monday's trading, produce what is known as the flattening of the yield curve.

Chinese Port Logjam Threatens Christmas Shipping Rush

The latest obstacle hitting global shipping is likely to jolt trade flows for several more weeks and could delay shipments heading into the year-end holiday shopping season.

Shipping executives say around 50 container ships remain backed up around the Yantian port in Southern China and that some 350,000 loaded containers are stacked up on docks as the major gateway for China goods heading to Western nations struggles to recover from a Covid-19 outbreak that disrupted operations there.

Write to paul.larkins@dowjones.com

Expected Major Events for Tuesday

04:30/NED: Jun Consumer confidence survey

04:30/NED: Apr Consumer Spending

(MORE TO FOLLOW) Dow Jones Newswires

06-22-21 0030ET

Stocks mentioned in the article
ChangeLast1st jan.
ABU DHABI NATIONAL OIL COMPANY FOR DISTRIBUTION PJSC 0.69% 4.36 End-of-day quote.16.27%
ALTHEA GROUP HOLDINGS LIMITED 1.59% 0.32 End-of-day quote.-26.44%
AUSTRALIAN DOLLAR / US DOLLAR (AUD/USD) -0.04% 0.734 Delayed Quote.-3.87%
BANK OF CHINA LIMITED 0.00% 2.7 End-of-day quote.1.89%
BITCOIN - EURO 0.04% 35278 Real-time Quote.49.62%
BITCOIN - UNITED STATES DOLLAR 0.23% 41924.76 Real-time Quote.45.13%
BRITISH POUND / US DOLLAR (GBP/USD) 0.06% 1.3906 Delayed Quote.2.12%
CANADIAN DOLLAR / US DOLLAR (CAD/USD) 0.00% 0.8017 Delayed Quote.2.23%
DJ INDUSTRIAL -0.42% 34935.47 Delayed Quote.14.63%
DS SMITH PLC -0.75% 423 Delayed Quote.12.92%
EURO / US DOLLAR (EUR/USD) -0.01% 1.1867 Delayed Quote.-2.65%
GOLD -0.88% 1814.15 Delayed Quote.-3.57%
INDIAN RUPEE / US DOLLAR (INR/USD) 0.00% 0.013452 Delayed Quote.-1.63%
JPMORGAN CHASE & CO. -0.80% 151.78 Delayed Quote.19.45%
LONDON BRENT OIL -0.82% 75.16 Delayed Quote.46.69%
NEW ZEALAND DOLLAR / US DOLLAR (NZD/USD) -0.49% 0.6974 Delayed Quote.-2.36%
S&P GSCI ALUMINUM INDEX -1.18% 164.9923 Delayed Quote.31.39%
TELENOR ASA -0.55% 153.4 Real-time Quote.5.14%
THE GOLDMAN SACHS GROUP, INC. -0.71% 374.88 Delayed Quote.42.16%
VIVENDI SE 0.00% 28.5 Real-time Quote.8.04%
WASHINGTON FEDERAL, INC. -0.68% 32.27 Delayed Quote.26.22%
WTI 0.53% 73.659 Delayed Quote.52.09%
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