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EMEA Morning Briefing : Wall Street Rebound to Boost European Shares; U.S. Jobs Data in Focus

12/03/2021 | 12:36am EST

MARKET WRAPS

Watch For:

Eurozone Germany, France, U.K., Italy Services PMI; Eurozone Retail Sales; Italy Economic Outlook, Industrial Production; U.K. Official Reserves; U.S. Employment Report; updates from Allianz, Phoenix Group, Finnair

Opening Call:

A rally on Wall Street should help European stocks recover some of Thursday's deep losses. In Asia, most stocks, the dollar, oil and gold all advanced, while Treasury yields dipped.

Equities:

European shares should rebound on Friday after U.S. stocks finished higher, with the Dow posting its largest one-day point gain since early November.

U.S equities rose across the board, with the S&P 500 and Dow more than recouping Wednesday's losses, as a tumultuous week for markets continued, driven by uncertainty about the potential impact of Omicron on public health and the economy.

"You have a demand disruption story on one hand-Omicron-and a monetary tightening issue with the Fed, so people are trying to figure out which way is up," said Austin Graff, co-chief investment officer and portfolio manager of the TrueShares Low Volatility Equity Income ETF, who is bullish on energy and financials companies.

Asian benchmarks were mostly higher on Friday, mirroring Wall Street's broad rally.

Stocks to Watch: Rio Tinto should get rising benefits from its relatively green aluminum footprint, according to Citi. Markets are starting to pay attention to the carbon cost of producing aluminum, which Rio Tinto has slashed by mostly using hydropower, Citi added.

Hydro-powered Canadian smelters account for one third of Rio Tinto's aluminum production, emitting less than 4 tons of carbon dioxide per ton of aluminum versus an industry average of 11.5 tons of CO2.

"We believe Rio has a competitive advantage with a high proportion of hydro-powered, low-carbon ali smelters versus largely coal-fired peers," Citi said. That's good for Rio Tinto because aluminum is its second biggest moneyspinner, after iron ore.

Forex:

The dollar remained firm against other major currencies ahead of the November U.S. jobs data. Any clear signs of strength in the labor market may raise expectations for the Fed's potential rate increases and boost the greenback further.

"Markets are really trying to get a better handle on how Omicron and the Fed will impact the dollar," said Oanda senior market analyst Edward Moya. He said leveraged funds continue to buy the dollar, with the Fed possibly delivering three rate hikes next year.

Problems in Europe make the dollar more attractive, and investors await an inflation report Dec. 10 that could pave the way for "faster tapering of asset purchases by the Fed."

"This is going to be a fascinating end of the year, you have a lot of investors that are getting nervous and taking profits. If there's a risk-off tone you could see a rise in the dollar."

The outcome of research into the threat posed by Omicron will be key in determining the Norwegian krone's outlook, said Commerzbank. If the new Covid-19 variant doesn't entail any higher risk than previous ones, the Norges Bank is likely to stick to its plan to raise interest rates at the Dec. 16 meeting, which would be positive for the krone, said Commerzbank senior currency analyst Antje Praefcke.

"Otherwise, it might postpone the rate hike, lowering the rate path, which would weigh on NOK." In the meantime, elevated uncertainty means the krone will struggle to make significant gains, she said.

Bonds:

Treasury yields eased back slightly early Friday. Most Treasury yields advanced Thursday, with the two-year yield posting its biggest one-day gain since Nov. 22, as investors assessed the U.S.'s second confirmed case of Omicron and the likely impact on the economy.

However, long-end rates failed to keep up with the rise in shorter-end yields, causing the spread between 2- and 10-year rates to shrink below 83 basis points, the narrowest since Jan. 4. Meanwhile, the gap between 5- and 30-year yields tightened to a level not seen since March 9, 2020.

"Higher daily volatility has scrambled technical signals for benchmark interest rates," Jim Vogel, executive vice president at FHN Financial, wrote in a note. "The effective range for 10s heading into payrolls is 1.40-1.55%; the potential for moves in that band is 5bp in any given hour." Meanwhile, "the range for the 5-yr is also 15bp, from 1.13%-1.28%."

Energy:

Oil extended gains in Asia after OPEC+ agreed to rollover existing policy to boost output in January.

Goldman Sachs views the outcome as consistent with OPEC's past decisions to ramp up oil supply in an uncertain demand environment and thinks traders should see current prices as an opportunity to position themselves for a structural bull market. However, it said more information on the virulence of Omicron will be needed for oil prices to start recovering.

"I expected a pause because of the uncertainty and their decision in the past to err on the side of caution," said UBS's Giovanni Staunovo, "but like everyone else, they don't know the impact of Omicron and it might be prudent not to alter the course." But, he cited OPEC's statement of being ready to change course pending pandemic developments.

Metals:

Gold managed to claw back some losses in Asian trade, but prices may remain rangebound as there is almost no sign that investors are flocking to it as a shelter from virus volatility, said Jeffrey Halley, a senior market analyst with Oanda.

Gold settled at a more than 7-week low on Thursday and while most traders and investors believe Omicron "won't cause catastrophic damage to the global economy, they prefer stocks over safe havens," said Chintan Karnani, director of research at Insignia Consultants. "Technical traders are also not buying as short term technicals are bearish."

Copper prices were slightly lower, extending this week's range-bound training pattern. The commodity's weakness Friday follows more confirmed infections of the new Covid-19 strain in the U.S., said Huatai Securities.

It reckons that current macroeconomic conditions, with inflation concerns rising and high uncertainty over Omicron's potential impact, would likely not help copper prices in the near term.

TODAY'S TOP HEADLINES

China Service Sector Growth Curbed by Covid Outbreaks in November, PMI Data Show

A private gauge of China's service sector fell in November, moving in line with the official index as the latest wave of coronavirus outbreaks hurt demand and disrupted operations at service companies.

The Caixin China Services purchasing managers index dropped to 52.1 in November from 53.8 in October, Caixin Media Co. and research firm IHS Markit said Friday. The reading remained above the 50-mark separating expansion from contraction.

Fed's Bostic Wants to Accelerate Pace of Bond Buying Taper

Federal Reserve Bank of Atlanta President Raphael Bostic said Thursday he would like to get the Federal Reserve in position to raise its short-term interest rate target next year if inflation pressures don't retreat from currently high levels.

To get there, the Fed should accelerate the pace of its drawdown, or tapering, of its monthly purchases of Treasury and mortgage bonds, he said.

Senate Approves Spending Bill Averting Government Shutdown

WASHINGTON-Congress passed a short-term extension of government funding and sent the legislation to President Biden's desk, averting a partial shutdown after resolving a standoff over vaccine rules.

Top Republicans and Democrats reached an agreement on the spending plan Thursday morning to extend funding through Feb. 18, then quickly maneuvered the legislation through both the House and Senate before the expiration of current funding at 12:01 a.m. Saturday. The legislation also includes $7 billion for assisting evacuees from Afghanistan.

Elon Musk's Tesla Share-Selling Spree Tops $10 Billion

Elon Musk has now unloaded more than $10 billion in Tesla Inc. stock as the billionaire's share-selling spree involving his holdings in the electric-vehicle maker stretched into a second month.

Mr. Musk on Thursday sold more than 934,000 Tesla shares valued at just over $1 billion, according to regulatory filings. The sales came as Mr. Musk exercised more than 2.1 million vested Tesla stock options.

Chinese Developer Kaisa Fails to Agree on Bond Swap

Chinese property developer Kaisa Group Holdings Ltd. failed to persuade bondholders to agree to a $400 million debt swap and warned it might not be able to repay creditors when the bonds it was trying to exchange mature next week.

Shenzhen-based Kaisa is one of the Chinese property sector's biggest offshore borrowers, after China Evergrande Group, with about $10.9 billion of dollar bonds outstanding as of the end of June. In 2015, it became one of the first Chinese developers to default abroad.

Write to paul.larkins@dowjones.com

Expected Major Events for Friday

00:01/UK: Nov BRC-Sensormatic IQ Footfall Monitor

01:01/IRL: Nov Ireland Services PMI

07:00/TUR: Nov PPI

07:00/TUR: Nov CPI

07:00/ROM: Oct Retail trade

07:45/FRA: Oct Industrial production index

08:00/HUN: Oct Retail Sales

08:00/SVK: Oct Internal trade, incl Wholesale & Retail

08:00/SVK: 3Q GDP

08:00/SVK: 3Q Average monthly wage of employees

08:00/SVK: 3Q Labour Force Sample Survey: Employment & unemployment

08:15/SPN: Nov Spain Services PMI

08:45/ITA: Nov Italy Services PMI

08:50/FRA: Nov France Services PMI

08:55/GER: Nov Germany Services PMI

09:00/EU: Nov Eurozone Services PMI

09:30/UK: Nov CIPS / Markit Services PMI

09:30/UK: Nov UK Official Reserves

09:30/UK: 3Q Bank of England external business stats

10:00/CYP: Nov Registered Unemployed

10:00/EU: Oct Retail trade

11:00/IRL: Nov Irish Live Register latest monthly figures

11:00/IRL: 3Q GDP

11:00/IRL: 3Q Balance of Payments

All times in GMT. Powered by Kantar Media and Dow Jones.

Write to us at newsletters@dowjones.com

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12-03-21 0035ET

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