MARKET WRAPS
Watch For:
Eurozone, Germany, France, U.K., Italy Manufacturing PMI; Eurozone, Italy Unemployment; Germany Retail Trade; OPEC Meeting; Sweden Interest Rate Decision; Christine Lagarde appears at Committee on Economic and Monetary Affairs; updates from Air France-KLM, Sodexo, Ubisoft Entertainment, Volkswagen, Porsche, H&M, Micro Focus, JD Sports Fashion, Aveva, Associated British Foods, Meggitt, Ryanair, 3i
Opening Call:
European shares should open higher, recovering some of Wednesday's losses, although worries over the Delta Covid strain remain. In Asia, stocks struggled for traction, the dollar extended its advance - along with oil and gold - while Treasury yields were unchanged.
Equities:
European stocks could stage a quick rebound on Thursday, as investors look ahead with some optimism to the U.S. jobs report, although Covid-19 worries remain.
U.S. stock indexes closed mostly higher Wednesday, with the Dow gaining more than 200 points and the S&P 500 sweeping to a record close.
Robert Pavlik, senior portfolio manager at Dakota Wealth Management, thinks growth stocks looked poised for further gains as 10-year Treasury yields slip further below 1.5%, and as investors potentially rethink where the U.S. might be sitting in terms of its economic expansion.
"At least in my mind, the economy may be a little bit further along in the economic cycle than a lot of people think," Pavlik told MarketWatch. "I see it as mid- or past-mid-cycle. If that's the case the Fed won't have the ability to make all of those rate hikes people are thinking may be coming."
Late Tuesday, Federal Reserve Gov. Christopher Waller told Bloomberg TV that the "unemployment rate would have to drop fairly substantially, or inflation would have to really continue at a very high rate, before we would take seriously a rate hike in 2022," but added that he is not ruling out such a move, noting that it is appropriate to think about scaling back the Fed's monthly purchases of $120 billion in assets, starting with a reduction of $40 billion in mortgage-backed securities.
Stocks to Watch: One of Credit Suisse's biggest and longest-term shareholders, the Qatar Investment Authority, trimmed its stake in the bank, a blow to the beleaguered Swiss lender. QIA cut its stake to 4.8% from 5.2% on Wednesday, according to its filings with the SEC. Credit Suisse is under pressure to revamp following twin scandals from the failures of Archegos Capital Management and Greensill Capital. QIA didn't immediately respond to a request for comment. A Credit Suisse spokesman declined to comment.
Forex:
The dollar kept its strength against other major currencies, with the ICE Dollar Index climbing to 92.42. Expectations are high ahead of Friday's nonfarm payrolls report and investors are preparing by parking liquidity in the dollar, said Cambridge Global Payments' Karl Schamotta.
"Following the Federal Reserve's hawkish mid-month pivot, the balance of risks surrounding Friday's report has turned asymmetric. A softer-than-forecast print will likely be pinned on labor supply shortages, leaving market expectations largely intact--while a number above the million-jobs mark could highlight underlying economic momentum and lift U.S. yields across the curve."
The yen also strengthened in Asia against most G-10 currencies on risk factors such as the Delta strain and Friday's U.S. nonfarm payrolls.
IG said while there is optimism on the vaccine front to curb the Delta variant, Asia's vaccination progress will need a substantial pickup to deal with the spread of the virus. Otherwise, Covid-19 restrictions will remain the go-to option, delaying the pace of economic recovery.
IG said USD/JPY may test 111.30 if the ISM report on U.S. manufacturing sector due later Thursday shows the sector's strength. USD/JPY briefly rose to 111.17 earlier, the highest level since March 2020.
Commerzbank said any gains in the euro versus the dollar will likely be caused by a weaker dollar over the medium term as the European Central Bank is a long way from raising interest rates.
The euro will only appreciate significantly once interest-rate hikes appear more probable, as was the case--albeit temporarily--in 2017, said Commerzbank currency analyst Thu Lan Nguyen. "In our view this episode is unlikely to be repeated for the foreseeable future though as the market will see through the rise in inflation in the end--presumably even more quickly than will be the case in the U.S."
Danske Bank said the Norwegian krone won't necessarily weaken even if OPEC+ decide to further ease crude production curbs at Thursday's meeting, causing oil prices to fall.
"At the moment, the correlation between FX and spot oil appears very low and this is likely so, as other drivers are at the forefront," said Danske Bank analyst Kristoffer Kjaer Lomholt. "NOK is a good case in point here as spot oil have gone higher, Norges Bank rate hike expectations have increased, but EUR/NOK has moved higher too."
Bonds:
U.S. government bond yields were mostly unchanged, after they fell across the board on Wednesday despite a report on private-sector employment showing the labor market slowly recovering from the coronavirus pandemic.
However, the conclusion of the session saw short-dated 2-year notes register their steepest quarterly yield gain since 2018, while long-dated bonds experienced their biggest quarterly yield drop since the period ended March of 2020.
Some analysts are attributing lower Treasury yields on bets the U.S. economy won't see a sustained period of inflation above the Fed's 2% annual target, even as evidence has suggested that pricing pressures are percolating in the economic recovery from the Covid-19 pandemic.
Emerging market debt is likely to continue to be a compelling source of returns in the second half of this year, said PineBridge Investments.
"We are...constructive on emerging market [EM] debt, with the staggered global recovery and peak global stimulus boding well for emerging markets," said PineBridge's Steven Oh. Corporate fundamentals remain positive, with first-quarter earnings beating estimates for more than half of MSCI Emerging Market index companies that have reported to date, he said.
China Huarong Asset Management's sharp rating downgrade after missing a deadline to produce financial results coupled with political noise in Latin America have all failed to dent demand, with higher new bond issuance being absorbed and most spread-widening being short-lived, he added.
Energy:
Oil edged higher still in Asia after prices gained on Wednesday, but closed off session highs.
Traders seem unwilling to challenge the recent upper bound of oil's recent trading range, as unwelcome surprises on both demand and supply sides could prevent the global market from tightening as expected, said TD Securities.
The OPEC+ decision remains the main event of the week. A meeting of the body's Joint Ministerial Monitoring Committee, or JMMC, was postponed by a day to Thursday, news reports said, in a move that means three meetings - OPEC ministers, the JMMC and then OPEC+ ministers - will take place on Thursday.
The JMMC delay was aimed at giving parties more time to reach a compromise, with Russia considering a proposal to hike production, while Saudi Arabia would prefer a more gradual approach, Bloomberg reported. Analysts have largely penciled in a decision that would allow output to rise by around another 500,000 barrels a day beginning in August.
"We would not overinterpret this as dissent," said Eugen Weinberg, commodity analyst at Commerzbank, in a note. "It is rather the case that OPEC+ currently has the luxury of being able to control events on the oil market in the medium term, partly because the reaction of countries outside the producers' alliance has been fairly disappointing," he said.
Metals:
Gold has added to Wednesday's gains but still faces a downside risk on the charts, according to analysts.
From a technical analysis perspective, gold prices are continuing to consolidate after breaking below trendline support of a so-called "bearish pennant," which opened the door for further downside potential, said DailyFX.com.
It has pegged immediate support at $1,750/oz and said the moving average convergence divergence indicator has formed a bearish crossover and trended lower, suggesting bearish momentum is dominating.
Copper prices rose on sentiment boosted by strong economic data out of China and the U.S., said analysts. However, investors remain concerned over the inflationary impact on manufacturers and consumers, and the risk that policy makers will have to raise rates to control inflation, said ANZ. Recently, the three-month LME copper contract was up 0.4% at $9,411.00 a metric ton.
Iron ore also gained, recovering some of Wednesday losses. However, Huatai Securities said the metal will likely come under pressure over the rest of the year, as China has recently started to roll out a new wave of production restrictions for steel mills, which use iron ore as a raw material.
TODAY'S TOP HEADLINES
Fed's Kaplan Says Time to Start Paring Bond Buying Aid Soon
Federal Reserve Bank of Dallas leader Robert Kaplan reiterated Wednesday his view that it will soon be time for the U.S. central bank to slow the pace of its $120 billion a month in bond buying stimulus, a process he expects to go smoothly.
"I think it would be far healthier to start soon, and sooner rather than later" on slowing the asset purchases, Mr. Kaplan said on Bloomberg's television channel.
China Manufacturing Activity Slows to Three-Month Low, Caixin PMI Shows
A private gauge of China's manufacturing activity fell to a three-month low in June, as a recent uptick in Covid-19 cases and supply-chain logjams weighed on output and dampened demand.
The Caixin China purchasing managers index dropped to 51.3 in June compared with 52.0 in May, Caixin Media Co. and researcher Markit said Thursday.
Japan Manufacturing Sentiment Rose to Highest Level in 2.5 Years in 2nd Quarter
(MORE TO FOLLOW) Dow Jones Newswires
07-01-21 0024ET
