MARKET WRAPS
Stocks:
European stocks were modestly higher Monday, with oil and mining majors leading the advance on gains in commodities prices. Investor sentiment also received a boost from Asia's rally, with stocks there tracking Wall Street's firmer close on Friday.
Investors are largely focused on the Federal Reserve's annual economic policy symposium later this week, awaiting fresh cues on when policy makers may slow bond purchases. At the same time, rising concerns that elevated Covid-19 infection levels may slow the global economic recovery sent stocks lower last week. Dallas Fed President Rob Kaplan said Friday he may rethink his call to begin tapering asset purchases soon if the Delta variant weighs on growth.
"If there is any sign that the U.S. economy is slowing, the Fed won't taper," said Michael Hewson, chief market analyst at CMC Markets. "There is a long way between laying out a pathway to tapering and actually doing it."
Shares on the move:
Shares of supermarket chain J Sainsbury jumped 12% on reports it will be next in line for a private-equity bid after Morrison Supermarkets. American buyout giant Apollo is said to be considering a bid for the U.K.'s second-largest supermarket chain, according to the Sunday Times, a report that neither the supermarket chain nor Apollo commented upon.
Tesco also traded higher, last up more than 2%. Shore Capital said the U.K.'s largest supermarket chain isn't too big to be become a takeover target. The Sunday Times report is yet another reminder of an industry-wide bid situation, Shore said.
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French biotech company Valneva said it has begun rolling submission for initial approval of its Covid-19 vaccine candidate in the U.K. Candidate VLA2001 is currently being studied in a Phase 3 trial in the U.K., with results expected in the year's last quarter, Valneva said.
In case of positive data, the vaccine could get approval from the U.K. by the end of the year. The U.K. government has ordered 100 million doses of the vaccine for delivery this year and next, as part of a supply agreement covering a total of up to 190 million doses to 2025, Valneva said.
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Vonovia said it has offered EUR53 a share for Deutsche Wohnen, valuing its German rival at EUR19 billion and confirmed it would be its final attempt to buy the company.
The real-estate company had already said earlier this month that it had agreed with its German rival to launch the new offer after failing in July to reach the minimum acceptance threshold of 50% from Deutsche Wohnen's shareholders when the offer price was at EUR52 a share.
Data in focus:
Eurozone business activity continued to grow in August at one of the strongest rates seen over the past two decades, the rate of expansion cooling only slightly despite widespread supply chain delays, said IHS Markit. The flash eurozone composite purchasing managers index fell from a 15-year high of 60.2 in July to 59.5 in August.
"Although the spread of the Delta variant caused widespread problems across the region, curbing demand and causing further supply issues, firms benefited from virus containment measures easing to the lowest since the pandemic began," said IHS Markit's chief business economist Chris Williamson. Furthermore, encouragement comes from a second month of strong job creation, which hit its highest levels for 21 years, he added.
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Similarly in Germany, business activity expanded strongly in August, with the rate of expansion easing only slightly. The German composite PMI fell to 60.6 from July's record of 62.4, but was still one of the highest readings in the series history stretching back to 1998.
"Although growth has slowed down since July, the data are still pointing to a stronger economic expansion in the third quarter than the provisional 1.5% increase in GDP seen in the three months to June," said IHS Markit associate director Phil Smith. This is despite signs of a further slowdown in manufacturing, with production levels held back by supply bottlenecks and record cost increases.
U.S. Markets:
U.S. stock futures edged up Monday, suggesting that the major indexes will kick off the week on the front foot as investors await data on the American manufacturing and services sectors.
Preliminary purchasing managers' surveys on manufacturing and services in the U.S. for August are due at 1345 GMT, while a gauge of existing home sales in the U.S. is due at 1400 GMT. Economists forecast a moderate pullback for July after prices hit a record in June.
"We'll probably see signs of [global] growth leveling off, this will be the overall picture," said Carsten Brzeski, global head of macro at ING. "There are two reasons for that: a bit more fear and uncertainty stemming from the Delta variant and supply chain frictions."
Forex:
The euro rose 0.3% to a five-day high of $1.1730 after German and eurozone provisional purchasing managers' data for August showed continued solid expansion in services and manufacturing activity. In earlier trade, the euro was around $1.1711.
The pound trimed earlier gains against the euro, with EUR/GBP last flat at 0.8591, after U.K. PMI data suggested the country's economic recovery was losing momentum. The composite PMI index, which comprises both services and manufacturing activity, dropped to a six-month low of 55.3, according to IHS Markit, below the 59 reading projected by a WSJ poll of economists.
Although the reading is still above 50 and points to expansion, "there are clear signs of the recovery losing momentum in the third quarter," said IHS Markit's Chris Williamson. ING currency analysts said EUR/GBP is likely to stay supported above 0.8565.
The dollar and the yen weakened slightly against most G-10 currencies as risk-on sentiment was spurred by gains in European equity markets and last Friday's comments from the Fed's Rob Kaplan. Those remarks indicated a less-hawkish tone compared with his stance at the start of the month, said IG. This could offer some reassurance for market players on accommodative monetary support to remain for longer if Covid-19's Delta variant persists and hurts economic progress.
Commonwealth Bank of Australia said Jay Powell's speech at Jackson Hole is the key event this week. Powell will be bolstered by the recent strong labor market data and as a result, he may provide more clarity around when the FOMC will announce a taper which can support the dollar. CBA's base case is that the FOMC will announce a taper in September if the August non--farm payrolls are strong.
Goldman Sachs said that "relatively hawkish Fed pricing has played a role" in supporting the dollar, but "a bigger factor has been the downgrade in global growth expectations." It added that both drivers "likely need to turn for the broad dollar to move lower on a sustained basis."
Commerzbank currency analyst Esther Reichelt said the dollar has performed better than the two other main safe-haven currencies, the Japanese yen and the Swiss franc, amid concern about the increase in cases of the delta variant of the coronavirus and about growth prospects.
The dollar has additional support from optimism about prospects of the Fed's tapering, while the yen is hampered as rising Covid-19 infections look "more and more out of control." Meanwhile, given the Swiss franc's significant rise since March, the Swiss National Bank may be trying to dampen further appreciation via intervention, Reichelt said.
Bonds:
Rangebound, directionless trade in Eurozone government bonds is "quite remarkable" with 10-year Treasury yields being in a 15 basis-point range, said Danske Bank's chief strategist Piet Haines Christiansen.
Posing the question of what could break the lack of direction in fixed-income markets, he pointed to U.S. tapering discussion and U.S. data, leaving European drivers slightly more in the background. Upcoming PMI and inflation data will probably not break that, he added.
The generally bond-friendly sentiment in the eurozone doesn't appear to be in short-term danger, said LBBW's senior fixed-income analyst Elmar Voelker.
In a sign of that, the whole German government bond yield curve remains "completely trapped" in negative territory for now, he says. In addition, there is no threat of a significant negative impact from the supply side either this week, "given the persistent summer lull in the primary market for euro sovereigns."
Morgan Stanley has stuck to its long positions in 10-year Bunds versus Treasuries, a trade it believes would work out well even in case of selloffs. The strong negative net supply dynamics "should remain supportive of duration as we approach the end of the summer lull period, continuing to support our long in [10-year] Bunds vs UST," said strategists Lorenzo Testa and Alina Zaytseva.
Morgan Stanley expects the European Central Bank to maintain the current "significantly higher pace" of asset purchases under the Pandemic Emergency Purchase Programme at the September meeting and through December. "This should contrast sharply with the gradual Fed policy normalization, keeping the downward pressure on European real yields and weighing on EUR/USD."
Scope affirmed Italy's 'BBB+' credit rating and raised the outlook to 'stable' from 'negative' in a review on Friday. The improved outlook reflects determined European institutional support since the Covid-19 pandemic in the form of monetary measures from the European Central Bank, alongside EU fiscal support, the ratings firm said.
The revision of the outlook also reflects the current enhanced stability of the national government and momentum behind a credible structural reform under the administration of Prime Minister Mario Draghi, aimed at addressing the investment gap and countering critical structural economic bottlenecks, Scope said.
Commodities:
Oil futures were more than 2% higher in Europe, with the weaker dollar "offering some support to the broader commodities complex," said ING's Warren Patterson.
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08-23-21 0602ET
