MARKET WRAPS

Stocks:

European stocks fell as investors fret about rising energy prices and events in China.

Stock indexes have been dragged lower in choppy trading in recent weeks. Investors are contending with an energy crunch that threatens to add to inflationary pressures just as signs emerge that global economic growth is slowing.

"The energy crisis shows no signs of abating, which means considerable cost pressures on companies and consumers facing the prospect of having less money," AJ Bell investment director Russ Mould said.

Frankfurt's DAX was 0.3% lower, underperforming other European indexes. Germany's ZEW survey of economic sentiment weakened for the fifth straight month Tuesday and hit its lowest level since the Covid-19 pandemic first rocked the country in March 2020.

Concerns about China's struggling real-estate sector continue. Two board members of embattled developer Fantasia resigned, days after the company failed to make a $206 million bond payment. Its troubles add to worries that China's property sector difficulties extend beyond Evergrande, whose failure to meet its debt payments raised concerns about a fresh drag on the world's second-biggest economy.

Shares on the move:

Shares in low-cost carrier EasyJet fell 1.8% in London, after the airline forecast a GBP1.2 billion loss this year.

EasyJet reported a pick-up in demand from business travel is encouraging and may point to companies cutting costs and telling staff to switch to cheaper airlines, Russ Mould of AJ Bell said.

Moreover, the airline has said that the recovery is underway, with losses narrowing and bookings strong enough to warrant increasing capacity for the rest of 2021.

Still, the airline needs to get back on the path to normality as there is only so long it can sustain hefty losses, Mould said.

"A GBP1.2 billion rights issue has given it some breathing room on the financial front, and it is encouraging to see the company generate positive operating cash in the three months to the end of September," he said.

Data in focus:

Germany's ZEW survey data add to the evidence that economic activity in the country slowed sharply at the start of 4Q, Pantheon Macroeconomics' senior Europe economist Melanie Debono said.

In the months ahead, both ZEW's current conditions and expectations indicators are expected to fall further as supply constraints continue to hit activity, particularly in manufacturing, she said.

"The continued fall in the surveys, and increasing risks from the rise in gas prices, suggest that the risks to our [Germany GDP growth] 4Q estimate are squarely to the downside," Debono said.

Strong U.K. jobs data released Tuesday increases the chances of a Bank of England rate rise, read what the analysts and asset managers say here.

U.S. Markets:

Stock futures wobbled, as rising energy prices exacerbated concerns about inflation, and lingering worries about China's property sector weighed on sentiment.

Investors are looking to the third-quarter earnings season, which begins this week, for clues on how companies are faring with price increases. Some of the U.S.'s biggest banks, including JPMorgan Chase and BlackRock, are set to kick off the reporting season Wednesday.

"The main topic will be inflation, there is some real concern about a winter of discontent," said Brian O'Reilly, head of market strategy for Mediolanum International Funds. "We could see some volatility if companies don't get their communications right on their cost pressures."

On Tuesday, investors are also awaiting the International Monetary Fund's world economic outlook report, which should offer insight into the faltering post-pandemic recovery. U.S. data on job openings and labor turnover are due at 10 a.m. ET.

Forex:

The dollar should stay supported after any dips lower as traders await the release of U.S. CPI inflation data and Fed minutes on Wednesday, ING said.

These will be the next input into market speculation on when and how quickly the Fed will tighten monetary policy.

"The issue of how central banks respond to current price pressures remain front and centre," ING said. USD/JPY, which last traded down 0.1% at 113.24, should stay supported above 112.80 and "looks on course to 115." The DXY dollar index should stay supported in a range between 94.00 and 94.50, it said.

The euro could weaken if most European Central Bank policymakers continue to show little concern about inflation risks, Commerzbank said.

The longer most ECB members play down inflation, the more likely this will "sow doubts" in the market that the ECB could move towards exiting its expansionary monetary policy sooner than anticipated, Commerzbank currency analyst Thu Lan Nguyen said.

"And then the currently high inflation is likely to put real pressure on the euro."

ECB chief economist Philip Lane on Monday said a one-off shift in wages in response to recent price spikes wouldn't be a sign of sustainably higher inflation.

The pound may continue to weaken even as the Bank of England moves closer to raising interest rates, MUFG Bank said.

"The negative supply shocks from Covid-19, Brexit and the energy price surge are set to have a clearer negative impact on the performance of the U.K. economy heading into year end," MUFG currency analyst Lee Hardman said.

Despite slowing economic growth, the BOE will likely lift rates to curb inflation, he said. In light of these risks, MUFG maintains its short GBP/USD position, he said.

Short positions bet on an asset price falling. MUFG has a target of 1.3200 and stop loss of 1.3950 for GBP/USD.

Bonds:

A sharp drop in U.S. job growth in September is unlikely to affect the Fed's taper plan, said BlackRock. The asset manager is strongly underweight on U.S. Treasuries, expecting a gradual rise in nominal bond yields even with the Fed poised to start tapering off asset purchases by the end of the year.

"We are tactically pro-risk, yet recognize the path for further gains in risk assets has narrowed after an extended run higher and that markets have become more susceptible to sentiment swings," it said.

German 10-year Bund yields remain close to 2021-highs of around -0.09% even as rising oil prices keep fanning inflation fears, analysts said.

ECB chief economist Philip Lane's speech, in which he reiterated what he sees as the transitory nature of inflation, "did not contain anything substantially new and failed to provide support to fixed income market," said UniCredit.

Commodities:

Oil prices rose with energy markets broadly calmer Tuesday.

European benchmark gas prices were up 1.2% at EUR86.22 per megawatt hour, with gas's climb having slowed to a crawl since Russian officials hinted at higher supply in November.

UBS's Giovanni Staunovo said he expects higher crude demand in the power sector, because of the continuing gas-supply crunch, and increased jet-fuel demand to drive oil demand over the next 12 months. That's why he has raised his Brent and WTI forecasts by $5 to, respectively, $80 a barrel and $77 a barrel over the coming year.

Aluminum prices rose to their highest level since 2008 as rallying energy prices add to the metal's input costs and threaten supply shutdowns.

Three-month aluminum on the LME was up 0.6% at $3,060 a metric ton, its highest level in 13 years.

The metal has already rallied this year as demand has rebounded and thanks to supply constraints in China. Now, surging prices of coal, gas, and oil are adding to the rally.

Energy accounts for 40% of the metals manufacturing costs, said Commerzbank, meaning higher prices are adding to aluminum smelters' bills. Higher energy prices also raised the prospect that some smelters could close or pull back on production "causing the global aluminum market to be even more poorly supplied," the bank said.

EMEA HEADLINES

German Economic Expectations Fall in October on Persisting Supply-Chain Woes

Economic expectations in Germany weakened in October for the fifth consecutive month to the lowest level since the Covid-19 pandemic first hit the country amid widespread supply-related strains, the ZEW economic research institute said Tuesday.

The measure of economic expectations decreased to 22.3 in October from 26.5 in September, below economists' forecast of 24.0 points taken from a survey by The Wall Street Journal.

UK Payrolled Employees Exceeds Prepandemic Levels

The number of people on company payrolls in the U.K. rose in September for the tenth straight month and now exceeds prepandemic levels.

The data offer a sign that employment held up after the closure of a government wage-subsidy program at the end of that month.

EasyJet Expects FY 2021 Headline Pretax Loss to Widen

EasyJet PLC said Tuesday that it expects to report a widened headline pretax loss for fiscal 2021, and that its headline loss for the fourth quarter fell by more than half on year.

The U.K. low-cost carrier said it expects headline pretax loss--which strips out exceptional and other one-off metrics--for the year ended Sept. 30 to be in the range of 1.14 billion pounds to 1.18 billion pounds ($1.55 billion to $1.60 billion), compared with consensus of GBP1.18 billion. The company reported a headline pretax loss of GBP835 million for fiscal 2020.

EU Draws Blockbuster Demand for Debut NGEU Green Bond

The European Union raised 12 billion euros ($13.87 billion) in its debut green bond under the NextGenerationEU program on Tuesday, with the more than 10-fold demand underpinning investors' strong appetite for green assets.

Demand for the new February 2037-dated green bond, the largest green bond issue to date, closed in excess of EUR135 billion, said one of the lead manager banks. The spread on the bond was set eight basis points below mid-swaps, said the same bank.

Lonza Provides New 2024 Targets; Anticipates "No Extraordinary" Capital Return

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10-12-21 0700ET