MARKET WRAPS
Watch For:
U.S. NAHB Housing Index for July; International Business Machines Corp. 2Q earning.
Opening Call:
Stock futures, oil prices and government bond yields slid, amid concerns that the spread of the delta coronavirus variant and rising inflation would hold back the global economy.
Surging cases of the coronavirus in many parts of the world, including highly-vaccinated countries such as the U.K., have prompted investors to dial down their expectations of economic growth in the coming months. Some also are concerned that a burst of inflation will pinch consumption and prompt central banks to withdraw stimulus.
"What you're seeing is a sense that the consumer is starting to be affected quite significantly" by the jump in prices, said Sebastien Galy, senior macro strategist at Nordea Asset Management.
Business reopenings, rising vaccination rates and government pandemic aid have helped propel rapid gains in consumer spending -- the economy's main driver. But surveys show that inflation, which accelerated to a 13-year high in the U.S. in June, is starting to knock consumers' confidence in their ability to keep spending, Mr Galy said.
Worries about the economic effects of the virus were evident in a broad retreat in global markets. The regional Stoxx Europe 600 slid, led lower by shares of economically sensitive travel, leisure and commodities companies.
Airline stocks were among the worst performers. British Airways owner International Consolidated Airlines Group and easyJet both dropped around 5% in London after the U.K. said quarantine rules would remain in place for travelers returning from France.
Among other stocks, Paris-listed Vivendi fell 0.8%. Pershing Square Tontine, a blank-check company led by hedge-fund manager Bill Ackman, said it had dropped plans to purchase a 10% stake in Universal Music Group. Mr. Ackman's Pershing Square said it would take a large stake in Universal, which is majority owned by Vivendi, instead.
Italian luxury fashion house Ermenegildo Zegna will go public on the New York Stock Exchange later this year as part of a tie-up agreement with special-purpose acquisition corporation Investindustrial Acquisition. Shares of the SPAC, whose chairman is former UBS CEO Sergio Ermotti, added 2% before the bell in New York.
In Asia, technology giants Alibaba and Tencent weighed on Hong Kong's Hang Seng Index, which had lost 1.8% by the close of trading. The losses came after the Biden administration on Friday warned American companies about the increasing risks of operating in the financial hub.
Japan's Nikkei 225 dropped. More athletes and staff members attending the Tokyo Olympics have tested positive, while cases are surging in Indonesia. Sydney, Australia's most populous city, is under lockdown because of a delta outbreak.
David Chao, a market strategist at Invesco, said the spread of the delta variant across Asia, coupled with low vaccination rates and expectations of additional social-distancing measures, has "taken wind out of the sail for many investors expecting an economic rebound" in the region.
Mr. Chao said he expected investors to continue to pull funds out of Asian stocks and shift them to shares in developed markets with high inoculation rates, such as the U.S. and U.K.
Stocks to Watch:
Ingersoll Rand has made takeover bids for component maker SPX Flow Inc. that have so far been rebuffed, according to people familiar with the matter.
The industrial-machinery company's most recent all-cash offer valued SPX Flow in the low-$80s a share, the people said, or around $3.5 billion. SPX shares closed Friday at $62.09, giving the company a market value of about $2.6 billion.
Charlotte, N.C.-based SPX primarily makes components for machinery used by food-and-beverage and industrial companies. Ingersoll Rand, one of the world's largest manufacturers of industrial pumps and compressors, has a market value of about $20 billion.
Forex:
The dollar rose broadly, taking the DXY dollar index to a 15-week high of 92.9360, as the safe-haven currency benefits from concerns about the global growth outlook due to rapidly rising Covid-19 cases, said MUFG.
These have prompted market participants to cut short U.S. dollar positions for the fifth consecutive week in the week to July 13, said currency analyst Lee Hardman. Short dollar positions have been cut back sharply in recent weeks, which have helped strengthen the dollar, he said.
Pimco maintains an underweight position on the dollar in their portfolios, saying that the U.S. currency looks expensive, or "rich," versus most developed and emerging market currencies. Pimco is neutral on the euro and Japanese yen, and sees value in many emerging market currencies, it said.
"Many emerging market currencies look particularly attractive from a valuation perspective, but ongoing Covid-related challenges in these economies warrant caution," Pimco said.
The DXY dollar index, which measures the dollar's value against a basket of currencies, rises to a 15-week high of 92.9360 on Monday.
Having dropped to a 15-week low of 1.1766, EUR/USD risks falling down towards the 2021 low at 1.1704 and perhaps even towards 1.1600, said Saxo Bank's chief investment officer Steen Jakobsen. The dollar tends to do better when general risk sentiment is weak, he said.
Thursday's European Central Bank meeting is also expected to result in policymakers "extending dovish guidance," albeit with widening dissent on the course of action from here, he said.
Bonds:
In a sign that investors were sheltering in the safety of government bonds and other safe-haven assets, the yield on 10-year Treasury notes fell to 1.261% Monday, from 1.30% Friday.
Developed-market yields might look low but the risk of a sharp selloff isn't high in the near term, Barclays said.
"Risk-reward suggests outright [eurozone government bond] yields can continue to grind lower," Barclays's strategists Cagdas Aksu, Emmanouil Karimalis and Max Kitson said.
Barclays considers the balance of risks for the European Central Bank's Thursday meeting to be on the dovish side. "We feel the risk is that the new forward guidance could potentially go beyond 'cosmetic' changes that emphasize just the new inflation target and may therefore surprise the market dovishly," they added.
The 10-year German Bund yield falls to four-month lows on Monday, continuing the downward trend seen in July but with a fresh impetus coming from a fall in 10-year U.S. Treasury yields below 1.30%, analysts said.
"As underpinned by the spread to USTs, which has traded fairly sideways in the last few months, the decline in Bund yields has been driven to large extent by global developments rather than idiosyncratic factors or ECB rhetoric," said UniCredit.
The European Central Bank's meeting on Thursday carries a certain degree of suspense, said LBBW's senior fixed income analyst Elmar Voelker.
The ECB's forward guidance is set to be recalibrated according to the new strategy, he said, but adds that LBBW doesn't expect any adjustment of the core monetary policy parameters, such as key interest rates and the structure of the bond purchasing programs.
"For the time being we can only speculate as to the details, so players on both the euro bond market and the foreign exchange market will certainly be looking ahead to the event with a certain amount of suspense," Voelker said.
Commodities:
Oil prices fell after OPEC and its Russia-led oil-producing allies agreed to unleash millions of barrels of bottled-up crude over the next two years. The two groups, known collectively as OPEC+, agreed to raise production by 400,000 barrels a day each month through the end of 2022.
The deal seeks to unwind all the cuts the two groups made at the start of the pandemic in order to meet recovering demand for oil.
"The market needs additional barrels through the balance of this year, to prevent the market from overheating," said Michael Tran, commodity strategist at RBC Capital Markets.
Gold prices were lower in early European trade.
Copper fell as concerns mount over a likely worsening demand profile for the base metal. Covid-19 flare-ups in many markets are threatening to derail recent improvements in demand, ANZ said.
While the bank notes that the Chinese auto and real-estate sectors have been picking up, "our copper downstream demand indicator remains weak, highlighting the fragile nature of the recovery."
The three-month LME copper contract was 0.6% lower at $9,368.00 a metric ton.
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07-19-21 0611ET
