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North American Morning Briefing : Stock Futures Rise After Proposed Debt-Limit Extension

10/07/2021 | 04:11am EST

MARKET WRAPS

Watch For:

U.S. Weekly Jobless Claims.

Opening Call:

Stock futures rose after Republicans offered a short-term debt-limit extension, helping stave off immediate concerns about a possible government default.

Concerns over whether the Treasury would be able to raise money to pay its bills have weighed on investors this week, alongside soaring energy prices and a general shift higher in government bond yields.

The Republican proposal would extend the debt ceiling into December, provided that Democrats affix a dollar amount to the debt level. Treasury Secretary Janet Yellen has warned that her department is likely to exhaust its cash-conservation measures by Oct. 18 if Congress doesn't act.

"Right now, there are loads of fears out there. It just takes a couple of positive developments and suddenly that picture changes. Last night, we had positive news on the debt ceiling," said Lewis Grant, an equities portfolio manager at Federated Hermes.

Meantime, the pan-continental Stoxx Europe 600 index jumped 1.1%, with gains led by the basic resources and auto sectors. Indexes in Asia also closed higher.

Fresh figures on the number of Americans who applied for first-time unemployment benefits in the week ended Oct. 2 are due out at 8:30 a.m. Jobless claims rose for three straight weeks in September, but economists surveyed by The Wall Street Journal expect weekly claims to have edged lower.

Forex:

The safe-haven dollar edged lower after news that Senate Democrats were poised to accept a Republican proposal to defer the showdown over the debt ceiling until later this year, which boosts risk appetite.

Moves are small, however, as markets await Friday's U.S. nonfarm payroll figures, which will be watched closely by the Federal Reserve as it looks to withdraw of monetary stimulus.

"Ranges have been very tight overnight, as is typically the case in the day ahead of the U.S. payrolls report," RBC analysts said.

---

Sterling fell versus the euro but remains near its recent highs due to the market's view that the Bank of England will be more responsive to inflation than the European Central Bank, ING said.

The market is pricing in a 5 basis points U.K. interest rate rise in November followed by 25 basis points in February, ING analysts said. "We think that is too aggressive, but the BOE has yet to disavow the market of these expectations."

Meanwhile, the European Central Bank is reportedly working on a new bond-buying program for when its pandemic scheme ends in March, which should serve as a reminder that the ECB won't be rushing into removing stimulus, the analysts said.

Bonds:

In bond markets, the yield on the benchmark 10-year Treasury note ticked down to 1.517% Thursday from 1.524% Wednesday.

Fixed-income investors are expected to hold off big moves ahead of Friday's U.S. labor data, said UniCredit. "Due to a rather light economic agenda today, fixed-income investors are likely to enter a wait-and-see mood ahead of tomorrow's U.S. payroll figures," analysts at the Italian bank said.

Fluctuations in commodity prices will probably remain in the spotlight, and they expect the joint European Central Bank and Federal Reserve Bank of Cleveland online conference on Oct. 7 and 8 "will probably receive more attention than it would have done in other times."

---

The ECB's minutes of its September policy meeting, due out Thursday, will be closely watched for how much risk to the official forecast was seen by Governing Council members, ING's rates strategists said.

"If this debate may seem dated as it precedes the spectacular jump in energy prices in late September/early October, it could still inform markets of how high the ECB's inflation pain threshold is," ING said.

The bank's strategists say that following the ECB's Sept. 9 meeting, some members highlighted upside risk relative to the official forecast.

---

German Bund yields are out of sync with the improving economic outlook, according to Santander Asset Management, which has a "strong underweight" in EU fixed income. "Although German Bund yields have risen from their August lows, they do not sufficiently price in the improving economic outlook," the asset manager said.

Santander AM thus expects eurozone long-term yields to follow their U.S. counterparts higher, albeit not to the same extent. Eurozone periphery bonds may outperform core bonds, benefiting from wider spreads, nonetheless being vulnerable to a deterioration in the policy backdrop and investor sentiment.

Commodities:

Brent crude oil was down after President Putin said Russia could ease the gas supply crunch. Separately, Department of Energy figures were "bearish to mixed" said DNB Markets's Helge Andre Martinsen, with crude stocks up by even more than Tuesday's API figures suggested.

Elsewhere, the U.S. Energy Secretary said Wednesday that the U.S. has several tools to rein in energy prices, including a potential release of oil from strategic petroleum reserves and an export ban, although the latter is "unrealistic as it would create havoc for the US shale oil industry, lead to sharply increasing Brent oil prices" and increase gasoline prices, Mr. Martinsen said.

---

Futures for gas to be delivered in the Netherlands-the European benchmark-fell 20% to 87.33 euros, equivalent to about $100.94, a megawatt-hour in volatile trading. This came after Russian President Vladimir Putin said Wednesday that Moscow was ready to work on stabilizing the global energy market, causing a sudden reversal in natural gas prices, which had earlier soared to their highest level on record.

---

Gold prices were flat as the dollar and bond yields trade sideways ahead of U.S. jobless claims data. Investors are awaiting the jobs data for clues on the strength of the U.S. rebound.

Jobless claims had risen over three consecutive weeks in September but economists are expecting new jobless claims to drop for the week ended Oct. 2, holding close to a pandemic low. The weekly data comes ahead of--and could shine some light on--the monthly jobs report due Friday.

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