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North American Morning Briefing : Stock Futures Rise as Evergrande Contagion Fears Ease, Fed in Focus

09/22/2021 | 06:13am EDT

MARKET WRAPS

Watch For:

U.S. Existing Home Sales for August; EIA Weekly Petroleum Status Report; U.S. Federal Reserve economic projections, U.S. interest rate decision.

Opening Call:

Stock futures rose as concerns over giant property developer China Evergrande Group eased and investors awaited a policy update from the Federal Reserve.

China's Shanghai Composite reopened after a holiday to muted gains, closing up 0.4%. Markets in Hong Kong were closed for a holiday Wednesday. Hong Kong's Hang Seng Index sold off earlier this week alongside broader markets as investors feared that defaults from one of China's biggest developers could create contagion risks in the broader market.

An onshore unit of Evergrande said Wednesday it would make an interest payment on time this week, though the debt-ridden conglomerate is seen missing a separate payment due on dollar bonds. Investors expect the Chinese government will step in to stave off ripple effects that could affect the country's growth and weigh on the global economic recovery.

"We don't know yet what that attempt to limit contagion is going to be, but the market does expect that Beijing will act," said Susannah Streeter, senior investment and markets analyst at U.K. asset manager and stockbroker Hargreaves Lansdown.

Investors are also awaiting an update to the Fed's monetary policy and economic projections. Officials are due to release a statement at 2 p.m. ET, followed by a press conference.

Expectations that Fed Chairman Jerome Powell could use the occasion to mark the scaling back of the pace of bond purchases this year have waned due to Evergrande fears and concerns over the pace of the U.S. labor market recovery, money managers say. Investors expect that any such reduction would be extremely gradual.

"Today it's a bit of a wait-and-see mode in terms of what the Federal Reserve will do," Ms. Streeter said.

"With Evergrande, there are concerns over what might happen with the global economy so there's some expectation that officials will take their foot off the pedal very slowly."

Forex:

The dollar's reaction to the Fed's policy statement will likely depend on the interest-rate outlook, given it is widely expected that the central bank will signal a decision on tapering asset purchases will be made in November or December, Commerzbank said.

Fed projections that point to rate increases starting earlier "would certainly be dollar positive," said strategist You-Na Park-Heger.

However, recent weaker economic data would justify caution and the Fed may try to dampen rate-rise expectations, she said.

"Today's Fed meeting might not provide any new impetus as far as EUR/USD is concerned, and it is possible that USD bulls will be disappointed," she said.

A surprise failure to signal tapering would "constitute a bitter disappointment" and the dollar would weaken, she added.

The dollar should stay supported by safe-haven demand even if the Fed is more cautious about prospects for tapering asset purchases than some expect, UniCredit said.

The dollar "is enjoying renewed support due to its safe-haven status" and concerns over China are likely to ensure trade in major currencies remains nervous, it said.

This may help offset any "broad-based downward correction" it would otherwise suffer if the Fed doesn't "sound as hawkish as some in the market expect."

Although an upward revision to interest-rate projections would be positive, the Fed will likely stress tapering will be gradual and won't necessarily herald rate increases, UniCredit said.

Bonds:

In bond markets, the yield on the 10-year Treasury note ticked up to 1.328% from 1.323% Tuesday.

The combination of still high growing inflation, the continuing pickup in the U.S. economy, and a tapering decision by the Fed is still likely to put upward pressure on long U.S. yields in particular in the next three months, Arne Lohmann Rasmussen, chief analyst and head of corporate research at Danske Bank, said.

However, the economic outlook has become "muddier", and recent developments in China could potentially send shockwaves through global financial markets, which would push long yields down in the coming months, he said.

Danske expects the 10-year U.S. Treasury yield to rise to 1.5% by the end of 2021, with a further increase to 2% in 12 months' time. The current level is 1.33%, according to Tradeweb.

Commodities:

Oil prices rose, with weekly API inventory data showing a sharp decline in inventories, according to DNB Markets' Helge Andre Martinsen. U.S. crude stocks fell 6.1 million barrels versus a consensus forecast of 3 million, making the overall figures "bullish," he added.

Elsewhere, in a relatively quiet week, investors are absorbing Russian forecasts for a bumper production year next year, awaiting U.S. Energy Information Administration data due later Wednesday, and continuing to watch European gas prices.

Copper prices jumped as Chinese traders return to the market following a public holiday. Three-month copper prices on the LME rose 2.3% to $9,221 a metric ton.

Chinese markets reopened Wednesday for the first time since Friday and helped push up metals prices which had slumped during their absence.

Some positive news about China Evergrande also helped lift the mood: the indebted company said they will meet an interest payment tomorrow. Still, uncertainty remains about the property giant's future.

"Prices mean-reversed after falling during the Chinese absence and there was a bit of positive sentiment sipping back into markets after the real estate unit of China Evergrande Group, " Anna Stablum at Marex said.

Gold prices were unchanged in early European trade.

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