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North American Morning Briefing : Stock Futures Slip as Bond Yields Hit Three-Month High

09/28/2021 | 06:11am EDT

MARKET WRAPS

Watch For:

U.S. S&P CoreLogic Case-Shiller Home Price Index for July; U.S. Consumer Confidence for September.

Opening Call:

Government bond yields hit their highest level in three months and stock futures sagged as investors rotated out of interest-rate sensitive technology stocks.

Some investors are recalibrating portfolios to prepare for the gradual end of the ultra-supportive monetary policies employed to see the economy through the worst of the coronavirus-driven downturn. Rising yields make bonds more attractive than equities, especially highly-valued tech stocks for which investors count on profit growth far into the future.

"People are realising, or at least remembering, that central banks are going to have to start raising rates," said Altaf Kassam, head of investment strategy for State Street Global Advisors in Europe. "The patient has become used to being given all these drugs, but soon those drugs are going to have to be reduced."

Fed Chairman Jerome Powell and Treasury Secretary Janet Yellen are set to appear before a Senate panel at 10 a.m. ET to discuss the state of the economic recovery.

Overseas, European markets slumped, while Asian indexes were mixed. The pan-continental Stoxx Europe 600 fell 1.1%, led by losses among tech stocks.

In Hong Kong, signs of support from China's central bank helped boost beaten-down shares of Chinese real-estate developers. The People's Bank of China said late Monday it would "maintain the healthy development of the property market and safeguard the legitimate rights and interests of house buyers."

Forex:

The dollar rose along with U.S. Treasury yields before Federal Reserve Chair Jerome Powell's testimony to the Senate Banking Committee later. Powell will say that the Fed would raise interest rates if sustained higher inflation became a serious concern, according to pre-released comments of his testimony.

The DXY dollar index rises to a five-and-a-half-week high of 93.5940 and EUR/USD falls to a five-and-a-half-week low of 1.1674, according to FactSet. "The DXY dollar index is still having difficulty climbing above the August high of 93.73 and this is reflected in the EUR/USD's ability to hold the line close to 1.17," Unicredit analysts said.

The European Central Bank's loose policy stance means the euro looks vulnerable to rising short-term U.S. Treasury yields, ING said ahead of the ECB's Sintra forum later. EUR/USD could fall below the key 1.1665 support level today, ING analysts said.

ECB President Christine Lagarde will deliver Sintra's opening speech at 1200 GMT and "the focus will be on ECB's view on inflation--likely still viewed as transitory-- and any hints over how the end of the Pandemic Emergency Purchase Programme scheme will be handled next March," the analysts said.

The shortage of truck drivers and lack of fuel at petrol stations in the U.K. are becoming increasingly serious but are so far having little impact on the pound, Commerzbank said.

"This is mainly due to the Bank of England, which is increasingly emphasizing its willingness to fight higher inflation risks (which supply bottlenecks also entail) with interest rate hikes if necessary," Commerzbank currency analyst Esther Reichelt said.

BOE Governor Andrew Bailey on Monday said that interest rates could be raised before Christmas if needed to stem inflation.

Bonds:

Expectations of tighter monetary policy and concerns about inflation pressures pushed bond yields higher. The yield on the benchmark 10-Year Treasury note rose for a sixth consecutive day Tuesday, to 1.533%, from 1.482% Monday.

Euro rates are currently being driven upwards by a global trend, said ING's rates strategists. "We think EUR rates had nothing more than a passenger's role in the rise of global rates of late," said ING's rates strategist team.

They add that European Central Bank speakers have made it "abundantly clear" that the recent, and upcoming, rise in inflation doesn't warrant a policy response. The key event for euro bond investors is the ECB's virtual conference starting Tuesday.

Commodities:

Oil prices rose, with both benchmarks hitting their highest prices in three years and Brent grazing the $80-a-barrel mark. Both benchmarks have gained 11% or more over the past month, with growing signals that demand is running ahead of supply and that global inventories are falling. Adding to moves is a spate of bets on higher prices from analysts and traders.

Goldman Sachs raised its year-end Brent price to $90 Monday, while Trafigura and other trading houses have spoken out about their bullish predictions. The recent surge in natural gas prices has also helped bets that crude will benefit from excess demand.

Natural gas prices set fresh highs Tuesday. U.S. Henry Hub natural gas prices jumped 5.8% to $6.06 per million British thermal units, their highest since 2014.

Metal prices edged lower ahead of testimony from Federal Reserve Chair Jerome Powell and Treasury Secretary Janet Yellen to U.S. lawmakers. Three-month copper prices on the LME dropped 0.4% to $9,311.50 a metric ton while Comex gold futures fell 0.6% to $1,742.20 a troy ounce.

Powell is expected to tell lawmakers that a surge in inflation because of bottlenecks in supply chains has been larger and lasted longer than expected, but should abate in time.

Powell is also likely to be quizzed on the Fed's bond buying program after he said last week that the central bank could begin reducing asset purchases as soon as November.

TODAY'S TOP HEADLINES

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Sunac Leads Rebound in Chinese Property Stocks

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Sanofi Ends a Covid-19 Vaccine Effort, Saying Market Is Already Well Served

Sanofi SA won't proceed with the development of one of its experimental Covid-19 vaccines, saying it didn't make sense to go forward in an already-crowded market.

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Santa Monica, Calif.-based Activision, with about 10,000 employees across the world, agreed to an outside monitor approved by the EEOC to make sure Activision is complying with its settlement agreement, according to a company press release. The findings by the outside consultant will be reported regularly to the EEOC and Activision's board of directors, the company said.

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Debt-Ceiling Standoff Distorts Short-Term Treasury Market

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GOP Senators Block Democratic Bill to Fund Government and Suspend Debt Ceiling

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09-28-21 0610ET

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