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EMEA Morning Briefing : Caution Likely as Traders Monitor Biden-Xi Summit

11/16/2021 | 12:38am EST

MARKET WRAPS

Watch For:

Eurozone Flash Estimate GDP, Employment; France CPI, New Home Sales; U.K. Unemployment, Card Spending; Italy CPI; IEA Oil Market Report; updates from RWE, Bouygues, EssilorLuxottica, Iliad, Land Securities, Vodafone, Intermediate Capital, Imperial Brands, Homeserve, SEB, Centrica, Stagecoach, Entain, Autoliv

Opening Call:

European stocks are seen little changed as Biden and Xi hold a virtual summit. In Asia, shares were mixed, with the dollar and bond yields flat and oil and gold ticking higher.

Equities:

Flat European stock-index futures suggest a lackluster opening session on Tuesday, largely following Wall Street's lead and as traders monitor the U.S.-China virtual summit.

President Biden and Chinese President Xi Jinping opened a virtual meeting Monday night with words designed to cool tensions between the two countries, as the leaders seek to work through areas of disagreement between the world's largest economies.

"It seems to me our responsibility as leaders of China and the United States is to ensure that the competition between our countries does not veer into conflict, whether intended or unintended," Mr. Biden said shortly before 8 p.m. ET, speaking to his counterpart via video.

Mr. Xi called Mr. Biden, the former vice president, his "old friend," and said he wants the U.S. and China to "coexist in peace." "China and the United States need to increase communication and cooperation," Mr. Xi said.

The public comments before a closed-door discussion expected to last several hours reflected an effort by both sides to tamp down on hostilities that have marked the relationship since Mr. Biden took office in January.

Forex:

The dollar was steady in Asia, with currency markets generally on hold as the Biden-Xi virtual meeting continued.

While no major breakthroughs are expected, the fact they are willing to talk is good news, said NAB. An easing in trade tensions is a potential outcome while issues involving human rights, Taiwan and Covid-19 are likely to remain unresolved, NAB added.

JPMorgan said it's staying long the dollar against the euro and yen, and added a short in the pound given unease about U.K. monetary policy and renewed uncertainty in U.K.-EU relations.

"We continue to position through EUR/USD and USD/JPY as the cleanest expressions of a bearish U.S. rate view. That said, the potential for the market to start to price a hockey stick moment for the Fed--the point at which it abandons the transitory defense, especially if at that point it is close to hitting its maximum employment objective--has the potential to bring more disruptive dynamics of the dollar smile into play, and with it a somewhat broader USD appreciation."

Rabobank said the European Central Bank's cautious stance on monetary policy will limit the euro's recovery prospects versus the dollar in coming months.

"Our current mid-2022 forecast of EUR/USD 1.14 is looking outdated, with the currency pair looking set to achieve this level sooner than we had expected," said Rabobank forex strategist Jane Foley.

Sterling was a touch lower in Asian trade having risen Monday after Bank of England Governor Andrew Bailey signalled the central bank was poised to raise interest rates to contain inflation. Bailey told U.K. lawmakers he was "very uneasy" about rising inflation and that the central bank's decision to leave rates on hold earlier in November was a close call.

"After this, many will be expecting the interest rates to go up in December," said Spreadex analyst Oliver Males.

Bonds:

Yields for long-dated Treasurys edged lower in Asia, after Monday's renewed uptick, with traders watching for further clarity on the pace and timing of interest-rate hikes and the rate of tapering of asset purchases by the Federal Reserve.

Analysts said bond-market volatility is likely to continue to climb, potentially sending ripples into other asset markets.

In the Treasury market, the frontloading of rate-hike expectations is stoking worries that the Fed will be forced to act aggressively, potentially sparking an economic downturn. As a result, longer-dated yields have remained largely steady, while real, or inflation-adjusted yields, have fallen toward all-time lows at the long end.

Market-based indicators are showing an increased likelihood for two or more interest-rate hikes in 2022, as measured by federal-funds futures, which shows an 83% chance of such a pace of rate increases, up from 60% a month ago.

Deutsche Bank said that, considering current inflation levels, the benchmark should be some 500 basis point higher. "While the inflation print continues to rise, long rates remain stubbornly compressed." The bank noted the yield has fallen since April, while core CPI in the period grew, "practically tripling from 1.6% to 4.5%."

Deutsche Bank said that given "the latitude of possible explanations for such high inflation numbers, the market seems to be less alarmed about the levels of the [latest] print than about the rate of its rise."

Energy:

Oil prices recovered in Asia after early declines on Europe's new pandemic restrictions and mounting pressure on Joe Biden to tap U.S. reserves to quell rising gasoline prices.

Crude futures finished on a mixed note Monday, with Brent lower but the U.S. benchmark ending higher after shaking off losses earlier in the session tied to the possibility of a release of crude from the Strategic Petroleum Reserve.

Rystad said investors are "refocusing on the return of two bearish factors--the possibility of more oil supply sources and more Covid-19 cases." A stronger dollar and calls for the release of U.S. reserves add downside pressure.

"Global oil supply is still lagging behind demand, but we expect this fundamental to flip by mid-2022, which will prevent any triple-digit ascent in oil prices.

UBS has raised its oil-price forecasts as it sees increased likelihood of underinvestment resulting in a tight supply side while demand rises back to normal levels.

UBS now sees Brent at $81 a barrel next year, up from $62 in its previous forecast, while its prediction for 2023 rises to $80 from $60 and for 2024-25 to $74 from $60.

"Underinvestment, actively promoted by policy-makers and capital markets as their proxy, looks increasingly likely to result in a tight supply side with prices that we set in the upper quartile of our historic $60-$80/bbl incentive range potentially shifting from marginal supply cost to reflecting marginal demand."

BNP Paribas said COP26's carbon market deal will face hurdles, "particularly as regards setting a universal price."

The bank said carbon markets will aim at helping economies that find it difficult to reduce emissions to offset unabated pollution, while also driving funds to emerging economies.

What remains to be answered: "will there be a multi-tier system that offers different prices for DM and EM?" and "how will these markets impact, if at all, the compliance markets already operating in the EU, China, U.K. and parts of the U.S.?"

Metals:

Gold ticked higher, with investors awaiting fresh signs that inflation will stay hotter for longer, said Oanda. The inflation story will likely get a significant update after U.S. retail sales figures are released later in the day, showing whether consumers have continued to cope with another wave of pricing pressures, Oanda added.

Bullion settled with a loss on Monday, as a rise in the dollar and strength in Treasury yields put pressure on prices for the yellow metal.

Aluminum was weaker in the morning Asian session on demand concerns. These worries have been spurred by a slowdown in China's property market, said ANZ, noting average new home prices in 70 major cities fell 0.25% in October from the prior month, while residential sales dropped 24% on year, the most in a year.

TODAY'S TOP HEADLINES

Biden, Xi Open Talks on Friendly Note, With Tough Topics Ahead

WASHINGTON-President Biden and Chinese President Xi Jinping opened a virtual meeting Monday night with words designed to cool tensions between the two countries, as the leaders seek to work through areas of disagreement between the world's largest economies.

"It seems to me our responsibility as leaders of China and the United States is to ensure that the competition between our countries does not veer into conflict, whether intended or unintended," Mr. Biden said shortly before 8 p.m. ET, speaking to his counterpart via video.

Fed's Barkin Says More Data Is Needed Before Raising Rates

Federal Reserve Bank of Richmond President Thomas Barkin said Monday that the U.S. central bank needs more data before it can make the call on when it is time to raise its short-term rate target.

"If the need is there, we'll do what we have to do," Mr. Barkin said in a Yahoo Finance video interview. "But, I personally think it's very helpful for us to have a few more months to evaluate, is inflation going to come back to more normal levels? Is the labor market going to open up?"

Biden Signs $1 Trillion Infrastructure Bill Into Law

WASHINGTON-President Biden signed into law a roughly $1 trillion infrastructure bill to repair the nation's aging roads and bridges, upgrade the electrical grid and expand access to broadband internet.

The legislation, the largest federal investment in infrastructure in more than a decade, is a central component of Mr. Biden's domestic-policy agenda and marks a rare bipartisan policy win for the White House.

Twitter CFO Says Investing in Crypto 'Doesn't Make Sense Right Now'

Investing some of Twitter Inc.'s corporate cash in crypto assets such as bitcoin "doesn't make sense right now," Chief Financial Officer Ned Segal said in an interview Monday.

"We [would] have to change our investment policy and choose to own assets that are more volatile," Mr. Segal said, adding that the company prefers to hold less volatile assets such as securities on its balance sheet.

Elon Musk's Tesla-Share Selling Spree Continues Into Second Week

(MORE TO FOLLOW) Dow Jones Newswires

11-16-21 0038ET

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