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EMEA Morning Briefing: Stocks to Advance Further as Investors Gear for Fed


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Eurozone Foreign Trade; Germany, France, Italy CPI; U.K. Unemployment figures; Joe Biden attends EU-U.S. summit in Brussels; updates from Wacker Chemie, Pirelli, Volkswagen, Ashtead, H&M, Evraz, Equinor

Opening Call:

Shares in Europe are likely to push higher for now, with all eyes on the Fed's upcoming June meeting. In Asia, major stock benchmarks were mixed, the dollar was flat, while bond yields and commodities dipped into the red.


European stocks are likely to extend their rally further into record territory on Tuesday, after the Stoxx Europe 600 closed yesterday's session with a gain of 0.2%, its seventh consecutive record high.

This follows fresh moves by U.S. investors to advance their rotation into technology and other growth stocks on Monday, pushing the S&P 500 and Nasdaq to new levels.

"Stock markets are by and large around all-time highs. We think there is still more upside there," said Salman Baig, multiasset investment manager at Unigestion.

Despite the latest market moves, the debate between growth and cyclical stocks continues. Some investors say the market's path forward hinges on the outcome of the Federal Reserve's latest two-day policy meeting starting on Tuesday.

Although most investors expect the central bank to keep rates where they are, attention will center on the Fed's view of inflation and whether it sees any need to accelerate its timetable of interest-rate increases. Higher rates would likely inject a fresh round of volatility into markets, especially growth stocks, which are sensitive to rate increases.

"The Fed's messaging this year will be critical," Glenmede strategists said in a note. "The Fed needs to convey its intention to wind down ultra-accommodative policy, but at the same time convey that it has no intention of abruptly tightening policy, a fine line that could easily be miscommunicated."


The dollar was little changed in Asian trading ahead of U.S. retail sales data. Expectations point to a slight on-month contraction, given that previous readings may have been boosted by the issuance of stimulus checks. However, a positive surprise could support the dollar, said IG.

With the FOMC meeting in focus, investors will be watching for any shift in the dot plot, any revision in the PCE inflation estimate and Jerome Powell's comments to form an idea of the tapering timeline, said IG.

TD Securities said the Fed's tone is likely to turn slightly less accommodative at Wednesday's policy meeting, lifting the dollar.

Mr. Powell will probably admit that the central bank has started to discuss a plan for tapering its bond-buying program, although he will emphasize that this depends on making much more progress towards the Fed's goals, said TD forex strategist Ned Rumpeltin. "If confirmed, our base case scenario should be USD supportive."

Sterling could fall if the EU becomes more concrete on its threat to impose retaliatory measures against the U.K. in a dispute over Northern Ireland border checks, said Commerzbank.

"Brexit may have been formally completed, but the end of this vexed issue is not yet in sight for the pound," said Commerzbank currency analyst Thu Lan Nguyen.

The EU has warned that it could impose tariffs and quotas on the U.K. after the Boris Johnson's government suggested it could unilaterally extend a grace period that allows the free movement of chilled meats moving between Great Britain and Northern Ireland.


Treasury yields edged lower in Asia after they recovered some of last week's losses on Monday ahead of this week's monetary policy meeting, with fixed-income investors closely watching the central bank's views on inflation.

"A patient Fed could help lower Treasury yields a bit further but we feel that 10-year Treasurys are a bit rich at yields below 1.5%. We still look for yields to be over 2% by the end of the year," wrote Steve Barrow, head of G-10 strategy at Standard Bank, in a Monday note.

The valuations of U.K. inflation-linked government bonds are looking rich and JPMorgan has advised clients to sell 10-year linkers.

"We see potential for a selloff in intermediate real yields given the strong growth backdrop and expected further hawkish tilt from the Bank of England over the coming months," said strategists at the bank. Ten-year index-linked gilt real yields--which strip out the effects of inflation--are close to their richest levels since February and look rich versus the slope of the Sterling Overnight Index Average curve on a six-month regression basis, said JPM.

"We recommend entering shorts in 10-year linkers," such as the inflation-linked 2031 gilt, the strategists said.

Separately, JPMorgan said that 10-year gilts have gained from the Treasury rally, despite domestic job surveys indicating a tighter labor market and with U.S. headline and core inflation surprising to the upside. But gains could be temporary.

JPM expects the BOE to raise interest rates earlier than it had previously anticipated. "As the recovery continues, the economic rebound looks more complete, with less scarring and a modest inflation overshoot and we have brought forward our call for the first BOE rate hike to 4Q22 from 1Q23," said JPM.

It has maintained a bearish duration bias on 10-year gilts given valuations, but has held off from taking outright short duration positions in conventional gilts because of the technical backdrop.

Natixis said French government bonds, or OATs, aren't pricing any political risk premia related to next year's presidential elections, when measured by the 10-year OAT-Bund spread and the one-month rolling beta.

However, Natixis expects the 10-year OAT-Bund to start widening in the autumn, reaching 45 basis points in December and 65 basis points in March 2022, before easing back to 40 basis points by June next year.

Expected yield and spread movements in the autumn could be affected by global tapering talk and some pricing of the end of the European Central Bank's pandemic emergency bond purchases, said Natixis, but it doesn't expect French regional elections on June 20 and 27 to prompt much price action in OATs.


Oil gave back early gains in Asia and edged into the red, with the U.K.'s decision to extend its pandemic restrictions by four weeks because of a surge in the Delta variant of the coronavirus, likely to temper optimism around a strong summer for transport-fuel demand globally, said ANZ.

Oil futures started the week on a mixed note, with U.S. crude prices down a few pennies, but Brent up on optimism over a recovery in global demand.

"With limited exception, crude and product prices have consistently marched higher in 2021, as the prospect of a global demand recovery has overshadowed the potential for new supply to hit the market," said Robbie Fraser, global research and analytics manager at Schneider Electric.

Regarding demand, "some recent support is likely tied to talks around the Iranian nuclear deal, which while ongoing, have failed to deliver a breakthrough that would allow Iran to resume oil exports without the threat of U.S. sanctions," said Mr. Fraser.


Gold prices were lower on the possibility Fed officials may discuss tapering at this week's FOMC meeting.

Phillip Futures said Fed taper whispers seem to be gathering momentum but while the consensus is that the FOMC won't make a formal announcement until 4Q, the increased talk may spook the Treasury market and send yields higher, which could pressure gold further.

Copper and other base metals fell on concerns that China may curb rising commodity prices. The three-month LME copper contract was down 2.2% at $9,748.00 a ton, the nickel contract fell 1.7% to $18,165.00 and the zinc contract was 1.4% lower at $3,000.50.

Copper has come under pressure on reports that China is preparing to release state reserves, said ANZ, adding that this follows recent measures to quell the prices of raw materials amid surging input costs for manufacturers.



Bitcoin Rises Above $40,000 on Elon Musk Tweet, MicroStrategy Plans

Bitcoin reached its highest level in more than two weeks Monday, buoyed by MicroStrategy Inc. completing its $500 million offering of junk bonds to buy bitcoin and by fresh comments from Tesla Inc. Chief Executive Elon Musk.

The world's largest cryptocurrency by market value traded as high as $41,046.77-a nearly 11% rise from its Friday level at 5 p.m. ET.


Fed Officials Could Pencil In Earlier Rate Increase at Meeting

WASHINGTON-Federal Reserve officials could signal this week that they anticipate raising interest rates sooner than previously expected following a spate of high inflation readings.

In March, the last time they released quarterly economic forecasts, most officials expected to keep the Fed's benchmark interest rate near zero through 2023 to encourage the economy's recovery from the pandemic. Officials are set to release updated projections Wednesday after a two-day policy meeting.


Philips Recalls Millions of CPAP, Ventilator Machines Over Potential Health Risks

Royal Philips NV has recalled millions of sleep apnea and ventilator machines over concerns that a type of foam used in the devices could degrade and release harmful, possibly cancer-causing, particles.

The recall affects three million to four million machines, more than half of which are in the U.S., a company spokesman said Monday. About 80% are machines for aiding people with sleep apnea, a condition that causes a person to stop breathing for short periods during sleep. The rest are life-supporting mechanical ventilators.


Chinese Nuclear Plant Flags Performance Issue, French Part Owner Says

French power giant Électricité de France SA said it had requested an extraordinary board meeting with Chinese managers of a nuclear plant it co-owns in Southeast China to get more information on the buildup of gases inside one of the plant's reactors.

(MORE TO FOLLOW) Dow Jones Newswires

June 15, 2021 00:16 ET (04:16 GMT)

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