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EMEA Morning Briefing: Caution to Dominate Ahead of Fed


Watch For:

Eurozone Labour Cost Index; Germany Ifo; U.K. Monthly Inflation, Producer Prices, House Price Index, Card Spending; U.S. Interest Rate Decision; updates from Delivery Hero, Babcock, STMicroelectronics, G4S, Tullow Oil, Provident Financial, IAG

Opening Call:

European shares should open higher, but gains are likely to be tentative at best, as investors wait for the latest Fed policy signals. In Asia, most major benchmarks tipped lower, while the dollar and bond yields held firm. Oil and gold prices moved higher, however.


European stocks face a cautious start on Wednesday as investors prepared for a key announcement on rates and fiscal policy from the Federal Reserve, which could provide a clearer picture of the central bank's view on the economy and inflation outlook.

"We're all on pins and needles to see if the Fed is tapering," said Louis Navellier, founder of asset-management firm Navellier & Associates.

The Fed could signal it's close to reducing the size of its bond purchasing program. That would lower bond prices and lift their yields, a negative for stock valuations. Additionally, there is some concern that the Fed will lift the short-term lending rate sooner than currently expected, with inflation running fairly hot.

"Concerns [that] FOMC language will take a hawkish turn seem to be impacting market internals," wrote Dennis DeBusschere, head of portfolio strategy research at Evercore.

U.S. shares fell on Tuesday as investors digested the latest retail sales data. Technology stocks took the hardest hit, which could reflect that investors are concerned about higher bond yields. If the Fed reduces the size of its bond buying program too quickly, bond prices would fall and their yields could rise fairly fast as well.


The dollar was steady, with Asian markets in a wait-and-see mood before the FOMC decision. The Fed's dot plot, economic forecasts and Jerome Powell's comments will be closely scrutinized for clues on the timeline for tapering, said IG.

TD Securities said the dollar stands to benefit from a potential shift in the Fed's ultra-loose policy stance at Wednesday's policy meeting. Mr. Powell is likely to say the Fed has started talking about plans for tapering asset purchases while also emphasizing that action will require much more progress.

The Fed's dot plot for interest rate projections will probably indicate a rate rise by the end of 2023. "A less dovish tone would support our view that the dollar has started to carve out a bottom, stabilizing through the early parts of the third quarter."

Commerzbank previously thought said GBP/USD should still reach a low in 3Q, but Brexit risks are having less on an impact than the bank previously thought. It also thinks speculation of an interest-rate hike in the U.K. should ease downward pressure on the pound, noting some investors think monetary policy could tighten by the end of next year.

"In view of the improving economic outlook, we have brought forward our forecast for a first rate hike and expect rates to be normalized from the first quarter of 2023 onward," said Commerzbank. It thinks GBP/USD will fall to 1.4000 by the end of September, from 1.4087 now, before rising toward 1.4300 by the end of 2022.

Commerzbank expects sterling to weaken against the euro next year but again, slightly less than previously forecast. It sees EUR/GBP rising to 0.88 by the end of 2022 compared with an earlier estimate of 0.90.

The Norwegian krone should be the best-performing G-10 currency against the euro between now and year-end as the Norges Bank looks set to raise interest rates in the coming months, said Capital Economics.

The Norway government's success in handling the coronavirus and concerns about rising house prices mean the Norges Bank will likely start raising rates in September, said Capital Economics economist David Oxley. That would make it the first G-10 central bank to start normalizing policy by some margin, he said.

"While Norwegian policymakers have made no secret of their intentions, and a series of rate hikes are priced into markets, we still think there is scope for gains in the NOK as reality bites."


Treasury yields mostly held firm in Asia as the Fed meeting loomed.

On Tuesday, short-term yields extended their climb to monthly highs, but long-dated bonds were subdued, as investors diverged about how major central banks will react to inflation.

Bank of America said it's worried the Fed may need to act soon, while Oxford Economics said monetary authorities in both the U.S. and Europe weren't mentioning inflation in their statements much more than they usually do, which could be a sign that policy will remain soft.

Tradeweb has noted the yield curve has been flattening since the last FOMC meeting in April. The 5/10-year spread moved from 75.3 bps on April 28 to 82.9 bps after and then moved to its current closing point of 71.2 bps. Likewise, the 5/30-year spread moved from 143.4 bps to 155.7 bps to its current closing point of 141.3 bps.

Barings Investment Institute said foreign investor demand for Treasurys and a comfortable temporary inflation uptick are the main two factors pushing yields lower.

"Buying Treasury bonds is an attractive investment for foreigners," said Agnes Belaisch, Chief Strategist, Europe, noting that as the dollar weakens, selling it forward to hedge Treasury bond holdings adds to their return.

Data last week showing annual U.S. inflation of 5% "wasn't scary" as "markets know that it's a glitch and the acclaimed recovery may peter out if financial conditions already tightened in response," she said. "It's not inflation that matters, but the Fed's reaction function."


Oil prices were higher in Asia after they climbed back to more than 2-year highs on Tuesday, on demand optimism and as traders watched Iran talks.

OANDA said crude may be pressured if the Fed has a less dovish tone at its upcoming meeting, which should send the dollar tentatively higher. "WTI crude should struggle to extend gains well beyond the $72.00 level."

Demand for oil is expected to keep growing throughout the summer as coronavirus restrictions continue to be relaxed in the U.S. and many parts of the world. Holdout states on the East Coast such as New York and Vermont announced this week they were lifting almost all remaining restrictions, citing high vaccination rates.

Late Tuesday, the American Petroleum Institute reported inventories of crude oil in the U.S. fell by a large 8.5 million barrels in the latest week, according to a source citing the data, while gasoline supplies rose by 2.9 million barrels.

The mixed-to-bullish results were released ahead of official inventories data from the Department of Energy set to be published later Wednesday. Average forecasts in a WSJ survey indicate the DOE report will show crude supplies fell by 2.9 million barrels the previous week and that gasoline supplies fell by 800,000 barrels.


Gold futures nudged higher despite lingering worries over possible Fed tapering. CBA said it's worth noting that when the Fed began discussing tapering in 2013, following the global financial crisis, gold futures responded negatively, tumbling by around 28% in 2013.

The main indicator to watch is the direction of the U.S. 10-year real yield, which has a negative correlation with the price of gold and has been historically strong, said CBA.

Copper prices steadied after falling sharply on Tuesday, with the market's focus on the Fed. While technical factors may have accelerated copper's selloff, a combination of macro and fundamental factors suggest that the bull run in base metals may need to take a breather, said ING. Speculation about Fed tapering could result in strong market gyrations and a bumpy road ahead for copper, it added.

Recently, the three-month LME copper contract was 0.3% higher at $9,599.00 a metric ton.



Legislation Aimed at China Seeks to Expedite Probes of Trade-Secret Thefts

Several senators introduced legislation Tuesday aiming to make it easier for businesses that believe they are victims of intellectual property theft to halt imports made with their trade secrets while their allegations are being investigated.

The bill by Sen. John Cornyn (R., Texas) and Sen. Christopher Coons (D., Del.) would amend the Tariff Act of 1930 to create a new committee at the U.S. International Trade Commission, a federal agency that already investigates violations of U.S. intellectual property rights, such as patents and trademarks.


Federal Judge Stops Biden Administration From Blocking New Oil and Gas Leases

A federal judge in Louisiana issued a preliminary injunction blocking the Biden administration from pausing new oil and gas leases on federal land.

Judge Terry A. Doughty of the U.S. District Court in Monroe said the administration doesn't have the legal right to stop leasing federal territory for oil-and-gas production without approval from Congress.


Uranium Investors Have Become Overly Reactive

A group of uranium mining companies saw their stock prices plunge on Monday after news emerged that a nuclear power plant in Southeast China flagged a performance issue. It was yet another unnecessary investor meltdown.

Canadian uranium mining companies Cameco and NexGen Energy dropped 10% and nearly 9%, respectively, and a basket of uranium-related companies tracked by the Global X Uranium ETF fell 6.5%. They regained some of that lost ground by Tuesday afternoon.


JPMorgan, Other Major Banks Excluded From Landmark European Bond Program

The European Union excluded some of the world's largest banks from working on a huge new debt-issuance program, citing recent cases in which regulators punished them for forming cartels in the bond and currency markets.

The banks include Barclays PLC, JPMorgan Chase & Co., Nomura Holdings Inc., UniCredit SpA, Bank of America Corp., Citigroup Inc. and Credit Agricole SA, according to an EU official.


(MORE TO FOLLOW) Dow Jones Newswires

June 16, 2021 00:23 ET (04:23 GMT)

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