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EMEA Morning Briefing:Stocks Rally to Continue as Virus Fears Ease; ECB Awaited

MARKET WRAPS

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Opening Call:

European equities are likely to extend their rebound rally on Thursday but gains could be capped ahead of the ECB policy decision. In Asia, stocks, the dollar and Treasury yields advanced, while oil and metals fell.

Equities:

The rebound in European stocks should continue on Thursday after Wall Street closed higher for a second day, boosted by some healthy corporate earnings.

The Dow closed up almost 300 points as investors stuck by the "buy the dip" mantra after the index on Monday suffered its biggest one-day drop since October.

"Earnings season is off to a solid start, with results beating bumper expectations in the second quarter," Craig Erlam, Senior Market Analyst, at OANDA wrote. "The positivity that's driving the market is clearly offsetting fears about another [virus] wave for now, aided no doubt by belief in the vaccine to stop surges turning into severe lockdowns in most cases."

Forex:

The dollar nudged higher against a basket of currencies and its recent strength despite lower Treasury yields reflects the fact that yields have also fallen elsewhere on concerns about the economic fallout from the Delta coronavirus variant, said Credit Suisse.

"This dynamic would likely need to persist or even accelerate for general USD strength to push on materially from here," said Credit Suisse forex strategists. The dollar's gains in recent days were typical of what is seen when forex volatility jumps, global recovery hopes are challenged and commodity prices drop at the same time, they said.

The euro could fall against the dollar if the European Central Bank signals it plans to keep monetary policy looser for longer at Thursday's policy meeting following its recent strategy review, said ING.

The ECB's decision to raise its inflation target to 2% from below, but close to 2% implies either a continuation of what the ECB has done for the past few years or a step towards more "dovishness," said ING analysts.

"While not a discussion for this week, the ECB dovish bias would suggest that the total reduction of the monthly [asset] purchases in 2022 will be less than previously expected." That would underscore the diverging trend between the ECB and the Federal Reserve, denting EUR/USD, they said.

Bonds:

U.S. Treasury prices extended their retreat in Asia, with the 10-year note yield recovering most of this week's losses.

Analysts said that worries about the delta variant and its effect on the global economy may have been overdone, possibly having caused yields to overshoot to the downside.

Markets have juggled Covid-19 resurgence versus bullish economic indicators, while an uptick in equities may indicate the Delta variant is becoming less of a concern. "The dynamics change very quickly depending on your view and outlook of the global economy," said AmeriVet. "The market will continue to offer volatility until we define the boundaries of a new range."

The ECB is expected to keep its current pace of corporate bond purchases unchanged after Thursday's rate setting meeting, said UniCredit.

"For the moment, we continue to expect net corporate bond purchases of up to EUR8 billion per month within the Corporate Sector Purchase Program and Pandemic Emergency Purchase Program," UniCredit's analysts said. They expect most changes on Thursday to be made on rates guidance, "where adjustments could theoretically have implications for Asset Purchase Program purchases and reinvestment, and thus corporate credit."

Investors will pay attention to how much the ECB plans to take ecological issues into account in its policy framework, as revealed in its recently published strategy review, they said.

Energy:

Oil futures slipped in Asian trade after they settled more than 4% higher on Wednesday, boosted by inventory data that showed supplies at Cushing, Okla., had fallen to the lowest level since January 2020.

The market is starting to realize that the overall situation is "still very tight," Phil Flynn, senior market analyst at The Price Futures Group, told MarketWatch.

"We did see a big surprise surge of imports and that kept the market somewhat at bay but if you look at the draw in Cushing, we're getting to a dangerously low level," he said. "We're almost out of oil at the Cushing delivery point if we continue to draw at this rate."

Achieving net-zero carbon emissions by 2050 would require between $92 trillion and $173 trillion in investments in energy supply and infrastructure, according to BloombergNEF. The research provider said the annual investment in these areas would need to more than double, rising from roughly $1.7 trillion a year today to between $3.1 trillion and $5.8 trillion a year on average over the next three decades.

"The capital expenditures needed to achieve net zero will create enormous opportunities for investors, financial institutions and the private sector, while creating many new jobs in the green economy," said Jon Moore, CEO of BNEF.

Metals:

Gold edged below $1,800 in Asia, extending Wednesday's losses, with prices settling at their lowest in nearly two weeks, as Treasury yields continued to bounce off five-month lows.

"Should prices linger below $1,800 for too long, bears may steal back control with the next key level of interest found at $1,760," Lukman Otunuga, manager, market analysis at FXTM, told MarketWatch. But if prices can push back above $1,800, "gold has the potential to retest $1,825, which is just below the 200-day simple moving average."

Aluminum was little changed, held back by signs that supply remains abundant. Commerzbank said the 4.5% on-year rise in the global aluminum supply for June was driven by China's 7.2% growth, with production for the rest of the world rising 1%.

"The Chinese aluminum market at least still appears amply supplied given that China exported large quantities of aluminum and aluminum products in June," it said.

Iron ore prices on the Dalian Commodity Exchange fell 3.9% as China further cut steel production targets. ANZ noted that steel companies in the Chinese province of Jiangsu had received guidance to rein in output for the rest of the year amid rising production in the first half.

Steel mills in the neighboring province of Anhui had earlier in the month also received guidance to reduce its steel output for the rest of the year. This should reduce demand for the steel-making material.

The metals industry is critical to achieving the bulk of the decarbonization required by the Paris agreement by 2050 possible, said Citi in a report. It said that metals will facilitate the shift to renewable energy, the electrification of transport and carbon capture and storage development.

Citi estimates that, in an aggressive electrification scenario, the "incremental ton of metal produced over the next 30 years" will lower greenhouse-gas emissions by more than 170 tons. Citi said each of 16 metals--including dirty steel and aluminum--have the potential to contribute equally to the net reduction in global emissions.

   
 
 

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(MORE TO FOLLOW) Dow Jones Newswires

July 22, 2021 00:16 ET (04:16 GMT)

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