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EMEA Morning Briefing: Stocks to Fall as Worries About Delta Variant, Economic Outlook Persist

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Opening Call:

Stocks could open lower. U.S. stock futures point higher. Dollar weakens. Oil gains, gold down.

Equities:

European stocks could open lower as investors remained uncertain about the Delta variant and economic outlook.

The S&P 500 gave up its early gains and slipped to start August as investors weighed a strong earnings season with growing uncertainty about the Delta variant and economic outlook.

Investors have been upbeat that the economic expansion will boost corporate profits and enable stocks to keep rising, albeit at a slower pace. A record number of companies have been beating analysts' estimates for earnings this season, according to Deutsche Bank. This week, traders will be parsing earnings from companies including Uber Technologies and Ford Motor.

"There are a few good reasons why the economy will continue to grow at above-normal rates," said Edward Smith, co-chief investment officer at U.K. investment firm Rathbone Investment Management. Consumers are spending freely, companies plan to invest in their businesses and firms are restocking inventories, he said.

"That should enable earnings momentum to stay strong, carrying through to the end of the year," Mr. Smith said.

Earnings and economic data have led investors to keep piling into stocks, putting major indexes within striking distance of records. Data released Monday also showed that manufacturing activity in the U.S. stayed robust in July.

Still, some are cautious that the highly contagious Delta strain of coronavirus, a prolonged spell of inflation and China's efforts to rein in tech firms could lead to bouts of volatility.

These worries also have stoked swings in the broader market lately, and major indexes whittled their gains in midday trading. Still, dips in the stock market have been short lived in recent weeks.

"There's just so much buying momentum on dips right now. It's hard to bet against the overall market," said David Bahnsen, chief investment officer of Bahnsen Group, a wealth-management firm.

Investors said sentiment in broader markets was given a boost by comments from the Chinese securities regulator. The China Securities Regulatory Commission said it would cooperate with Washington on U.S. listings after the Securities and Exchange Commission said it would increase scrutiny of Chinese companies that aim to sell shares in the U.S.

"Chinese and U.S. regulators shall continue to enhance communication with the principle of mutual respect and cooperation, and properly address the issues related to the supervision of China-based companies listed in the U.S.," a spokesperson for the CSRC told reporters, according to a transcript posted on the regulator's website Sunday.

Chinese stocks were lower in early trade, tracking declines in other Asian equity markets. Pandemic developments are likely to be in focus in China, following news that the highly contagious Covid-19 Delta variant was found in more than 20 cities, IG said.

"Efforts to stem the spread of the virus may hint at a slower economic activity and softer energy demand in the months to come," it says.

Forex:

The U.S. dollar weakens slightly against the euro and softens 0.3% against the yen. The WSJ Dollar Index ticked slightly lower.

"The combination of less-pronounced but nonetheless lingering Delta concerns, China's uncertain regulatory crackdown, and the glide-path towards Fed tapering suggests a summer holding pattern for USD," JPMorgan said.

"Despite the dollar sell-off post-Fed, this combination of factors underscores how the opportunity for broad-based USD weakness remains quite narrow, contained by both sides of the dollar smile (growth risks vs Fed normalization.)

The potential ripple effects of China's regulatory crackdown into CNY's portfolio flow backdrop are concerning, even if there is a better policy regime to prevent any repeat of the 12% CNY slide in 2015-16."

Range-bound trading in the euro versus the dollar is likely to persist this week due to a lack of eurozone economic data and the European Central Bank's looser for longer policy stance, ING said.

"The eurozone's calendar is fairly quiet and indeed the ECB provided enough reasons with its strategy review and at the July meeting that they will remain unreactive to economic developments for longer," ING analysts said.

That means moves in EUR/USD this week will be caused by factors outside the eurozone and driven by the dollar, they said.

If the dollar recovers, EUR/USD could fall below 1.1800 but declines will be limited with the pair remaining in a tight range, they said.

Bonds:

The Treasury rally picked up speed, sending the 10-year yield as low as 1.146%, its lowest level since February, ahead of July employment report coming up Friday and as the Delta variant raises the prospect of new sanitary restrictions for business around the globe.

The yield is now off the day's low, trading at 1.162%. Both the Fed and the ECB have pledged to keep an easy monetary policy for now, busting demand for government debt.

Energy:

Oil gained in morning Asian trade after declining overnight on disappointing U.S. and China economic data.

Rising case numbers of the highly contagious Covid-19 Delta variant globally is likely to remain a major concern for oil demand, CBA said. "Restrictions on mobility, like we're seeing through parts of Asia, are particularly negative for oil demand given that two thirds of global oil consumption is tied to transportation," it added.

Metals:

Gold inched lower in Asian trading after rising overnight on a further pullback in U.S. 10-year Treasury yields. The precious metal could continue to trade above $1,800 an ounce, due to concerns over the rising number of Covid-19 Delta variant cases, which is likely to continue weighing on global economic growth, OCBC said.

Copper fell in Asian trading amid continued concerns over possible supply disruptions arising from the threat of strike action at some Chilean mines. Workers at the Escondida mine in Chile, the world's largest, are threatening to go on strike after rejecting the latest wage offer from operator BHP, ANZ said.

The bank also noted similar situations at Chile's Andina and Caserones mines, which, together with Escondida, represent some 7% of the world's copper supply. The three-month LME copper contract was 0.5% lower at $9,650.5 a ton.

   
 
 

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August 03, 2021 00:19 ET (04:19 GMT)

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