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EMEA Morning Briefing: Stocks to Dip as Commodities Losses Deepen

MARKET WRAPS

Watch For:

Germany Trade Balance; U.K. BRC-KPMG Retail Sales Monitor; no major earnings scheduled

Opening Call:

Shares in Europe face modest opening losses as the slump in commodities continues. In Asia, stocks steadied after early weakness, the dollar and Treasury yields extended their gains, while oil and gold prices continued to tumble.

Equities:

European stocks are likely to open in the red, held back by continued steep losses in oil and metals, with fresh questions about Federal Reserve policy following Friday's upbeat U.S. jobs report, adding to the cautious mood.

In Asia, most markets managed to reverse opening losses, while Chinese trade data released over the weekend undershot forecasts, with the fast-spreading Delta variant of the coronavirus looming on the horizon.

Indeed, Goldman Sachs revised down its China GDP forecast for the third quarter by 3.5 percentage points to 2.3%, as the spread of the variant prompted Chinese authorities to tighten restrictions on travel and entertainment.

The bank expects China's fourth quarter growth to benefit from policy support and a normalization of activity, revising its forecast for the October-December quarter to 8.5% from 5.8%. It expects China's full-year GDP to be 8.3%, compared with its previous forecast of 8.6%.

Forex:

The dollar held on to its post-labor data gains in Asia, with Friday's strong payrolls reading boosting confidence in the economic recovery and triggering predictions of an expedited monetary tightening.

However, CBA said the dollar's strength could be tested if U.S. CPI data for July on Wednesday shows some moderation in inflation.

The impact of base effects and reopening frictions on prices are beginning to fade, added CBA. Still, over the medium term, FOMC members will increasingly voice their support for tapering asset purchases this year following vice chair Clarida's lead last week.

Commerzbank said the safe-haven Swiss franc should fall against the euro in coming quarters as the pandemic eases and the Swiss National Bank maintains its loose policy stance but the deprecation will be moderate.

"This is because the European Central Bank is also likely to remain keen to dampen any speculation about an early exit from its expansionary monetary policy, and this is likely to weigh on the euro," said Commerzbank currency analyst You-Na Park-Heger.

Levels above 1.20 in EUR/CHF should therefore be out of reach for the time being, she said. Commerzbank expects EUR/CHF to rise to 1.08 by year-end and to 1.13 by December 2022.

Bonds:

U.S. Treasurys weakened further in Asia, sending the yield on the 10-year note above 1.300%.

The yield snapped a five-week losing streak on Friday, boosted by the strong labor figures and progress on Covid-19 vaccination. But the yield is unlikely to reach February's highs, said SVB's Eric Souza, as inflation fears are likely to recede over time.

"Why did we have low inflation in the past few years? It was because of globalization and technology, and those things haven't gone away."

Deutsche Bank said long-end Treasurys remain expensive despite Friday's selloff. The bank compares market value with its own model and said the gap is at the widest level since 2008. The benchmark yield "remains low after accounting for the co-movements of other market variables."

In credit, riskier corporate bonds remain the most attractive asset, said Chris Iggo, chief investment officer at AXA Investment Managers.

"High yield does offer some risk premium over investment grade with the average index spread relative to BBB-rated bonds well above 200 basis points," he said, noting that "looking at 'risk' premiums across asset classes there is nothing to compensate investors for taking interest rate risk."

Alternatives look grim: 30-year bund yields turned negative again last week, indicating real capital losses for buy-and-hold investors, while investment grade bonds traded at very tight spreads, offering little credit risk premium.

Energy:

Oil futures were sharply lower in Asia, extending Friday's 1% retreat, as concerns grow that rising Covid-19 cases in China could weigh on demand prospects, said AmBank Research.

The resurgence of the virus in China has overshadowed signs of strong demand elsewhere, it said, noting that U.S. highways traffic appears to have returned to 2019 levels, while gasoline deliveries in Spain have also jumped above pre-pandemic levels.

Away from oil, Macquarie said there's little sign of something that could snap thermal coal's rally, and reckons it is underpinned by tightness in supply and demand that will continue well into the fourth quarter.

"Despite indexes approaching multiyear highs, we do not yet see scope for a significant price correction," said Macquarie. While even Europe is demanding more of the fuel, China's especially short on coal. "The structural shortage in China seems hard to address in the short term, despite the NDRC's calls for increased production."

Metals:

Gold was more than 1% lower in Asian trade after it ended a downbeat week on Friday with the sharpest daily fall since mid June, with the upbeat U.S. jobs report stoking fears of a pullback in stimulus measures, said ANZ Research.

ANZ said inflation concerns are likely to remain heightened in the short term, denting investor appetite for precious metal.

Copper prices were around 0.4% lower, pressured by the stronger dollar, reversing some of the metal's price gains that were driven by possible disruptions to supplies from Chile, said ANZ.

However, the bank said the base metals market is likely to remain supported by the U.S. infrastructure package, which could boost demand for copper.

Iron ore was down more than 4% and Huatai Futures expects prices to enter a downturn in the second half amid muted demand from Chinese steel producers due to regulators' steel-output curbs and a recent outbreak of new Covid-19 infections in the country.

China is the world's biggest buyer of iron ore and accounts for more than half of global steel output.

   
 
 

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August 09, 2021 00:20 ET (04:20 GMT)

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