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EMEA Morning Briefing: Stocks to Struggle as Update on Evergrande Awaited

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Eurozone New Commercial Vehicle Registrations; Germany Ifo Index; Italy Business/Consumer Confidence Surveys; U.K. CBI Distributive Trades Survey; updates from Carnival, Severn Trent

Opening Call:

Stocks in Europe are likely to stutter on Friday, as uncertainty about potential risks from the crisis at Evergrande continue to cast a shadow. In Asia, most stocks struggled for momentum, as did oil, the dollar edged lower again, while Treasury yields and gold notched modest gains.

Equities:

European equities are likely to waver on Friday, as persistent worries over troubled Evergrande held back Asian markets. Japan's Nikkei rose after reopening from Thursday's national holiday, but shares elsewhere were muted.

On Wall Street, stocks rose broadly for a second consecutive session, as investors expressed cautious hope that the problems at Evergrande could be contained.

U.S. markets closed with no word on whether Evergrande would make $83.5 million in debt payments by a Thursday deadline. Chinese authorities are asking local governments to prepare for Evergrande to potentially fail, The Wall Street Journal reported, signaling Beijing's reluctance to bail it out.

"There is some confidence that the government is standing by to make sure that this doesn't become more widespread," said Stephanie Lang, chief investment officer at Homrich Berg. "There is no clear indication that they are going to prop up Evergrande, but they will make sure that this won't spillover more broadly."

Forex:

The dollar continued to pull back in Asia after it dropped sharply Thursday, as risk appetite improved.

Sterling extended gains, after the Bank of England said it could raise the bank rate before its asset purchases had finished.

"With quantitative easing set to run until the end of the year, this implies that is would be possible, albeit unlikely, that the BOE could hike rates later in 2021," said Dominic Bunning, head of european forex research at HSBC.

Market pricing is now implying interest-rate rises in the first quarter of next year, which "should support GBP for now," Bunning said. "Any signs that these expectations might be pulled further forward would be even more bullish."

Citi analysts said they were surprised by "the magnitude and the timing" of the Turkish central bank's decision to cut interest rates by 100 basis points to 18%.

Turkey now risks "the possibility of an adverse cycle of rising inflation and expected inflation, which could further complicate the country's already challenging price dynamics," Citi said.

Given a weaker international reserve position and a more challenging macroeconomic backdrop, the possible adverse consequences of premature easing are likely to be greater than during similar episodes in the past. Citi's own recent analysis suggested "there was no room for easing" and tighter policy would have been more appropriate.

Bonds:

Treasury yields strengthened again in Asia, after the 10-year note yield posted its biggest one-day climb since March on Thursday.

"Powell said the tapering process could be wrapped up by mid-2022, which would require either an earlier [than December] start or larger reductions," Moody's said.

Unless upcoming economic data brings extreme surprises, "It seems we're headed for an eight-month taper, or $15 billion reduction per month," Moody's added.

"If 10-year yields close above 1.42%, look for a move towards 1.52%," said Tom di Galoma of Seaport Global Holdings.

Record inflows hit New York's reverse repo facility on Thursday, a day after Fed doubled to $160 billion how much an individual counterparty could place on its books.

The reverse repo facility took in $1.352 trillion, up from $1.283 trillion on Wednesday, as money market funds and other eligible firms continued to find it easier to move money to the Fed for a 0.05% return rather than chase scarce private sector short-term investments.

The size seen Thursday remained consistent with what analysts had said was possible. That said, while Fed officials seem completely fine with what's happening, the reverse repo tool saw almost no activity as recently as the spring.

And it compares with a $8.5 trillion Fed balance sheet, and dwarfs the $120 billion per month the Fed continues to add via its bond buying stimulus.

Energy:

Oil futures were little changed in Asian trade, having closed the New York session around 1.5% higher, as a return of risk appetite in financial markets and fears of tightening crude supplies kept the commodity well-bid.

Demand for crude remains tepid, weighed by slowing aviation travel, Marex said. "Demand from the airline industry has slowed down in recent months" and remains well below pre-pandemic levels.

However, prices could be supported by signs of increased oil consumption from crude importer Japan. The country's crude inventory levels registered a net decrease of 882,390 kilolitres for the week of Sept. 12 to 18, compared with a week earlier, according to data from the Petroleum Association of Japan.

Metals:

Gold posted modest gains in Asia, as investors shrugged off signals the Fed could begin scaling back its asset-purchasing activity and possibly raise interest rates.

"It's quite impressive just how relaxed investors are with the situation, " Oanda said. Even so, the Fed's intention to taper should weigh on the precious metal, with Oanda expecting the precious metal to test the $1,740/oz level soon.

Copper and aluminum prices were lower, as continued uncertainty over Evergrande's possible demise weighed on sentiment, with the wider base metals complex also broadly falling.

Beijing has asked local officials across China to prepare for a "possible storm" which signals it may not step in to bail out the property developer, according to the WSJ. This could have repercussions for the real estate and construction sectors, which may weigh on demand for the industrial metals.

Capital Economics said the Evergrande debacle is likely to hurt the global metal industry.

"We think that the most likely outcome is a managed restructuring, which would see other developers take over uncompleted Evergrande projects. However...we doubt it will be sufficient to offset the growing structural headwinds facing the property sector."

Capital Economics said that "China accounts for around half of global zinc consumption, of which 70% finds its way into the construction sector," and copper "also relies heavily on the Chinese construction sector...and this would be hard to offset even with increased demand elsewhere."

   
 
 

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September 24, 2021 00:37 ET (04:37 GMT)

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