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EUROPEAN MIDDAY BRIEFING: Stocks Rise, Oil Prices Near Three-Year High

MARKET WRAPS

Stocks:

European markets rose as oil prices increase and as investors digest the outcome of the German elections.

The DAX, Germany's benchmark stock index, rose 1% in the best intraday performance among Western European indexes. Germans voted for a new chancellor over the weekend. The initial results showed a tight race that will likely mean lengthy coalition talks and no major changes to policy, according to Peter Schaffrik, a global macro strategist at RBC Capital Markets.

"For markets this means continuity. At the end of the day, it will remain a centrist government in all cases," Mr. Schaffrik said. "Germany's fiscal stance will remain within the boundaries of what the market will find easily acceptable."

German policies will continue to evolve but not shift dramatically, Berenberg chief economist Holger Schmieding said.

In the first federal election in 16 years without Merkel, Germans don't seem to yearn for fundamental change, he said.

Both a traffic light and a Jamaica coalition--the two most likely options--would continue the German tilt of the last eight years toward a more relaxed, centre-left and greener policy stance, characterized by more spending on digital, infrastructure, climate protection and health, and a new attempt to complete the European banking union without softening Germany's position very much.

"Differences in the overall fiscal stance between traffic light and Jamaica wouldn't be big enough to change the outlook for German or Eurozone aggregate demand," Schmieding said.

The pan-continental Stoxx Europe 600 advanced 0.7%, with stocks that benefit from the loosening of pandemic restrictions leading the index higher.

Shares on the move:

Office-landlord and WeWork competitor IWG rose nearly 7%. Travel stocks rallied. International Consolidated Airlines Group rose 3.7% and Aeroports de Paris climbed 4.8%. Rolls Royce jumped 7%, rising for a second trading session after the jet-engine maker won a deal to supply the U.S. Air Force fleet of B-52 bombers.

Data in focus:

Financial markets are assuming that German coalition negotiations will drag on for a long time and this might spark some volatility, said Lale Akoner, senior market strategist at BNY Mellon Investment Management.

"We know markets do not like uncertainty and should therefore expect higher volatility," she said. Coalition outcomes do have implications for bonds markets, she added. A "traffic light" coalition--one with SPD, FDP and Greens--"may result in a material change in political regime and higher fiscal spending--meaningfully deviating from [Chancellor Angela] Merkel's frugal era."

U.S. Markets:

Stock futures rose, and oil hit its highest level in nearly three years, as fears about China Evergrande Group 's debt problems waned and investors bet on further economic reopening from the pandemic.

Stocks swung last week as fears about Evergrande's debt problems weighed on markets. Despite the Chinese property developer missing a bond coupon payment, the S&P 500 still finished the week up 0.5%.

Federal Reserve Chairman Jerome Powell helped boost confidence when he said the U.S. economy has recovered sufficiently for the central bank to potentially announce the start of bond-purchase tapering at its next meeting.

"People have had time to think over the weekend and have decided that this is another occasion to buy the dip," said Sebastien Galy, a macro strategist at Nordea Asset Management, referring to the practice of buying after stocks fall. "The high levels of liquidity in the market changes our view of the world and how fast we fade the fear."

At 8:30 a.m. ET Monday, fresh data on new U.S. orders for durable goods in August is set to be released. Economists are expecting an increase, as business investment and consumer spending was strong.

There are a number of Federal Reserve officials due to speak this week, with Monday including speeches from Chicago Fed President Charles Evans, New York Fed President John Williams and Fed Gov. Lael Brainard.

Forex:

Germany's federal elections, where the center-left SPD party won a narrow victory and a government is unlikely to be formed for weeks, likely won't have any immediate impact on the euro, Commerzbank said.

The issues affecting the euro "will only begin to emerge slowly," said currency analyst Ulrich Leuchtmann. A government favoring greater EU fiscal consolidation would be euro-positive, and a SPD-Green-Liberal coalition could take this route, depending on concessions made to the Liberals.

A tougher stance towards China might strain Europe-China relations, which is likelier if the Greens and Liberals have a big influence. "The example of the U.S.-Chinese trade war suggests that this might lead to appreciation potential for the euro," Leuchtmann said.

The U.K.'s supply constraints could send the pound lower even though the market has recently priced in more interest rate rises by the Bank of England for next year, MUFG Bank said.

The seriousness of supply side bottlenecks was underlined by the U.K. government's decision to offer temporary visas to fuel tanker and food truck drivers, and to poultry workers, MUFG currency analyst Lee Hardman said.

"The latest developments are creating a more negative combination of weaker growth and higher inflation in the U.K. which we believe is a bad mix for pound performance." GBP/USD could weaken, especially if it falls below the 1.3600 support level, he said.

Bitcoin recovered after falling in reaction to Friday's news that China will ban all cryptocurrency transactions and mining. Bitcoin rose 5.6% to $43,858, having fallen as low as $41,120 on Friday, according to CoinDesk.

"The impact of the latest Chinese news on Bitcoin's price was significant but not dramatic as the $40K support held well during the kneejerk drop and during the weekend," Swissquote Bank analyst Ipek Ozkardeskaya said.

"But Bitcoin is still in the bearish consolidation zone and should make a move above the $44/45K mark to step back to the positive trend, otherwise we may see the price of a coin fluctuating between $40K and $45K range without too much excitement for traders."

Bonds:

The yield on the 10-year benchmark U.S. Treasury note ticked down to 1.447% Monday, from 1.459% Friday, capping a four-day rise that drove the biggest weekly increase since March.

Investors are likely to continue to sell U.S. Treasurys and U.K. government bonds, pushing their yields higher, as they price in the possibility of higher interest rates, said Mizuho.

"The move higher in yields should continue in U.S. Treasurys and more forcefully in GBP rates," analysts at the Japanese bank said.

The Bank of England's surprise comments last week that the latest developments had strengthened the case for modest tightening makes foreign selling of gilts more likely, they said.

Corporate bond purchases by the European Central Bank are likely to partially offset supply pressure this month, said UniCredit.

In particular, ECB's bond-buying activity should support euro investment-grade nonfinancial senior debt, alleviating the technical pressure from the strong new-bond supply this month, analysts at the bank said.

Sales of new debt by companies tracked by the iBoxx nonfinancial corporate bond index reached EUR27 billion so far this month, they added.

A rebound in risk-on sentiment Monday may lead to tighter credit spreads, unwinding some of last week's spread widening in hybrid debt and high-yield corporate bonds, said UniCredit.

"Despite ongoing concerns about developments in the Chinese real estate sector, appetite for risk looks to be up this morning," analysts at the bank said, adding that market sentiment is in the driver's seat this morning.

This may lead to at least a partial reversal of last week's spread widening in hybrids of about 6 basis points and of 4 bps for high-yield debt, they said.

Commodities:

Oil prices rose thanks in part to broader concerns over the tightness in energy markets, with oil demand expected to get an additional boost from gas to oil switching over the course of this winter, according to DNB Markets' Helge Andre Martinsen.

Those gains also come after Goldman Sachs on Sunday increased its year-end Brent forecast by $10 to $90 a barrel.

"The current global oil supply-demand deficit is larger than we expected, with the recovery in global demand from the Delta impact even faster than our above consensus forecast and with global supply remaining short of our below consensus forecasts," Goldman Sachs's Damien Courvalin said.

Gold prices traded sideways as investors shun the metal in favor of other assets. Investors continued to wind down their gold positions last week as the precious metal's lackluster price performance made other assets more appealing, Commerzbank said.

Gold exchange-traded funds tracked by FactSet saw a net outflow of $464 million last week. Speculative investors also slashed their exposure to gold futures, according to CFTC data. Money managers cut their net long positions in gold futures by 24,000 lots in the week to 21 September. That is equivalent to selling 76 metric tons of gold in one week, noted Commerzbank.

Copper prices edged lower as the dollar rises and investors weigh risks from central bank tightening and the Evergrande saga. Three-month copper on the LME edged down 0.4% to $9,317 a metric ton.

Other base metals also begin the week on the ropes. Aluminum fell 1.2% to $9,316.50 a ton while nickel fell 1.6% to $18,900 a ton.

"Deleveraging and regulatory pressures will continue to see tailwinds morph to headwinds in the coming months," TD Securities said in a note.

The Fed is likely to begin tapering next month, "[suggesting] that macro forces will increasingly point to the downside as the path of least resistance in the coming months," the bank said.

   
 
 

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