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North American Morning Briefing: Stock Futures Waver Amid Energy, Inflation Concerns

MARKET WRAPS

Watch For:

U.S. NFIB Index of Small Business Optimism for September; U.S. World Agricultural Supply & Demand Monthly Estimates.

Opening Call:

Stock futures wobbled Tuesday, as rising energy prices exacerbated concerns about inflation, and lingering worries about China's property sector weighed on sentiment.

Futures tied to the S&P 500 edged up 0.1% Tuesday, a day after the broad index was pulled lower by ongoing concerns about slowing growth and inflation. Futures for the blue-chip Dow Jones Industrial Average also added 0.1% while the technology-heavy Nasdaq-100 rose 0.2%.

Stock indexes have been dragged lower in choppy trading in recent weeks. Investors are contending with an energy crunch that threatens to add to inflationary pressures just as signs emerge that global economic growth is slowing.

Concerns about China's struggling real-estate sector continue. Two board members of embattled developer Fantasia resigned, days after the company failed to make a $206 million bond payment. Its troubles add to worries that China's property sector difficulties extend beyond Evergrande, whose failure to meet its debt payments raised concerns about a fresh drag on the world's second-biggest economy.

Investors are looking to the third-quarter earnings season, which begins this week, for clues on how companies are faring with price increases. Some of the U.S.'s biggest banks, including JPMorgan Chase and BlackRock, are set to kick off the reporting season Wednesday.

"The main topic will be inflation, there is some real concern about a winter of discontent," said Brian O'Reilly, head of market strategy for Mediolanum International Funds. "We could see some volatility if companies don't get their communications right on their cost pressures."

On Tuesday, investors are also awaiting the International Monetary Fund's world economic outlook report, which should offer insight into the faltering post-pandemic recovery. U.S. data on job openings and labor turnover are due at 10 a.m. ET.

Overseas, the pan-continental Stoxx Europe 600 index fell, led by automotive and mining companies. In Asia, stock markets were broadly lower.

Forex:

The dollar should stay supported after any dips lower as traders await the release of U.S. CPI inflation data and Fed minutes on Wednesday, ING said.

These will be the next input into market speculation on when and how quickly the Fed will tighten monetary policy.

"The issue of how central banks respond to current price pressures remain front and centre," ING said. USD/JPY, which last traded down 0.1% at 113.24, should stay supported above 112.80 and "looks on course to 115." The DXY dollar index--which is last at 94.3050--should stay supported in a range between 94.00 and 94.50, it said.

The euro could weaken if most European Central Bank policymakers continue to show little concern about inflation risks, Commerzbank said.

The longer most ECB members play down inflation, the more likely this will "sow doubts" in the market that the ECB could move towards exiting its expansionary monetary policy sooner than anticipated, Commerzbank currency analyst Thu Lan Nguyen said. "And then the currently high inflation is likely to put real pressure on the euro."

ECB chief economist Philip Lane on Monday said a one-off shift in wages in response to recent price spikes wouldn't be a sign of sustainably higher inflation.

The pound may continue to weaken even as the Bank of England moves closer to raising interest rates, MUFG Bank said.

"The negative supply shocks from Covid-19, Brexit and the energy price surge are set to have a clearer negative impact on the performance of the U.K. economy heading into year end," MUFG currency analyst Lee Hardman said.

Despite slowing economic growth, the BOE will likely lift rates to curb inflation, he said. In light of these risks, MUFG maintains its short GBP/USD position, he said.

Short positions bet on an asset price falling. MUFG has a target of 1.3200 and stop loss of 1.3950 for GBP/USD.

Bonds:

The yield on the benchmark 10-Year U.S. Treasury note rose to 1.612% Tuesday from 1.604% Friday.

Yields have been on an upward trajectory since the Federal Reserve strongly signaled last month it could start tapering its bond purchases as soon as November.

A sharp drop in U.S. job growth in September is unlikely to affect the Fed's taper plan, said BlackRock. The asset manager is strongly underweight on U.S. Treasuries, expecting a gradual rise in nominal bond yields even with the Fed poised to start tapering off asset purchases by the end of the year.

"We are tactically pro-risk, yet recognize the path for further gains in risk assets has narrowed after an extended run higher and that markets have become more susceptible to sentiment swings," it said.

German 10-year Bund yields remain close to 2021-highs of around -0.09% even as rising oil prices keep fanning inflation fears, analysts said.

ECB chief economist Philip Lane's speech, in which he reiterated what he sees as the transitory nature of inflation, "did not contain anything substantially new and failed to provide support to fixed income market," said UniCredit.

Commodities:

Oil prices rose with energy markets broadly calmer Tuesday. European benchmark gas prices were up 1.2% at EUR86.22 per megawatt hour, with gas's climb having slowed to a crawl since Russian officials hinted at higher supply in November.

UBS's Giovanni Staunovo said he expects higher crude demand in the power sector, because of the continuing gas-supply crunch, and increased jet-fuel demand to drive oil demand over the next 12 months. That's why he has raised his Brent and WTI forecasts by $5 to, respectively, $80 a barrel and $77 a barrel over the coming year.

Aluminum prices rose to their highest level since 2008 as rallying energy prices add to the metal's input costs and threaten supply shutdowns. Three-month aluminum on the LME was up 0.6% at $3,060 a metric ton, its highest level in 13 years.

The metal has already rallied this year as demand has rebounded and thanks to supply constraints in China. Now, surging prices of coal, gas, and oil are adding to the rally.

Energy accounts for 40% of the metals manufacturing costs, said Commerzbank, meaning higher prices are adding to aluminum smelters' bills. Higher energy prices also raised the prospect that some smelters could close or pull back on production "causing the global aluminum market to be even more poorly supplied," the bank said.

Corporate News:

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Top Stories:

China to Let Power Prices Rise in Bid to Fix Electricity Crunch

The shortage has slowed factory output, in turn hitting companies around the world that sell made-in-China products or use Chinese electronic parts in their own factories.

Some Investors Find Stability in SPACs

Shares of special-purpose acquisition companies have lost their luster for those who recently saw them as a ticket to fast riches. That is good news for a different group of investors, who treat them as an alternative to bonds.

Oil Jumps Above $80, Turbocharged by Supply Shortages

The extended climb in oil prices is leaving some other industrial commodities behind, a divergence that reflects bets that energy supply shortages will offset any slowdown in the global economy.

   
 
 

TODAY'S TOP HEADLINES Write to sarka.halas@wsj.com

TODAY IN CANADA

Earnings:

Nothing major scheduled

Economic Indicators (ET):

Nothing major scheduled

Stocks to Watch:

No items published

Other News:

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Market Talk:

Supply-Chain Woes Weigh on Dorel's Remaining Business

Dorel Industries, which has unveiled plans to sell its bicycle unit for $810M, warns that supply-chain issues are pressuring its remaining home and juvenile segments. Dorel says demand for container freight is pushing up costs and is hampering its ability to meet demand for its products. The company says inflation, labor shortages and fallout from the Covid-19 pandemic are also weighing on results, and that it won't meet the forecasts it made in early August. Dorel reports 3Q before the bell on Nov. 5.

Dorel Not Shopping Its Home, Juvenile Units

As it announces the $810M sale of its bicycle unit, Dorel Industries says it doesn't plan to shed its home and juvenile segments. The Canadian company says it plans to grow the businesses, which accounted for roughly 60% of its revenue in the first half of the year, organically and through tuck-in acquisitions, adding that it also plans to reduce its cost structure to improve cash-flow generation. Dorel, which earlier this year dropped plans to be taken private, also says it will reassess its strategy as required.

   
 
 

All times in GMT. Powered by Kantar Media and Dow Jones.

   
 
 

Powered by Kantar Media and Dow Jones.

   
 
 

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October 12, 2021 06:25 ET (10:25 GMT)

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