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EMEA Morning Briefing: Stocks to Struggle as Inflation Worries Mount


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Opening Call:

Worries over inflation will continue to dampen the mood in Europe, as investors look ahead to the latest U.S. CPI print and the start of another earnings season. Stocks were mixed in Asia, the dollar and oil weakened, Treasury yields were little moved and gold rose.


Caution will likely dominate European stock markets early Wednesday, as inflation worries continue to weigh on investor sentiment.

With the U.S. earnings season set to get under way on Wednesday, investors are worried that executives will report that supply-chain problems and inflation are chipping away at corporate profit, which could deliver a fresh hit to Wall Street sentiment.

"There's a lot of consternation in the market right now circling around the growth outlook as it relates to the impact from higher energy prices" and bottlenecks in the global supply chain, said Jack Janasiewicz, lead portfolio strategist at Natixis Investment Managers Solutions.

"That filters right into the earnings season. Everybody is sort of on pause waiting around to hear and see" from companies on how they're faring amid higher costs and wages.

U.S. stocks inched lower for the third consecutive session on Tuesday driven by losses in communications stocks.

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.

"Investors are running around like chickens with their heads cut off," said John Buckingham, portfolio manager at Kovitz. "They focus on one thing at a time and buy and then change their mind and sell."

Back in Europe, investors dumped U.K. equity funds last month amid food and fuel-shortage chaos sparked by the pandemic and the country's EU exit, a survey showed.

September was the second-worst month for U.K. equity funds yet recorded by the Fund Flow Index from investment-fund trading network Calastone. Investors sold a net GBP567 million as multiple crises hitting the U.K. spooked investors, the latest index showed.

"September stood out because investors clearly singled out U.K.-focused equity funds," said Calastone.

"This contrasted with June 2020, the worst month on record, as investors at that time sold heavily across almost all equity categories to take profits after the sharp increase in global markets sparked by huge stimulus from central banks."

Stocks to Watch: U.S. shares of SAP rose 2.2% in the extended session Tuesday after the company said strong momentum in its cloud computing segment is allowing it to raise its outlook for the year.

The company said that cloud services revenue rose 20% in the third quarter to EUR2.39 billion, raising total revenue to EUR6.84 billion. As a result, SAP now expects cloud revenue for the year of EUR9.4 billion to EUR9.6 billion , up from its previous forecast range of EUR9.3 billion to EUR9.5 billion.

Cloud and software revenue for the year is now expected to be EUR23.8 billion to EUR24.2 billion, up from a previous forecast of EUR23.6 billion to EUR24 billion.


The dollar weakened slightly in Asian trading, in tandem with lower Treasury yields, reducing the appeal of USD-denominated fixed-income assets. However, forex markets may tread water ahead of key events that include U.S. CPI data, the latest FOMC minutes and speeches from some central bank officials.

"The expectation is that CPI topline numbers are expected to come in at 5.3%, which is pretty high, and that's after 5% from the previous month, " said Minh Trang, senior FX trader at Silicon Valley Bank. "We've had several months where CPI numbers were pretty elevated and I think that'll be the theme this week for sure."

Deutsche Bank economists are shifting to a slightly more hawkish outlook for Federal Reserve monetary policy. "With the [FOMC] proving to be sensitive to higher-than-expected inflation data earlier this year, we now expect the greater persistence in these inflation dynamics to lead to liftoff in December 2022."

Deutsche Bank said inflation will eventually moderate back to the central bank's target, leading it to "anticipate the hiking cycle will be relatively gradual. In particular, we expect three rate increases in 2023, followed by three more in 2024, bringing the fed funds rate to 1.9% at that time."

The Russian ruble's recent gains have further to go given the country's strong current account surplus and the prospect of another interest rate rise at the central bank's Oct. 22 meeting, said ING.

The current account recorded the largest ever quarterly surplus of $40.8 billion in the third quarter, which is "very constructive" for the ruble. The surplus could reach 7-8% of gross domestic product this year, said ING.

"This comes at a time when ruble implied yields are trading over 7% and could well move higher if [Russia's central bank] delivers a 50 basis points rate hike later this month." ING expects USD/RUB to fall to around 70.0-71.0 in the next month, from around 71.95 currently.


Longer-dated Treasury yields were little changed in Asia after they fell on Tuesday, weighed by growing negative sentiment on the U.S. economy's outlook.

Rising commodity prices, led by oil and natural gas, have contributed to concerns about potential inflationary pressures, alongside widespread supply-chain bottlenecks, analysts said. Traders and investors are bracing for Wednesday's reading on consumer prices to potentially exceed expectations, just as optimism over a global recovery is slipping away.

"With investor anticipation continuing to build ahead of the CPI release...and yet another round of commodity price rises that's making it increasingly difficult for central banks to argue that inflation is in fact proving transitory," said Jim Reid, strategist at Deutsche Bank, in a note.

Read the article: Bond Investors Face Up to Risk of Persistent Inflation

JPMorgan now expects European company bond prices to remain steady towards the end of year instead of rising moderately.

"We now formalize our more cautious view by revising up our year end spread targets by 5 basis point to 95bp in investment grade and by 50 bps to 325bp in high yield," analysts at the bank said, adding these new spread targets are essentially flat to current levels.

The bank said it has been steadily paring risk in its top trade portfolio as its "biggest concern" is entering an environment of deteriorating economic growth and tightening monetary policy, which would be challenging for credit markets.


Oil prices were lower in Asia after a media report of possible Iran nuclear talks. The Bloomberg report suggests that negotiations could start as soon as this week, said OANDA. If progress is made after several weeks of talks, a revival of the Iran nuclear deal could cause Brent crude to fall toward the mid-$70s a barrel, OANDA added.

"The oil market has put Iran on the backburner, but given the brewing energy crisis, Iran's ability to ramp up production could easily save Europe if it has a cold winter," said Edward Moya, Senior Market Analyst, OANDA. "Both sides have added motivation since the talks stalled in June."

Oil ended on a mixed note Tuesday, with U.S. prices stretching their streak of gains to a fourth session, but Brent settled lower after the IMF trimmed its global economic growth forecast.


Gold nudged higher, helped by lower Treasury yields and a slightly weaker dollar. Looking ahead, growing fears of stagflation could offer support for the precious metal and may trigger more aggressive and sustained covering of short gold positions, said TD Securities.

Gold futures marked the first gain in four sessions on Tuesday, with prices settling at their highest in almost a week after the IMF growth downgrade.

The IMF update weighed on copper prices, which were around 0.6% lower. "As the cross-asset investor's favorite barometer for global growth, copper often trades with shifts in broader macro sentiment," said Goldman Sachs.



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October 13, 2021 00:48 ET (04:48 GMT)

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