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EMEA Morning Briefing: Stocks to Nudge Higher But Growth Worries Persist

MARKET WRAPS

Watch For:

European Commission Assessment of Covid-19's Impact on Economy; Eurozone Construction Output; updates from Deutsche Boerse, Publicis, LVMH, Roche, Aeroports de Paris, Siemens Healthineers, Petrofac, Tele2, BHP Group

Opening Call:

European equities should see a mildly-positive start, despite U.S. stocks wavering over global growth concerns. In Asia, stocks mostly gained; the dollar, Treasury yields and oil weakened while gold rose.

Equities:

Shares are likely to edge higher in Europe following a largely positive finish on Wall Street on Monday and gains in Asia this morning.

The S&P 500 and Nasdaq rose Monday, boosted by investor enthusiasm over a busy earnings week that many hope will give clues about how companies are dealing with inflation and supply-chain issues. However, the Dow closed the session down 0.1%. Asian stocks mainly advanced on Tuesday, tracking Wall Street's tech-driven rally, with Chinese markets rebounding.

A strong start to the third-quarter U.S. earnings season has alleviated some of the uneasiness among investors in recent days. About 81% of S&P 500 companies that have reported so far have beat earnings-per-share expectations, according to FactSet data.

"Many of the companies we are looking at are citing very strong demand, and we can work with a situation where demand is strong and supply is problematic because eventually we will work through supply problems," said Christopher Harvey, head of equity strategy at Wells Fargo Securities. "We're trying to ascertain if we've had a peak in supply-chain issues[and whether] this might be as bad as it gets."

Stocks to Watch:

BHP's first-quarter production was soft, said Macquarie, with better-than-expected petroleum and energy coal output being offset by misses for metallurgical coal, copper and iron-ore output volumes. "Importantly, guidance for all key commodities is unchanged with maintenance programs the key driver behind the metallurgical coal weakness."

BHP was last down 1.6% in Sydney.

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Jefferies prefers BHP over rival Rio Tinto, for now, based on the latest production reports and relative valuations. Strength in prices for some of BHP's key commodities, including steelmaking coal, copper and petroleum, should offset weakness in iron ore prices for the world's No. 1 miner in the short run, said Jefferies.

The bank does forecast a fall in BHP's earnings and cash flow in FY 2022 versus FY 2021, "however, risk to our commodity price forecasts is to the upside."

Forex:

The dollar continued to ease lower in Asia as risk appetite strengthened in most regional markets.

"The market has re-assessed its expectations for the Federal Reserve and now has lift-off fully priced by November 2022. That said, some bullish short-term USD risks are still present, especially vs low-yielders," said JPMorgan.

"Higher, stickier, and more broad-based inflation points to the potential for further front-end repricing, a USD-bullish dynamic, as evident in the performance of JPY last week but with applicability to EUR as well."

Sterling failed to gain on Bank of England Governor Andrew Bailey's remarks that the central bank "will have to act" to curb inflation, as the market has already factored in an interest-rate hike before year-end, said Deutsche Bank.

"Markets were already pricing in an initial +15 basis points move up to 0.25% by the end of the year before the speech."

Speaking to the G30 group of central bankers on Sunday, Bailey said the energy crisis means inflation will last longer and the BOE may need to respond.

Bonds:

Treasury yields edged slightly lower early Tuesday as the recent rally in oil continued to buttress concerns about inflation in the short-term and as investors positioned for an eventual reduction of the Fed's asset purchases.

Increased demand for U.S. government debt last week was "technical and temporary" and inflation is likely to be "persisting in the foreseeable future," said JPMorgan.

"The inflation force is putting pressure on central banks to unwind ultra-accommodative policies, not only because inflation has risen uncomfortably above their targets, but also because inflation depresses real policy rates making current monetary policy even more accommodative than the nominal policy rate suggests."

U.K. sovereign bonds carry a substantial amount of valuation risk as the Bank of England is expected to start scaling back ultraloose monetary policy, said AJ Bell.

"Twelve years of ultra-loose monetary policy has driven gilt prices so high, they now carry an awful lot of valuation risk, and offer a desultory yield in return," said Laith Khalaf, head of investment analysis.

Gilt investors and conventional gilts are directly in the firing line if monetary policy tightens, either through interest rate rises or an unwinding of quantitative easing, Khalaf said, adding that some U.K. gilt funds have already sustained double-digit falls so far this year and that the average U.K. gilt fund has lost 8.8%.

Energy:

Oil prices were near-flat in Asia after they took a split path Monday, with Brent ending lower for the first time in three sessions and the U.S. benchmark significantly paring early gains after both touched multiyear highs.

The oil market is likely to see an increase in volatility because of the recent multiyear highs for prices, said Phil Flynn, senior market analyst at The Price Futures Group. However, "from the supply versus the demand side, all the news is bullish."

Natural-gas prices, meanwhile, fell by nearly 8% on Monday, as a forecast for warmer weather helped to ease worries about winter energy supplies.

Morgans said this oil cycle has a long way to go. Demand is rushing back while supply has been caught flatfooted, mainly due to ESG pressures.

"While we see the potential for oil prices to rally through $100/bbl, more important will be the market's restored confidence in what a typical oil cycle looks like," said Morgans.

Metals:

Gold futures rose, helped by mild dollar weakness. The price of gold seems to be reflecting a tug of war between Fed rate-increase expectations, with many traders becoming more confident a rate increase could occur next summer, said Oanda.

The precious metal may eventually get steady inflows once investors focus excessive money supply and rising inflation in the U.S., Oanda added.

Gold settled with a loss on Monday for a second straight session, pressured by a rise in bitcoin and some strength in Treasury yields, but a retreat in most global stock markets helped to limit losses for the precious metal.

Copper and aluminum prices were higher too, despite China's weak GDP growth weighing on the market, said ING.

The bank said this was because the market for the metals was still fundamentally tight, which should result in continued price support. The aluminum market may tighten further as China's ongoing power crunch crimps production of the energy-intensive industrial metal, it added.

   
 
 

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October 19, 2021 00:33 ET (04:33 GMT)

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