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EUROPEAN MIDDAY BRIEFING - Stocks Tread Water Ahead of US Earnings

MARKET WRAPS

Stocks:

European stocks were broadly flat despite a rebound in Asian markets as investors eye U.S. earnings later.

The Stoxx Europe 600 rose 0.1% while the FTSE 100, CAC 40 and DAX were largely unchanged.

"While most European indices started the week with uncertainty after Chinese GDP and industrial production data over the weekend came in below expectations, U.S. indices have managed to extend the upward move and are once again approaching recent highs," XTB Market Analyst Walid Koudmani said.

As macro concerns such as inflation and central bank stimulus remain, investors looked ready Tuesday to focus on the wave of corporate earnings coming down the pipeline. In the spotlight will be how supply-chain disruptions have weighed on profits, as well as company outlooks for the year ahead.

Meanwhile, the European Commission will officially start the consultation process for the discussion on whether and how to reform the eurozone's fiscal rule but any quick agreement amongst member states looks highly unlikely, ING said. The European Commission will present possible ways forward for the Stability and Growth Pact, or SGP, and will start a public consultation process.

"The current positions are simply too different," ING's economists said. But with or without official changes to the fiscal rules, ING expects fiscal policies in the eurozone to remain accommodative for some years to come. However, reforming the SGP doesn't necessarily imply that fiscal consolidation should be delayed eternally, ING said.

Shares on the move: Ericsson shares fell 3.5%. Citi said Ericsson 3Q 2021 revenues missed consensus by around 3% as strong underlying demand excluding China and a higher intellectual property contribution was offset by supply chain constraints (Citi estimates a 2-3 percentage point impact).

Third quarter adjusted Ebit came in 18% ahead, of which Citi estimates 6 percentage points was down to disciplined operational execution and product competitiveness offsetting the supply chain headwinds.

"In terms of consensus, we expect overall 2021 adjusted Ebit moving around 2%-4% higher on better operational profitability despite assuming around 5% cut to 4Q21 revenues on supply chain constraints."

Citi said it also believes that the supply chain constraints could translate into potential upside for FY22, as underlying demand trends remain supportive.

Shares of TeamViewer fell 6.2% after Berenberg analysts downgraded their recommendation on the Germany-listed software maker to hold from buy.

U.S. Markets:

Stock futures ticked up ahead of a slew of earnings that investors will parse for insight into how companies are faring with inflation and supply-chain disruptions.

A spate of companies are due to report quarterly earnings ahead of the market open, including Johnson & Johnson, Bank of New York Mellon, Travelers, Procter & Gamble and Philip Morris International. Netflix will report earnings after the closing bell.

Investors are using earnings and companies' guidance for the future to assess how corporations are faring with a number of issues. Inflation is expected to be stickier than originally anticipated by central-bank officials, exacerbated by continued supply-chain disruptions, higher energy costs and labor shortages.

About 81% of S&P 500 companies that have reported so far have beat earnings-per-share expectations, according to FactSet data through early Monday.

"It is a market now where you're going to see more differentiation because it is a more challenging environment," said Daniel Morris, chief market strategist at BNP Paribas Asset Management. "If you look at earnings so far, ex-financials, it's been very good."

U.S. housing starts, which are due at 8:30 a.m. ET, are expected to have moderated in September. Builders have been caught between strong demand from buyers-spurred in part by low interest rates-and shortages of materials, labor and lots.

Forex:

The dollar fell broadly, with the DXY dollar index dropping 0.4% to a three-week low of 93.5850, as risk appetite improves and amid uncertainty over whether U.S. President Joe Biden will give Federal Reserve Chairman Jerome Powell a second term, MUFG said.

Although Powell remains favorite to keep the job, questionable trading activities by two Fed bank presidents cast a cloud over his prospects, The Wall Street Journal reported last week.

"The decision does not appear as much as a done deal as before which has increased uncertainty and downside risks for the U.S. dollar," MUFG currency analyst Lee Hardman said. He added that recent dollar weakness has coincided with a rebound in global equity markets.

The Bank of England could start raising interest rates in November but the pound is still likely to depreciate in coming months, MUFG Bank said.

"GBP is more likely to weaken heading into year-end given the more challenging backdrop of slowing global growth, higher inflation and tightening liquidity conditions, which should be less supportive for risk assets and high beta currencies like the pound," MUFG currency analyst Lee Hardman said.

BOE policy tightening could also be viewed as a policy mistake if the U.K. economy slows more notably, which would dent sterling, he said.

Bonds:

Inflation pressures are persistent but are likely to ease, said BlackRock, which doesn't consider the current situation as stagflation.

The asset manager keeps its moderately pro-risk investment stance on a tactical basis, even as it sees a narrower path for risk assets to rise. It attributes inflationary pressures to the economic restart after the pandemic rather than to rising energy prices and it expects the near-term supply-demand imbalances to ease.

"We see the restart price pressures eventually resolving themselves, and believe central banks with credible policy frameworks will look through most of them," BlackRock said.

The European Central Bank will have to raise inflation projections significantly at the Dec. 16 meeting, said NordLB's chief economist Christian Lips and economist Bernd Krampen, adding that this could challenge the ECB's forward guidance.

"This could provoke a test of the forward guidance on the key interest rates," the economists said. NordLB sees concerns over stagflation exaggerated for now, nonetheless, they envisage the ECB to act "very cautiously" when exiting the Pandemic Emergency Purchase Programme and otherwise maintain its accommodative monetary policy for some time.

The ECB's next monetary policy meeting is on Oct. 28, but the next review of staff forecasts is due at the December meeting.

J.P.Morgan expects the ECB's monetary policy meeting to provide some clarity on the form of monetary policy accommodation for the era after the Pandemic Emergency Purchase Programme, said rates strategists Fabio Bassi and Sampathh Vijay. In the short term, European rates will face uncertainty around the Bank of England's delivery in early November, they said.

However, JPM remains confident in fading the amount of excessive tightening expectations that are currently priced at the short end of the EUR curve.

Eurozone government bonds sold off heavily Monday, causing yields to rise, amid inflation fears and some spillover from U.K. rate-rise expectations, but yields trade lower Tuesday.

Eurozone government bond yields dropped in early trade after the massive yield rise Monday caused by inflation fears and spillover from rate rise expectations in the U.K, analysts said.

"The dramatic repricing of short Sterling is leaving massive traces on the EUR curve," said Christoph Rieger, head of rates and credit research at Commerzbank.

He added that contagion into other markets cannot be avoided, with euro money markets now pricing in the first 10-basis-point interest-rate rise by the European Central Bank one year from now, even as the ultralong end of the euro curve remains shielded.

DZ Bank forecasts the 10-year German Bund yield will stabilize around -0.20% on a three-month horizon, said analyst Christian Reicherter.

"As inflation fears are heavily priced into Bund yields in our view, the scope for a further rise in yields is relatively limited," he said.

For 2022, DZ Bank expects the 10-year Bund yield to trend up moderately, reaching 0.10% on a six-month horizon and 0% in 12 months' time.

Commodities:

Oil prices were higher, with both benchmarks paring most of their gentle Monday losses that came with the news of a fall in U.S industrial production and weaker GDP numbers out of China according to ING's Warren Patterson.

Markets were generally calm Tuesday, though investors are awaiting the release of the API's weekly inventory figures later in the day and the EIA's inventory data due Wednesday.

Benchmark European gas prices were down 2.3% after a volatile Monday during which worries that Russian producers won't follow through with more supply caused temporary price spikes.

Gold gained as the dollar slipped and investors worry about the impact of the energy crunch on inflation. Expectations that central banks will raise interest rates to tamp down inflation are keeping the precious metal in check, said TD Securities.

However, investors are likely overestimating how quickly the Fed will move to raise rates. The Fed is likely to look through inflation driven by the energy shock, they said. "This suggests gold is an ideal hedge against rising stagflationary winds, and reasons to own the yellow metal are growing more compelling," the bank said.

Copper prices rose on a weaker dollar and worries about supply disruptions in major producer Peru. A Peruvian community said they'd block a key road used by mining companies in protest over pollution and poverty.

Analysts said that even without those disruptions, the background for copper is bullish. Inventories are dwindling while demand remains strong, says Anna Stablum, at the brokerage Marex.

"Focus was still on the tightening of spreads as traders scrambled to get hold of available metals and scrap markets were tight," she said.

   
 
 

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October 19, 2021 06:39 ET (10:39 GMT)

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