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EMEA Morning Briefing: Stocks to Open Higher as Concerns Over Omicron Ease, GDP in View

MARKET WRAPS

Watch For:

U.K. Halifax House Price Index; Germany Industrial Production Index; EU Q3 GDP; EU Employment; Germany ZEW Indicator of Economic Sentiment; EU ECOFIN meeting of EU finance ministers.

Opening Call:

European stocks should open higher, while London's FTSE 100 may waver at the open. U.S. stock futures point to a higher open on Wall Street. U.S. dollar strengthens. Oil and gold rise.

Equities:

European stocks are set to open higher, fueled by investors' bets that the Omicron Covid-19 variant may cause milder illness than previously feared, renewing confidence in consumer and travel demand.

Scientists and vaccine makers have sent mixed signals regarding the severity of Omicron and how well existing vaccines may work against it. It still may be weeks before a more definitive picture forms.

Investors are also weighing high inflation readouts and the potential for the Federal Reserve to hasten the reduction of its pandemic stimulus measures to combat the surge in consumer prices. This could leave the door open to an interest-rate increase in the first half of 2022

Reports from South Africa, where omicron first was spotted, that hospitals haven't been overwhelmed "is fueling some optimism" among traders who sold earlier, said Yeap Jun Rong of IG in a report.

Airlines, cruise lines and other travel companies that stand to gain from avoiding more anti-coronavirus controls advanced after Dr. Anthony Fauci said early indications suggested omicron may be less dangerous than the earlier delta variant.

Meanwhile, travel to retail and recreation destinations, restaurant bookings and flights have all declined in Europe in the past few weeks as coronavirus restrictions have been tightened in the face of rising hospital admissions, Capital Economics said.

Eurozone GDP growth will be lower than the 0.7% forecast by Capital Economics in the fourth quarter, Capital Economics' Chief Europe Economist Andrew Kenningham said. The Omicron coronavirus variant has added to downside risks, he said.

Capital Economics also said eurozone inflation probably peaked at nearly 5% in November. "If restrictions are tightened sharply, energy inflation may fall more than we have assumed, pulling headline inflation down a bit further and faster than we are assuming," Kenningham added.

Read why Generali Insurance Asset Management said European stocks look a better bet than U.S. stocks here.

Forex:

USD/JPY rose as concerns ease for now about the Omicron variant of Covid-19. The pair's clear breach of the recent resistance around 113.60 likely opens up upside toward 114.00. Investors remain focused on Omicron developments, governments' responses to it and U.S. economic data in coming sessions.

The dollar strengthened against the euro and against the yen, and the WSJ Dollar Index inched higher. Friday's consumer-price report is seen providing further justification for speeding up asset-purchase reductions at the Fed's December meeting, suggesting risks are tilted to the downside, Karl Schamotta at Cambridge Global Payments said.

"If price growth shows evidence of moderation, investors could push monetary tightening expectations out slightly--reducing upward pressure on the dollar."

The chief market strategist is watching yield-curve dynamics, saying last week's moves, in which rate-hike expectations were brought forward even as long yields fell, weren't necessarily dollar-supportive, "suggesting that the US economy might prove unable to bear higher interest costs in the years ahead. If expectations of lower terminal rates become more entrenched, the dollar could lose some altitude."

The prospect of the Bank of England raising interest rates before other central banks will offer limited support to sterling in 2022 due to Brexit, Societe Generale said.

"We remain nervous that the U.K. inflation/growth trade-off has been harmed by Brexit (i.e., U.K. supply-chain difficulties are worse than elsewhere for an obvious reason), and this means the support the currency gets from earlier rate rises will be limited," SocGen forex strategist Kit Juckes said.

By the fourth quarter of 2022, SocGen sees EUR/GBP little changed at 0.85 and predicts GBP/USD will fall to 1.29, from 1.3247 currently, as the Federal Reserve is also expected to lift rates while the European Central Bank leaves rates on hold.

Bonds:

The yield on 10-year German government bonds, or Bunds, will "probably have room" to nudge towards the 0% mark in 2022, but it is unlikely to move beyond that level, said Antonio Cavarero, head of investments at Generali Insurance Asset Management, which manages EUR470 billion worth of assets.

Employment and inflation data support faster monetary tightening, Deutsche Bank said, noting last week's nonfarm payrolls showed a declining headline unemployment rate alongside a falling U-6 rate (which includes discouraged job seekers and the underemployed) and rising labor-force participation.

"In addition, the metrics that Fed policymakers have focused on with respect to their 'broad-based and inclusive' definition of maximum employment showed steady improvement," DB said. Its economists expect Friday's CPI to bring "sturdy gains," with headline inflation rising to 6.9% and core CPI to 5.1%.

Read comments from Aegon AM on why fixed-income investors face a challenging 2022 here.

Energy:

Oil gained in early Asian trade as concerns over the Covid-19 Omicron variant ease. Hopes that the new variant will have a less damaging economic impact have been supported by reports from South Africa that patients there showed only mild symptoms, Phillip Securities said.

Oil is also supported by expectations of a quick return of Iranian oil into the market easing, after the U.S. said that chances of Iran rejoining the nuclear deal may be slipping, ANZ said.

The CEO of Saudi Aramco presses the case for the continuance of fossil-fuel investment at the World Petroleum Congress in Houston. The predominant energy transition strategy "is deeply flawed," because "alternatives are nowhere near ready to carry a big enough load," said Aramco CEO Amin Nasser, speaking to an audience made up mostly of people from the oil and gas industry.

He warned of economic consequences from halting investment in oil and gas. "I understand that publicly admitting oil and gas will play an essential and significant role during the transition and beyond will be hard for some," Nasser said. "But admitting this reality will be easier than dealing with energy insecurity, rampant inflation and social unrest if prices become intolerably high."

Metals:

Gold rose in early Asian trade, after declining overnight on a higher U.S. dollar and U.S. Treasury yields. The precious metal may consolidate in a $1,750-$1,800 trading range alongside growing optimism that the Covid-19 Omicron variant is unlikely to lead to widespread lockdowns. Early data on the variant suggests that cases are mild, Oanda said.

Copper gained in Asian trading following China's move to ease liquidity, ANZ said. Prices are also being supported by the mounting supply risk in South America, ANZ noted.

The Las Bambas copper mine in Peru is planning to halt production amid protests by community groups, it said.

   
 
 

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December 07, 2021 00:26 ET (05:26 GMT)

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