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EMEA Morning Briefing: Stocks Seen Higher But Caution Likely Ahead of U.S. Jobs Report

MARKET WRAPS

Watch For:

Eurozone PPI; Germany Foreign Trade; U.S. Employment Report; no major corporate updates expected

Opening Call:

European shares could bounce back on Friday, although investors remain wary of a "too hot" U.S. jobs report later in the day. In Asia, most major benchmarks made modest gains; Treasury yields were mixed; the dollar edged down; while oil and gold prices rose.

Equities:

Stock-index futures suggest European equities could break their losing streak on Friday, after the S&P 500 and Dow finished higher following days of declines.

Some strong economic data reinforced expectations of a hawkish Federal Reserve, weighing on U.S. shares early on Thursday, but the major indexes were able to recover toward the end of the day.

However, the big data news comes later Friday, with the release of the August employment report.

"[The] jobs report once again carries risks for stocks because if it runs 'too hot,' that will increase the prospects of more hikes and, more importantly, delay when markets expect rates will be cut," Sevens Report said.

It also carries a possible reward, which partially explains why the stock market came back a bit in the final hour of trading. The indexes had already dropped precipitously since Jerome Powell's Jackson Hole speech, and if the jobs result comes in anywhere below July's result, the stock market could rally.

"If you get this jobs report to disappoint, you're going to have a whole bunch of people start to say the Fed isn't starting to get more hawkish and you're going see stocks rally," Sevens Report said.

Stocks to Watch:

Rio Tinto's C$43/share cash offer for shares in Turquoise Hill that it doesn't already own falls short of Goldman Sachs's valuation.

Turquoise Hill, which is 51%-owned by Rio, has a 66% interest in the Oyu Tolgoi copper-gold mine in Mongolia. In a note, Goldman Sachs estimated Oyu Tolgoi was worth $23.5 billion, citing Goldman's long-term outlook for copper prices. That means Rio's current 34% effective share of the operation is worth $9.1 billion.

"The $3.3 billion offer equates to an enterprise value of $10.4 billion including Turquoise Hill's net debt as at 30 June of $3.8 billion, which implies a valuation of $15.7 billion for 100% of Oyu Tolgoi," Goldman Sachs said.

Economic Insight:

Fitch said a recession in the eurozone now appears likely as a result of the gas crisis.

It said "a full shut-off of Russian pipeline gas to the EU increasingly looks like a reasonable assumption for the purposes of constructing macroeconomic forecasts for the eurozone."

Fitch believes a recession starting in the second half of this year would be "likely," adding that Germany and Italy would see GDP declines next year.

Fitch also said efforts to ration gas would "amplify economic disruptions," adding that "while widespread rationing across the EU is not inevitable even in a shut-off scenario, it would be a high risk in some countries, including Germany."

Market Insight:

Rising short-term rates and inflation will likely continue to hound the markets into 2023, CIBC research said.

After a 15% rally off the June lows, equities are moving back into a period of volatility. Even large companies with pricing power are unlikely to fully insulate their earnings over the next couple of years, with two or more "down" earnings quarters in the foreseeable future, CIBC said.

"We continue to believe that the current environment is most akin to the 1970s. Spiking oil prices, rising interest rates and volatility all affected equity returns, which were reasonable in absolute terms but barely kept pace with inflation."

Forex:

The dollar eased back slightly in Asia following Thursday's gains, with the August jobs report likely to be monitored by investors for clues of how much more monetary tightening by the Fed might be in store.

Well Fargo expects nonfarm payrolls to show 375,000 openings in August, revising up the forecast from 325,000. It is above consensus of 318,000 and compares to 528,000 openings reported a month ago.

Well Fargo said the change wasn't connected the jobless claims, "rather, due to the large increase in the employment component of the ISM manufacturing survey as well as a recalibration of how much the birth-death model may be lifting reported NFP numbers at present."

The DXY Index gained nearly 1% on Thursday, touching its the highest level since 2002 after jobless claims indicated layoffs weren't as high as expected, fueling expectations the Fed would remain hawkish for longer than previously thought.

Bonds:

Treasury yields were mixed in Asia, with the 10-year edging down but the two-year gaining slightly.

Some analysts said demand for U.S. government debt was declining, as the Fed phases-out its bond-buying program, weakening prices and boosting yields.

They added that any surprises to the upside in the jobs report would likely fuel a Treasury selloff.

Other News:

Tradeweb data show that real Treasury yields were along with he prospect of higher interest rates.

Data showed the five-year TIPS yield at 0.855%, up 16.9 basis point from Wednesday. "This yield ended July and opened August in negative territory, closing as low as -0.054% on August 1."

Tradeweb said the five-year TIPS was at its highest level since January 2019. It also showed the 10-year TIPS yield at 0.792%, up 15.5bp from Wednesday, after tumbling a month ago.

This comes "amid strong demand for inflation-protected securities and liquidity in the TIPS market that still lags the nominal market but is improving."

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As the Fed's efforts to shrink the size of its balance sheet move into full force, analysts at TD Securities don't see much market impact for a process many refer to as quantitative tightening, or QT.

"We don't think the ramp-up of QT itself is a significant market-moving event," noting markets should have already priced the event in.

"We forecast the 10 year rate to have already peaked for this cycle, and see a gradual decline over time as the economy feels the impact of the Fed tightening cycle," TD Securities said, adding it's more important now for traders and investors to determine how long the Fed will be shrinking its holdings.

Energy:

Oil prices moved higher in Asia, gaining close to 2%, after they settled at their lowest level in about two weeks on Thursday.

China is a critical factor for the crude demand outlook and it appears that the country's reopening momentum will remain elusive following the lockdown of Chengdu due to a Covid-19 outbreak, OANDA said.

"Oil is looking very vulnerable here as the risk of further Chinese lockdowns grow and as king dollar might be ready for another major run."

Read: U.K. Commits to Plan to Cap Price of Russian Oil

Read: Europe Weighs Price Cap to Bring Down Electricity Prices

Metals:

Gold prices steadied in Asia, after ending at a 6-week low in New York trading.

Most-active gold, silver futures down for a 5th straight session on Thursday as investors bet that interest rates will remain higher for longer.

In a market note Thursday, analysts at ICICI Bank said they maintain their bearish view on gold prices as U.S. real yields continue to drift higher. They see gold prices trading between $1,680 and $1,750 in the near-term, with prices moving further lower to the $1,600 level by December 2022.

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Base metals were broadly lower on growing concerns that demand may be hurt by Europe's energy crisis.

"The EU is likely to place restrictions on gas consumption in heavy industry if shortages persist," ANZ said, noting that these demand concerns were outweighing supply-side issues.

Other News:

Moody's has lowered its 12-month price targets for a host of industrial metals, due largely to data showing an economic slowdown in China.

"China is a major consumer of base metals, coal and iron ore, and the largest steel producer globally," Moody's said.

"A slowdown in the country's economic growth would reduce demand across the metals and mining sector."

Affected metals include aluminum, copper, and steel--as well as precious metals like gold and silver. However, Moody's added that supply will stay tight for most base metals during the coming 12 months, as production has not kept pace with demand and supply-chain snarls have also disrupted production.

   
 
 

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September 02, 2022 00:30 ET (04:30 GMT)

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