EMEA Morning Briefing: Stocks to Extend Gains With Powell's Speech Still in Focus

MARKET WRAPS

Watch For:

Eurozone Business & Consumer Surveys; Germany Provisional CPI; OECD Quarterly National Accounts; UK Summer Bank Holiday, financial markets closed; updates from Gazprom, VEON

Opening Call:

European shares should post modest opening gains, as traders continue to weigh Jerome Powell's comments on Fed policy. In Asia, most stock benchmarks were little changed; the dollar, Treasury yields and gold fell slightly, while oil was mixed.

Equities:

European stocks should continue to gain from Jerome Powell's dovish Jackson Hole speech, though their advance may be capped Monday, with London markets closed for a national holiday.

"It was viewed, I think, by many as a dovish speech," said Bob Doll, chief investment officer at Crossmark Global Investments. "I'm not sure I see it that way."

Doll said he continues to expect the Federal Reserve to make an announcement on tapering at its policy meeting in September.

In his view, the market will probably become "bumpier" amid uncertainty surrounding the delta variant of the coronavirus, and as economic and corporate earnings growth slows from an "unsustainable" pace in the recovery from the pandemic to a "very respectable pace."

"The exact timing and speed of the taper will be flushed out in the coming meetings and will likely have some dependency on the labor market data in the next couple of months," wrote Charlie Ripley, senior investment strategist at Allianz Investment Management.

"However, it's worth noting that Powell warned market participants that bond tapering should be differentiated from rate lift off as one event may not seamlessly lead to the other," Ripley said.

Forex:

The dollar continued to weaken in Asia, in line with falling Treasury yields, despite the risk-on mood spurred by Powell's remarks on Friday.

However, Capital Economics said weakness in the dollar in the latter half of the week is seen as unlikely to last. "We think that an expectation of tighter Fed policy in response to persistently high inflation will push up U.S. yields and boost the dollar in the coming months, which will weigh on the prices of all commodities," said Capital Economics.

Commonwealth Bank of Australia said GBP/USD should consolidate gains this week, pointing to reports of widespread supply constraints, including labor shortages, that risk pushing up U.K. wages and inflation.

"If supply constraints are not overcome quickly, the Bank of England may need to consider an earlier than expected exit from ultra-easy monetary policy that may push up GBP sooner than our forecasts envisage," said CBA.

Bonds:

Yields on U.S. government bonds eased back further in Asia, extending Friday's fall after Powell indicated a possible reduction in bond purchases.

"Powell's speech is being interpreted as Treasury friendly," Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets, wrote in a note to clients after Mr. Powell's remarks on Friday. "On net, tapering remains on track and the next question is when it will be appropriate to hike."

A pickup in bond supply and elimination of uncertainty around the Jackson Hole symposium should allow global rates to resume an upward trend in September as risk assets rally, said Peter Chatwell, head of multi-asset strategy and Peter McCallum, rates strategist at Mizuho. They expect Bund yields to rise as well, though Bunds are more resilient than Treasuries and Gilts.

Mizuho has stuck to its year-end target of -0.45% for 10-year Bund yields, which is below the current level of -0.415% , according to Tradeweb. Mizuho sees upcoming German elections as a risk for Bunds to become less "risk-free."

Energy:

Oil prices were mixed in Asia, with Brent edging higher but WTI nudging into the red, as concerns about supply disruptions dominated the market with Hurricane Ida making landfall in the U.S. Gulf.

The category four storm has forced the shut-in of 1.74 million barrels per day of oil production in the Gulf of Mexico, equivalent to some 96% of production there, or 1.7% of global oil supply, CBA said. It said the Colonial pipeline, which can distribute 2.5 million bbl/day of gasoline, diesel and jet fuel across the east and southeastern U.S., has also been shut.

Metals:

Gold futures were a touch lower in Asia but remained firmly above $1,800, with Powell's speech on Friday still in focus. ANZ said his remarks alleviated worries that the Fed will tighten monetary policy to curb higher inflation, bolstering investor demand for gold.

Copper prices were higher almost 1.5% higher, as persisting labor-related issues at mines in Chile raised concerns about output from the world's top producer of the red metal.

ANZ said labor unions appear to be pushing for higher wages, and it seems unlikely that workers at three Chilean mines--Andina, Cerro Colorado and Salvador--will accept the latest offers from their respective operators. Should negotiations fail, that will probably exacerbate supply-side issues.

TODAY'S TOP HEADLINES

China Curbs Steel Output, but Familiar Economic Pressures Test Its Mettle

HONG KONG-A two-month fall in China's steel output, ordered by economic officials, handed Beijing a global showcase for advancing climate goals and controlling commodity markets. A brewing economic slowdown is testing the government's will to sustain the cuts.

China's production of crude steel, half the world's annual total, fell in July by the widest year-on-year margin since the 2008 global financial crisis. Early indicators suggest it might slip again this month. Culled by state inspections and other official curbs at mills nationwide, the usually prodigious flow that is often the subject of global trade and environmental tensions has fallen by 12.5 million metric tons-about twice Britain's annual total-in July from May's record high.

Treasury Demand Shows Resilience as Fed Signals Bond-Buying Pullback

Investors keep buying U.S. Treasury securities, defying predictions for a broad selloff that would send bond yields back to their March highs.

Yields, which move in the opposite direction of bond prices, have held steady in recent weeks after rising sharply in the first quarter and then sliding in subsequent months as investors scaled back some of their most optimistic economic forecasts.

Covid-19 Surge in Malaysia Threatens to Prolong Global Chip Shortage

SINGAPORE-A surge of Covid-19 cases in Malaysia, a little-known but critical link in the semiconductor supply chain, has opened a new front in the battle to fix manufacturing woes that have rippled across industries during a global shortage of computing chips.

The Southeast Asia nation is one of the world's top destinations for assembly and testing of the devices that control smartphones, car engines and medical equipment. Disruptions in Malaysia threaten to prolong uncertainty over chip supply well into next year, dashing hopes of relief in the second half of 2021.

Stock Market Turns Cautious as 'Defensive' Shares Surge

Some of the hottest stocks in the U.S. are pointing to an economic cool-down.

Utilities and healthcare are among the best-performing groups in the S&P 500 so far this quarter, with gains of 7.8% and 6.6%, respectively, compared with a 4.9% rise in the broad stock index. Big winners include utility NextEra Energy Inc., which is up 14% this quarter, while shares of medical company Danaher Corp. are up 19%.

Fed Faces New Challenge Spelling Out Employment Goals

Federal Reserve officials are talking more about how to define a fuzzy concept-maximum employment-that will heavily influence their thinking around how much longer to keep interest rates near zero.

Favorable hiring conditions, as seen in record levels of job openings and job quitting, suggest "job seekers should help the economy cover the considerable remaining ground to reach maximum employment," Fed Chairman Jerome Powell said in a speech Friday at the Kansas City Fed's annual economic policy symposium.

White House More Than Doubles Its Inflation Forecast in New Update

WASHINGTON-The White House more than doubled its forecast for annual inflation in new projections released Friday, as supply-chain disruptions stemming from the Covid-19 pandemic continue to put upward pressure on prices.

The Office of Management and Budget said it expected consumer prices would rise 4.8% in the fourth quarter from a year earlier, up sharply from the 2% rise that the Biden administration forecast in May. Officials see those price pressures quickly abating next year, with the consumer-price index rising 2.5% in the fourth quarter of 2022, more than the 2.1% they expected in May, and reaching 2.3% in 2023.

EU Set to Recommend Halting Nonessential Travel From the U.S.

The European Union is set to recommend halting nonessential travel from the U.S. because of the spread of Covid-19, diplomats said on Sunday.

European officials have been considering the move for much of the last month, with the average U.S. infection rate now above that of the EU.

U.S. Carries Out Airstrike to Prevent Kabul Airport Attack

A U.S. drone struck a vehicle packed with explosives in a residential area of Kabul on Sunday, preventing an imminent attack on the city's airport, the Pentagon said, as the massive international airlift out of Afghanistan entered its final hours.

The vehicle contained multiple suicide bombers affiliated with Islamic State who intended to strike the airport, possibly targeting U.S. troops, a defense official said.

Write to paul.larkins@dowjones.com

Expected Major Events for Monday

04:30/NED: Aug Producer confidence survey

04:30/NED: Jul PPI

06:00/DEN: Aug Business tendency survey

07:00/SVK: Aug Economic sentiment indicator

07:00/SVK: Aug Business tendency survey

07:00/SWI: Aug KOF economic barometer

07:00/SPN: Jul Retail Sales

07:00/SPN: Aug Flash Estimate CPI

08:00/ICE: Aug CPI

08:00/BUL: Jul PPI

08:00/ICE: Jul PPI

08:00/GER: Aug Bavaria CPI

08:00/GER: Aug Hesse CPI

08:00/GER: Aug Baden-Wuerttemberg CPI

08:30/GER: Aug North Rhine Westphalia CPI

09:00/MLT: Jul PPI

09:00/CYP: Jun Industrial Production Index

09:00/EU: Aug Business & Consumer Surveys - Business Climate Indicator & Economic Sentiment Indicator

09:00/CRO: Jul Retail trade

09:00/GER: Aug Saxony CPI

09:30/BEL: Aug CPI

10:00/FRA: 2Q OECD Quarterly National Accounts: GDP growth

10:00/POR: Jul Retail trade

12:00/GER: Aug Provisional CPI

13:00/BEL: 2Q Final GDP

15:59/UKR: Jul Industrial Production

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This article is a text version of a Wall Street Journal newsletter published earlier today.


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  08-30-21 0024ET
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