EMEA Morning Briefing: Stocks to Extend Retreat as Fed Signals Economic Growth Slowed

MARKET WRAPS

Watch For:

ECB interest rate announcement, ECB macroeconomic projections; Germany Foreign Trade; OECD Harmonised Unemployment Rates; updates from Gazprom, Morrison Supermarkets, Fuller Smith & Turner, Sibanye-Stillwater

Opening Call:

Europe will likely open in the red again after further losses on Wall Street following a Fed report that showed the U.S. economic recovery slowed and prices continued to rise over the summer. In Asia, shares were weaker, the dollar and Treasury yields were little changed, oil gained but gold fell.

Equities:

European stocks face further losses Thursday on persistent uncertainties about economic growth and more stimulus measures.

Shares have weakened in recent days as investors assessed the rise in coronavirus cases and the below-forecast U.S. jobs report on Friday. Money managers are awaiting fresh cues from the Federal Reserve and the European Central Bank about how signs of a slowing economic recovery and high inflation levels may influence their plans to taper monetary stimulus.

"For so long, there's been a glass half-full view," said Aoifinn Devitt, chief investment officer at financial advisory firm Moneta. "There was so much toward the upside, latching on to the growth narrative. Nothing has changed really, but some negative exogenous factors such as Afghanistan, Hurricane Ida and Friday's jobs report, which have combined to dampen the sentiment in the current week."

U.S. benchmarks pulled back on Wednesday after a report from the Fed indicated that economic growth in the U.S. slowed to a moderate pace in early July through August. The Beige Book cited a widespread pullback in dining out, travel and tourism "reflecting safety concerns" related to the latest Covid-19 surge.

"The hard data in the jobs report on Friday and the Beige Book, all of that is corroborating what we're seeing, which is that we've definitely taken a hit in the economy," said Lori Van Dusen, founder and chief executive officer at LVW Advisors.

Forex:

The dollar dipped slightly against a basket of major currencies, but losses were minor.

Peter Ng, senior FX trader at Silicon Valley Bank, said: "In the medium term, with the prospect of rates moving higher, it should favor the dollar, especially with the Fed having more flexibility than other central banks."

EUR/USD was slightly firmer, with the ECB's policy meeting the highlight for currency traders.

CBA expects the ECB will make no explicit changes to monetary policy but may signal a reduction in the pace of asset purchases under the Pandemic Emergency Purchase Program. CBA also expects the ECB will significantly upgrade both its GDP and inflation forecasts, while any comments about how transitory the recent surge in inflation is expected to be will be closely watched.

The safe-haven Swiss franc should weaken versus the euro in coming quarters as the global economy recovers, but its depreciation will be modest, Commerzbank said.

Concerns about the pandemic should ease next year, reducing flows into the franc, although the euro could weaken as the ECB may take longer than expected to scale back stimulus, Commerzbank currency analyst You-Na Park-Heger said.

"As we believe that the ECB will stick to its ultra-expansive monetary policy for a very long time, expectations of an earlier exit are likely to be disappointed and prevent a more significant rise in EUR/CHF even after the end of the pandemic," Park-Heger said. Commerzbank sees EUR/CHF rising to 1.10 by March 2022 from 1.0892 currently.

Bonds:

Treasury yields were steady in Asia after they fell on Wednesday following the release of the Fed's Beige Book.

The report was seen by some strategists as lackluster. Several economists also suggested that the narrative from the anecdotal account of business conditions from the Fed's 12 business districts wouldn't meet the criteria of "substantial further progress," that the central bank says it needs to see before considering removing easy-money policies and eventually raising interest rates.

Silicon Valley Bank's Peter Ng, said even if incoming data remains soft and tapering is delayed by a month or two, it is imminent, with more Fed officials saying tapering should begin soon.

"There's too much money in the system and rates are held at record lows. As economies are recovering, you have to withdraw emergency stimulus. Otherwise, you get hyperinflation," Ng said.

Energy:

Oil futures edged higher in Asia, extending Wednesday's gains, spurred by a sluggish output recovery in the Gulf of Mexico after Hurricane Ida.

Commonwealth Bank said the global oil demand rebound is facing setbacks with the growing number of Covid-19 Delta cases in Asia. Although OECD commercial stockpiles of crude oil and other liquids is expected to fall to a 61-day low by November, demand still remains uncertain due to the pandemic.

"It's difficult to have conviction that demand will be strong enough to drive shortages in coming months."

Late Tuesday, the API reported inventories of crude oil in the U.S. declined by 2.9 million barrels in the latest week, while gasoline supplies rose by 6.4 million barrels. The results, bullish for crude and bearish for gasoline, were released ahead of official inventories data from the Department of Energy due later Thursday.

Average forecasts in a WSJ survey indicate the DOE report will show crude supplies fell by 2.5 million barrels and that gasoline supplies declined by 2.9 million barrels.

Metals:

Gold futures extended their retreat in Asia, stretching losses to a third consecutive session.

"Gold, like all markets, is trading on a day-to-day basis according to how traders are interpreting the tea leaves for [Fed] monetary policy," said Brien Lundin, editor of Gold Newsletter.

OANDA said the precious metal's upward momentum appears to have waned significantly as a severe bout of recent dollar strength has set a downward correction in motion. It has put support for gold at $1,780.00 an ounce.

Aluminum continued to rally after hitting a 13-year high. Political unrest in bauxite-exporting Guinea is exacerbating an already-tight market as China curbs aluminum production, ANZ said.

"Investors remain on edge, despite coup leader, Colonel Mamady Doumbouya, lifting the curfew and urging mining companies to maintain their output, " ANZ said, noting that stricter environmental controls are raising the cost of producing the metal, which could restrict new supply from hitting the market.

Chinese iron-ore futures fell, with the most-traded January contract on the Dalian Commodity Exchange touching the lowest level in more than a year before paring losses slightly.

Sentiment is clouded by concerns about weaker demand from China's property sector, ANZ said, noting indebted developer China Evergrande's worsening situation and government plans to put a lid on home rents in cities.

CITIC Futures said steel mills generally have a weak impetus to purchase the raw material amid intensifying output curbs, although they may restock when iron-ore prices are low.

TODAY'S TOP HEADLINES

China's Producer Prices Rose at Faster-Than-Expected Pace in August

BEIJING-China's factory-gate prices in August rose at their fastest pace in 13 years, boosted by soaring prices of coal, chemicals and steel, the National Bureau of Statistics said Thursday.

The producer-price index rose 9.5% from a year earlier in August, accelerating from a 9.0% increase in July, according to the statistics bureau. Economists polled by The Wall Street Journal had expected PPI to rise 9%.

U.S. Economic Growth Slowed Over the Summer Due to Delta Variant, Fed's Beige Book Says

The U.S. economic recovery slowed and prices continued rising over the summer as a resurgence of Covid-19 cases linked to the Delta variant led consumers to pare back spending and persistent supply chain problems hampered businesses, the Federal Reserve said in a report Wednesday.

"The deceleration in economic activity was largely attributable to a pullback in dining out, travel, and tourism in most Districts, reflecting safety concerns due to the rise of the Delta variant," the report said. The report, known as the Beige Book, collects anecdotes from businesses around the country.

Democrats Jockey Over Healthcare, Taxes in $3.5 Trillion Package

WASHINGTON-Democrats faced fresh intraparty disagreements over the details of their $3.5 trillion healthcare, education and climate bill, as House Democrats began releasing drafts of segments of the legislation in a race to attempt to complete it in the coming weeks.

Democrats are hoping to construct the wide-ranging bill-which aims to significantly expand the nation's social safety net, reduce carbon emissions and raise taxes on companies and high-income households-by the end of the month. To do so, lawmakers are trying to pre-emptively sort through differences between House and Senate Democrats over many of its provisions, a task that has so far proven difficult.

Fed's John Williams Says Economy Appears on Track for Fed Taper This Year

Federal Reserve Bank of New York President John Williams said the U.S. central bank is likely still on track to slow the pace of its bond-buying stimulus effort this year, although he declined to say when that process might kick off.

"Assuming the economy continues to improve as I anticipate, it could be appropriate to start reducing the pace of asset purchases this year," Mr. Williams said in a virtual appearance Wednesday.

Democrats' Split Deepens Over Powell Fed Reappointment

A centrist Democrat on the Senate Banking Committee said President Biden should nominate Federal Reserve Chairman Jerome Powell to a second term, the latest volley in an intraparty rift over the future leadership of the Fed.

Montana Sen. Jon Tester said in an interview Wednesday that he was concerned by recent calls from progressive House Democrats to replace Mr. Powell with someone who would focus the Fed on advancing liberal political priorities, including climate change. Mr. Tester said he worried doing that would harm the economy by politicizing the central bank.

Coinbase Says SEC Is Investigating Its Crypto Lending Program

The Securities and Exchange Commission is investigating Coinbase Global Inc. over a lending program the company plans to market and has indicated it would sue the company over the offering, Coinbase said Tuesday.

Coinbase co-founder and Chief Executive Brian Armstrong disclosed the dispute in a series of tweets late Tuesday. He called the SEC's actions "sketchy" and "intimidation tactics behind closed doors," and said other crypto companies are able to offer such programs.

Janet Yellen Says Treasury Could Exhaust Cash-Conservation Measures in October

WASHINGTON-The Treasury Department could run out of room next month to keep paying the government's bills on time unless Congress steps in to suspend or raise the federal borrowing limit, Secretary Janet Yellen said in a letter to congressional leaders Wednesday.

Time to raise or suspend the limit is running short against a backdrop of deep partisan disagreements over President Biden's spending plans, complicating the path forward on Capitol Hill.

Hurricane Ida's Fallout Continues to Cripple U.S. Oil Production

Nearly four-fifths of U.S. oil and gas production in the Gulf of Mexico remains offline, more than 10 days after Hurricane Ida tore through Louisiana, as companies struggle to restart offshore platforms.

Ida, which barreled through the heart of the Gulf as a Category 4 hurricane, is turning out to be the most damaging storm for offshore production in more than 15 years. It crippled key onshore infrastructure, which has contributed to keeping about 12% of U.S. oil production idle. Its storm surge and maximum winds of 150 miles an hour also damaged some offshore operations, including underwater pipelines that have leaked oil into the Gulf.

Renewable Storage Firm Energy Vault Reaches $1.6 Billion SPAC Deal to Go Public

Energy Vault Inc. is combining with a blank-check company to go public in a merger that values the gravity-based energy-storage company at roughly $1.6 billion, the companies said.

Energy Vault uses a block tower system to store and release renewable energy from wind and solar operations. Employing software to gauge when power demand is low, it uses surplus renewable energy to essentially store power by constructing the tower with a crane. When demand rises, the crane unstacks the tower, producing kinetic energy by dropping the blocks so that they can turn generators and create electricity.

U.S. Puts $562 Billion Price Tag on Ramping Up Solar Power

The U.S. could get 37% of its electricity from solar power by 2035-and 44% by 2050-if the U.S. pursues an ambitious agenda to cut reliance on fossil fuels, the Energy Department said Wednesday.

The Energy Department says the U.S. now gets 3% of its power from solar sources, requiring rapid growth if the country aims to eliminate greenhouse-gas emissions from its power sector. The Energy Department report said ramping up solar power to the 44% level would require an increase in spending by the public and private sector of as much as $562 billion between 2020 and 2050.

Write to paul.larkins@dowjones.com

Expected Major Events for Thursday

00:01/UK: Aug KPMG and REC UK Report on Jobs

06:00/DEN: 2Q Labour force survey

06:00/GER: Jul Foreign Trade

06:00/NOR: Jul Monthly GDP

06:00/ROM: Jul International trade

09:00/CRO: Aug PPI

09:00/MLT: Jul International Trade

09:00/CYP: Jul Foreign Trade (provisional)

10:00/POR: Jul International trade statistics

10:00/FRA: Jul OECD Harmonised Unemployment Rates

10:00/IRL: Aug CPI

11:45/EU: ECB interest rate announcement

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


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  09-09-21 0026ET
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