EUROPEAN MIDDAY BRIEFING: Stocks Under Pressure Ahead of ECB

MARKET WRAPS

Stocks:

European stocks fell ahead of the European Central Bank meeting due later Thursday.

The ECB will issue its latest policy statement, with policy makers offering their assessment of the economy and inflation. Some investors are betting that the central bank will disclose plans to start paring back its purchase of government bonds through an emergency program that was meant to bolster credit markets and growth during the pandemic.

"The real unknown is if the ECB will revise its inflation and growth forecast," said Agnès Belaisch, chief European strategist at the Barings Investment Institute.

"If it raises its inflation forecast closer to 2%, that will make markets wonder if it could overshoot and if the ECB could have to raise interest rates."

Data in focus:

ECB nerves dampened the reaction to economic data from Germany showing that exports in July were stronger than expected, adding weight to recent upbeat production figures in Europe's largest economy.

Meanwhile, the U.K.'s labor force has shrunk by 1.6% since the pandemic began, mainly due to the fall of participation in the job market and less migration, Deutsche Bank Senior Economist Sanjay Raja said.

Some people left the labor force during the pandemic due to early retirements, return to studying or simply due to being discouraged, he said.

On the migration front, the combination of closed borders due to health concerns and Brexit also hit the labor force. A smaller labor force will make getting back to pre-pandemic GDP levels a little harder and will increase supply frictions in the labor market, he said. GDP in the medium-term is likely to be weaker relative to its pre-pandemic trend, he added.

U.S. Markets:

Stock futures fell ahead of fresh data on jobless claims and an update to the European Central Bank's monetary policy.

Investors' optimism has waned this week following a jobs report that showed a sharp slowdown in the pace of hiring in the U.S., and signs that the pace of economic recovery weakened over the summer due to the Delta variant of Covid-19. Questions around when the Federal Reserve and the ECB will begin to pare back their stimulus programs is also weighing on sentiment, money managers said.

"We're slightly more cautious," said Charles Hepworth, an investment director at GAM Investments. "It does feel that people are getting a bit freaked out by valuations. The Delta variant transmission is a threat for global growth. If you get tapering too soon, that risks derailing the recovery."

The Cboe Volatility Index-Wall Street's so-called fear gauge, also known as the VIX-ticked up to 19.

Investors will get fresh figures at 8:30 a.m. ET on the number of Americans who applied for first-time unemployment benefits, a metric that is seen as a proxy for layoffs, in the week ended Sept. 4. The Fed has said that inflation and the labor market are two key factors it is monitoring to determine changes to monetary policy.

Forex:

The dollar fell after gains in the previous session, which were led by increased demand for safe havens on concerns about the pandemic derailing the global recovery and central banks starting to scale back stimulus.

The DXY dollar index fell 0.1% to 92.5570 after reaching a 12-day high of 92.8620 on Wednesday.

"The [DXY's] rise overnight leaves it in the middle of its recent trading range between 92.00 and 93.20, which I still expect to contain the week's trading," Oanda analyst Jeffrey Halley said.

The euro could fall further against the pound, with the ECB unlikely to say it will slow the pace of pandemic bond purchases at its policy meeting later, ING said.

"While cable [GBP/USD] remains a function of the dollar and risk-sentiment dynamics we expect EUR/GBP to trend lower today...as the ECB may fail to meet hawkish expectations embedded in the euro," ING analysts said.

The pound will see no idiosyncratic drivers on Thursday given an empty U.K. economic data calendar and the absence of speeches from Bank of England officials, they said.

Bonds:

In bond markets, the yield on the 10-year Treasury note ticked down to 1.322% from 1.333% Wednesday.

The ECB is expected to deliver a "soft taper" Thursday, RBC Capital Markets said. Despite a slowdown in purchases under the emergency pandemic purchase program, the "ECB will stand out as one of the most dovish central banks in the G- 10 space," analysts at the bank said.

The ECB currently purchases around EUR80 billion of bonds a month.

"Real yields remain low or even falling and spreads of both sovereign as well as corporate issuers remain tight," they say, adding that this should be well received by the ECB governing council, "who made it their mission to keep financing conditions as accommodative as possible."

TwentyFour Asset Management expects a return to higher U.S. Treasury yields and the associated knock-on effects for financial markets as the main risk for fixed-income investors toward the year-end.

"In recent weeks Treasury yields have resumed their slow grind higher, with much less resistance, as the short base feels significantly smaller, " Mark Holman, chief investment officer at the asset manager, said.

The data backdrop is more balanced, while as each month goes by, the economy gets closer to meeting the Federal Reserve's mandate, thereby allowing them to commence tapering, he said.

TwentyFour AM's base case is that 10-year U.S. Treasury yields will end the year between 1.50% and 1.75%.

Commodities:

Brent crude oil was flat and WTI futures slipped, with prices slightly below flat for the week so far. U.S. oil stats released Wednesday were rather constructive, said DNB's Helge Andre Martinsen.

API data showed a bigger-than-expected drop in gasoline inventories, though crude draws undershot expectations. EIA data will be in focus later, after the body released its short-term energy outlook on Wednesday, which contained slight downward revisions to its global oil demand forecasts for this year and next.

Separately, the market also faces the potential risk of disruptions to Libyan supply, with protests at eastern oil terminals and reports of tankers being blocked.

Aluminum prices set a fresh high amid supply concerns. Three-month aluminum on the LME was up 1.3% at $2,828.50 a metric ton, its highest level since 2008.

China has been cracking down on illegal aluminum production while curtailing the activities of other producers of the metal in order to reduce its carbon emissions.

The supply picture has been further clouded by a coup in Guinea, which produces 22% of the world's bauxite, crucial for making aluminum.

"The coup in Guinea is further accentuating the metals supply risks plaguing aluminium markets," said TD Securities.

The supply picture is drawing in speculators, the bank said. "This further reinforces our view for aluminium to sustainably outperform copper prices," said TD.

Gold prices were listless ahead of the ECB.

EMEA HEADLINES

EasyJet to Raise $1.65 Bln in Rights Issue

EasyJet PLC said Thursday that it would launch a fully underwritten rights issue to raise 1.2 billion pounds ($1.65 billion) and that it has secured a new $400 million credit line to repair its balance sheet and invest in growth.

The U.K.-based airline said the additional equity would restore its balance sheet position to pre-pandemic levels and enhance liquidity.

888 Holdings Acquires William Hill's Non-US Business for GBP2.2 Bln

888 Holdings PLC said Thursday that it has agreed to buy the non-U.S. business of William Hill Organization Ltd. from Caesars Entertainment Inc. for an enterprise value of 2.2 billion pounds ($3.03 billion).

The online betting and gaming company said the acquisition is expected to be completed in the first half of 2022, subject to shareholder approval and other industry approvals.

Wm. Morrison 1H Pretax Profit Fell on Covid-19 Costs

Wm. Morrison Supermarkets PLC reported Thursday a decline in pretax profit for the first half of fiscal 2022 due to higher direct costs linked to Covid-19, and said its guidance is unchanged.

The British grocer posted a pretax profit for the six months ended Aug. 1 of 82 million pounds ($112.9 million) compared with GBP145 million for the same period a year earlier.

German Trade Surplus Widened in July as Imports Fell

Germany's trade surplus widened in July as exports continued to grow while imports fell amid widespread supply-chain strains that are leading to shortages in raw materials and components.

Germany's trade surplus--the balance of exports and imports of goods--stood at 17.9 billion euros ($21.15 billion) in calendar and seasonally adjusted terms in July, data from the country's statistics office Destatis showed Thursday.

Merck KGaA Aims for Around EUR25 Bln in Sales by 2025

Merck KGaA is targeting sales of about 25 billion euros ($29.54 billion) by 2025 as it plans a significant ramp-up in investments.

The German pharmaceuticals-and-chemicals company said Thursday that it expects to boost investments between 2021 and 2025 by more than 50% compared with the period from 2016 to 2020.

Swiss Re Expects Insurance Market Premium Growth to Continue

Swiss Re AG said Thursday that insurance-market premium growth should continue on the back of higher exposures and risk awareness, citing research from Swiss Re Institute.

The Swiss reinsurer said the research predicts that nonlife insurance premiums should rise 10% above pre-pandemic levels by the end of 2021 to $6.9 trillion and exceed $7 trillion in 2022 for the first time ever.

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.

GLOBAL NEWS

Jobless Claims Expected to Drop Employers Retained Workers

Filings for jobless benefits last week are estimated to have fallen and reached a fresh pandemic low, extending a downward trend that has remained intact despite challenges posed by the Delta variant of Covid-19.

Economists expect the Labor Department will report Thursday that initial unemployment claims, a proxy for layoffs, moved lower in the week ended Sept. 4 to 335,000 from 340,000 during the prior week, when claims fell by 14,000.

Funds Go Green, but Sometimes in Name Only

Fund companies are rebranding their out-of-fashion investment offerings as green, hoping to grab a portion of the cash pouring into sustainable products. In some cases, the rebranding has been in name only.

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%.

Malaysia Central Bank Keeps Policy Rate Unchanged

Malaysia's central bank kept its benchmark interest rate unchanged on Thursday, even though the economy has been weighed by over two months of restrictions to contain the spread of Covid-19.

Bank Negara Malaysia held its overnight policy rate at 1.75%, as predicted by 10 of 11 economists polled by The Wall Street Journal. One economist had predicted the central bank would reduce its key rate.

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.

Taliban to Allow 200 Americans, Other Foreigners to Fly Out of Kabul

KABUL-Afghanistan's Taliban authorities are allowing some 200 Americans and other foreign citizens to leave the country on a flight to Qatar scheduled for Thursday, the first such departure by air since U.S. forces withdrew last month, Qatari and American officials said.

The expected flight by a Qatar Airways Boeing 777 would mark the resumption of international passenger operations at Kabul's Hamid Karzai International Airport, and is expected to be followed by daily air links to foreign countries, a senior Qatari official said.

North Korea Holds Toned-Down Military Parade, Its First of Biden Administration

SEOUL-North Korea held its first military parade since President Biden took office, though the event didn't feature major military hardware or a speech from leader Kim Jong Un.

The parade, held in central Pyongyang, celebrated the 73rd anniversary of North Korea's founding and occurred in the middle of the night, according to a state media report published Thursday. Mr. Kim, wearing a gray suit, watched the festivities at Kim Il Sung Square through binoculars. Thousands of unmasked spectators lined the streets.

Covid-19 Policies Ignite Battle at UT Austin

AUSTIN, Texas-Scientists at the University of Texas at Austin drew up a series of projections for how Covid-19 could move through the 50,000-member student body this semester.

Two scenarios, which assumed aggressive protections such as twice-weekly surveillance testing, would limit spread to a few hundred students. Plugging in a set of less restrictive variables suggested the virus would infect about a quarter of the student body by the end of the term.

This Flu Season Is Expected to Be Worse Than the Last One, Threatening Hospitals Strained by Delta

The coming flu season is on track to be much worse than the last cycle, according to health experts, who fear an influx of cases could further strain hospitals already overwhelmed by the Delta surge.

The season could also strike earlier and more severely than usual, doctors and researchers said, because many people haven't been able to build up their natural immune defenses while working from home and avoiding strangers.

Afghanistan Evacuation Efforts Snarled by New Taliban Rules

Efforts to get 100 stranded Americans and thousands of vulnerable Afghans out of Afghanistan foundered on Wednesday as the Taliban imposed more restrictions on flights out of the country, according to people involved in the rescue efforts.

The Taliban have refused to allow any commercial flights out of Afghanistan since the U.S. completed a military withdrawal last week, before all Americans could get out of the country.

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  09-09-21 0630ET
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