EMEA Morning Briefing: Growth Risks to Shackle Stocks Again; Oil Climbs


Watch For:

Italy Labour Cost Index; G20 Finance and Central Bank Deputies Meeting; OPEC Monthly Oil Market Report; updates from Associated British Foods, FirstGroup, S4 Capital

Opening Call:

Growth risks will likely continue to hold back European shares on Monday. In Asia, stocks were mostly lower, the dollar and oil gained, while Treasury yields and gold prices barely moved.


European equities may struggle to break free from their recent trading ranges on Monday, following another downbeat session on Wall Street and a cautious start in Asia today.

The S&P 500 Index slumped to its worst weekly showing since February on Friday, with a broad pullback highlighting investor concerns about a volatile fall ahead. The spread of the variant has added to investor jitters by raising the prospect of a coronavirus-induced slowdown.

"The bullishness is fading quickly," said Steve Sosnick, chief strategist at Interactive Brokers. "It's a seasonally awkward time for the market."

With stock markets near record highs, some investors are growing concerned about the end of "some of the massive stimuli" that have pushed shares higher, including fiscal and monetary stimulus programs introduced during the pandemic, according to Sosnick.

He said that he's seen "very solid bids for puts protection" in the options market, which is a form of "insurance" for investors seeking to protect their portfolios from a possible decline in stocks.


The dollar managed to recover some of its recent losses, with the USD Index at 92.67 in a generally risk-averse Asian session, as concerns over U.S. economic growth and China's regulatory clampdown linger.

There appear to be growth worries, along with rising inflationary pressures, IG said, with China's regulatory crackdown seemingly far from over.

CBA said the dollar will struggle to gather momentum in either direction this week amid competing cross-currents.

The Delta situation in the U.S. is more serious than in other major economies and is a weight on the currency. Still, the FOMC still looks to be readying to taper asset purchases. The taper is likely to be announced in November rather than next week, CBA said. U.S. CPI data this week will likely reaffirm that the FOMC's inflation threshold for tapering asset purchases has been met but a softer-than-expected print could temporarily weigh on the dollar, CBA said.

Goldman Sachs doesn't see the dollar's gains lasting. "Our market forecasts through the balance of the year assume that Treasury yields will rise but that the dollar will depreciate against most crosses."

"The dollar's correlation with Treasury yields tends to vary over time, and depends on the underlying macroeconomic fundamentals driving rates and FX markets. In a period of rising cyclical optimism, as we expect over the near term, we should anticipate a negative correlation, with rising rates associated with broad Dollar weakness."

UniCredit expects the euro to rise over the medium term but gains will be limited. The European Central Bank remained cautious on the policy front at last week's meeting, despite a firmer eurozone recovery and this casts "plenty of doubt" about the room for a very strong EUR/USD rally over the medium term.

UniCredit forex strategist Roberto Mialich said: "We still expect EUR/USD to move back beyond 1.20 over the medium term, but the risk that the recovery may be less intense than we previously thought is increasing."


Treasury yields remained largely rangebound in Asia, following gains on Friday.

BMO said that "real interest rates remain extraordinarily low" well into the pandemic, despite huge increases in government debt and with "no guarantee that real rates will stay anywhere close to current friendly levels."

BMO warned that fiscal risks can't be ignored: "While not fiscal hawks, per se, and readily recognizing that the economy requires heavy support during this difficult episode, we would still assert that deficits do still matter."

Bank of America expects Treasury yields to climb for the time being, forecasting the 10-year at 1.55% by year end, up from 1.324% now.

The Federal Reserve's more dovish stance adopted since Jackson Hole, among other factors, will drive the rise, according to BofA's prediction. The bank also cited "ongoing strong data, especially around prices...improvements in the pandemic, and...the passage of a substantial infrastructure bill" as factors pushing up long-term yields.

Seasonal factors could also help: BofA said rates tend to rise in September and in October, while "November and December are roughly flat to lower in seasonals."

Recent gains in TIPS breakevens have been driven by a decline in liquidity premium rather than higher expected inflation, Deutsche Bank said, based on the Fed's DKW model, which looks into different elements that influence inflation-protected Treasurys.

Deutsche Bank said the so-called "True" inflation expectations hover around 1.8%-1.9%, slightly lower than the central bank's target, while the Fed's share of the TIPS market has grown to 22% now from 8% 18 months ago. Deutsche Bank estimates it could take 12 years for the Fed's share to fall back to its pre-pandemic level.


Crude futures extended gains in Asian trade, as the U.S. oil industry struggles to get back on its feet following Hurricane Ida, ANZ said.

More than one million barrels/day of capacity are still offline, nearly two weeks after the storm hit the Gulf of Mexico, ANZ noted.

Meanwhile, market focus will also be on disruptions in Libya, where the oil ministry is trying to wrestle control of the industry from Mustafa Sanalla, the chair of the National Oil Corp., ANZ said. "This could see more than 1.2mb/d disrupted."

OPEC is expected to release its monthly oil report Monday. The group will likely downwardly revise its 2022 demand growth forecast as the spread of the coronavirus delta variant threatens the pace of recovery in fuel use, Reuters reported Friday, citing two sources from OPEC+.

Separately, the IEA will issue its monthly oil report on Tuesday.


Gold prices were flat in Asia, remaining below $1,800.

Oanda said gold is not acting like an inflation hedge currently and for the moment will likely struggle to get its groove back. "Gold needs to see strong demand for Treasuries (to) send yields back down before investors get behind bullion again." Oanda puts initial support for gold at $1,750.

Aluminum climbed 1.6% on continuing supply worries. The industrial metal has broken above $2,900 a metric ton for the first time since August 2008, as the risk of disruptions increases sharply, ANZ said.

Power shortages and environmental measures are restricting output in China, while political unrest in Guinea is threatening to delay the large pipeline of new bauxite projects that feed aluminum smelters in China, ANZ added.

Iron ore declined as China's steel-output cuts continue to weigh on demand for the steelmaking material, CBA said.

Beijing's plans to keep full-year steel production levels flat compared with 2020 levels imply a 12% on-year contraction in steel output from August to December. "China's influence on iron ore markets is more pronounced than most other commodities. China accounts for 70%-75% of the world's iron ore imports," CBA said.


House Democrats Consider 26.5% Corporate Tax Rate

WASHINGTON-House Democrats expect to propose raising the corporate tax rate to 26.5% from 21% and imposing a 3- percentage-point surtax on individual income above $5 million, according to two House Democratic aides familiar with the plans.

The tax increases would be part of the House Ways and Means Committee's plans to pay for the party's priorities in a fast-moving budget bill. Those items include an expanded child tax credit, a national paid-leave program and renewable- energy tax breaks.

Short-Lasting Inflation Depends on Long-Lasting Goods

For decades, Americans have enjoyed falling prices for cars, electronics and furniture.

Until the Covid-19 pandemic, that is. For the past year, prices for durable goods have been rising-and not just by a little. Whether those prices come back down is a key part of the puzzle facing the Federal Reserve as it plots how to handle an unexpectedly strong burst of inflation.

U.S. Stock Market Faces Risk of Bumpy Autumn, Wall Street Analysts Warn

After a record-breaking bull run for the U.S. stock market this year, many Wall Street analysts are starting to warn that investors could be in for a bumpy ride in the coming weeks and months.

Analysts at firms including Morgan Stanley, Citigroup Inc., Deutsche Bank AG and Bank of America Corp. published notes this month cautioning about current risks in the U.S. equity market. With the S&P 500 already hitting 54 records this year through Thursday-the most during that period since 1995-several analysts said that they believe there is a growing possibility of a pullback or, at the least, flatter returns.

Riskier Chinese Property Bonds Suffer as Evergrande Struggles

Bonds from lower-rated Chinese property developers have fallen steeply in price after warnings of a potential default at industry giant China Evergrande Group sent investors scrambling to protect themselves against trouble elsewhere in their portfolios.

Various dollar bonds due in 2023 and 2024 from Fantasia Holdings Group Co. and Guangzhou R&F Properties Co. have fallen to less than 60 cents on the dollar, pushing yields on most of these debts above 40%.

Libor Transition Stokes Sales of Risky Corporate Debt

Wall Street's shift away from Libor is fueling sales in the red-hot market for bundles of risky corporate loans.

Managers of collateralized loan obligations-securities made up of bundled loans with junk credit ratings-are rushing to close deals ahead of the year-end move away from the London interbank offered rate. The interest-rate benchmark underpins trillions of dollars of financial contracts but was scheduled for phaseout after a manipulation scandal.

Shipping Options Dry Up as Businesses Try to Rebuild From Pandemic

A wave of shipping consolidation over the past five years is adding to the supply-chain woes caused by Covid-19 outbreaks, further delaying the movement of cargo across the oceans.

A handful of big shipping players control the majority of containers via giant vessels, leaving the world with fewer routes, fewer smaller ships and fewer ports that could keep the flow of goods moving when the pandemic disrupted operations, according to cargo owners and freight forwarders, who secure ship space to move cargo.

Iran Pledges to Cooperate With U.N. Atomic Agency, Easing Nuclear Talks Threat

Iran reached an agreement Sunday with the United Nations atomic agency that will grant international inspectors access to some of the country's nuclear-related sites, a step likely to avert a crisis in the negotiations on restoring the 2015 nuclear deal.

The agreement comes after International Atomic Energy Agency Director-General Rafael Grossi made a last-minute trip to Tehran this weekend in a bid to persuade Iran to step up its cooperation with the agency ahead of a meeting of the IAEA's top member states starting Monday.

Older Voters Dominate German Politics, but Now the Young Are Fighting Back

BERLIN-One of the hottest campaign topics in Germany's national elections is something that is a distant dream for the country's younger voters: pensions.

Older voters have long had a determining influence on elections in Germany. As the aging country grows even older-the over-60 now make up more than a third of the electorate, according to the government-they are becoming the key target of political parties' messages, something a new cadre of politically savvy influencers is trying to change.

Write to paul.larkins@dowjones.com

Expected Major Events for Monday

06:00/GER: Aug WPI

07:00/SVK: Jul Employment and average monthly wage in selected branches

07:00/SVK: Jul Turnover in selected branches of economy, incl Industry & Construction

07:00/TUR: Jul Balance of Payments

07:00/TUR: Jul Industrial Production Index

08:00/ITA: 2Q Labour Cost Index

08:00/CZE: 2Q Quarterly Balance of Payments

08:00/CZE: Jul Monthly Balance of Payments

12:00/POL: Jul Balance of payments

16:59/AUT: Sep OPEC Monthly Oil Market Report

23:01/UK: 4Q Manpower UK Employment Outlook Survey

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

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  09-13-21 0008ET
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