North American Morning Briefing: Markets Steady with Fed in View

MARKET WRAPS

Watch For:

Housing Starts for August; FedEx 1Q earnings

Opening Call:

Stock futures rose Tuesday, suggesting markets were poised to rebound a day after concerns about China's property sector helped fuel a global selloff in stocks and commodities.

In Asia, Hong Kong's flagship Hang Seng Index fell as much as 1.3% but quickly recouped most of those losses and rose 0.5% by the close of trading.

Global stocks have slid this week on concerns about a potential default of property giant China Evergrande Group. Despite the stronger tone Tuesday, investors remain concerned about the knock-on effects Evergrande's debt crisis could have on China's already flagging economic growth.

"Evergrande is not an isolated incident," said Dave Wang, a portfolio manager at Nuvest Capital in Singapore. "There are, and will be, more property developers defaulting." Given the sector's contribution to the economy, "markets are pricing in the possible contagion impact," he said.

Investors say concerns about the embattled property giant have come at a fragile time for markets. Signs that U.S. economic growth may be slowing have helped arrest a long-running rally, while expectations are building that the Federal Reserve is getting closer to announcing a tapering of its stimulus measures.

Fed officials are set to gather Tuesday for a monetary policy meeting that will be scrutinized by investors for insight into the central bank's plans regarding its bond purchases and interest rates.

"We are at a pivot point: we are moving away from maximum policy accommodation and at the same time the V-shaped recovery is over and it poses some real questions about what is next," said David Donabedian, chief investment officer at CIBC Private Wealth. "We have had a great run but it is going to get tougher from here, with lower returns and more volatility."

China Evergrande shares dropped another 0.4% to HK$2.25 a share, taking its year-to-date decline to almost 85%. Shares in some other large Chinese real estate groups rose, however. Exchanges in mainland China were closed Tuesday for a public holiday.

Elsewhere, Japanese stocks caught up with Monday's selloff, with the Nikkei 225 dropping 2.2%. Japan's market had been closed Monday for a public holiday.

In Europe, the pan-continental Stoxx Europe 600 index rose 1%. Universal Music Group jumped on its stock market debut. Shares of the company, which was spun off from French media group Vivendi, rose over 37% from their reference price.

Stocks to Watch:

German American Bancorp has agreed to a merger deal which will see Citizens Union Bancorp of Shelbyville merge into German American Bancorp. The deal will see subsidiary bank Citizens Union Bank of Shelbyville merge into German American's subsidiary bank, German American Bank.

Under the terms of the deal, shareholders will receive 0.7739 share of German American common stock and $13.44 in cash per share of Citizens Union Bancorp of Shelbyville. The companies said German American would issue about 2.9 million shares of common stock and pay about $49.8 million cash. German American will also make a cash payment in cancellation of Citizen Union's unexercised stock options. That payment is currently estimated to total about $900,000 "if none of the outstanding options were to be exercised before closing," the companies said.

Forex:

The dollar edged lower as markets steadied after Monday's turbulence. However, it "seems too early to expect calmer waters just yet," with Chinese markets reopening Wednesday, ING said.

The dollar's rise on Monday, which saw the DXY dollar index hit a four-week high, may have been tempered by concerns that equity market falls could dissuade the Fed from sending a hawkish signal regarding plans to gradually roll back monetary stimulus at its meeting announcement Wednesday, ING's analysts said.

Metzler said the dollar is receiving double support currently, benefiting from uncertainty that is hitting general risk sentiment and from the expectation the Federal Reserve will say something about plans to scale back asset purchases at Wednesday's meeting. This backdrop has brought the EUR/USD to the 1.17 area, leaving not much room to the interim low of 1.1663 reached on Aug. 20, Metzler said.

"For the dollar in general, but from our perspective for the EUR/USD in particular, it is of enormous importance how the Fed verbally packages its actions (or non-actions)."

ING said the U.S. decision to reopen borders to fully vaccinated foreign visitors will provide a major boost to the economy, potentially lifting GDP growth by 0.75 percentage points in 2022.

An extra $140 billion of spending would directly boost U.S. GDP assuming there is a full recovery in foreign travelers next year, ING's chief international economist James Knightley said. Money from visitors would have repercussions in sectors that continue to lag the broader recovery, such as accommodation or recreation and entertainment.

Bonds:

The yield on the 10-year Treasury note rose modestly in early European action, as global markest steadied somewhat

As Fed officials convene in Washington this week, "the situation in China only adds to the list of factors advocating for more patience from monetary policy makers as greater clarity is gained and the broader market impact comes into sharper relief," strategist Ian Lyngen of BMO Capital Markets wrote in a note.

Newton Investment Management said this week's Fed meeting is likely to be too soon for it to commit to tapering, since it is still very unclear where inflation will settle and there are still uncertainties on the U.S.'s recovery path.

"There is still a significant way to go for the U.S. economy to recover all the jobs it lost and there is still a risk of a spike in virus cases causing further restrictions," Jon Day, fixed-income portfolio manager said. The Fed's messaging may become more urgent but it will be patient as to announcing a formal start to tapering, Day said, seeing the November meeting a more likely time for that.

Capital Economics identifies three channels through which the pandemic has pushed up inflation this year: a rebound in global commodity prices, a rise in prices caused by friction as sectors reopen from lockdowns, and the emergence of goods shortages as global supply has struggled to keep pace with a surge in demand.

Around nine-tenths of the rise in inflation in advanced economies this year has been driven by these three factors, which are likely to prove transitory, Capital Economics group chief economist Neil Shearing said. "The increase in inflation experienced as a direct result of the pandemic is close to peaking." Capital Economics expects headline inflation to fall back in advanced economies in 2022.

Commodities:

Crude futures rebounded in Europe as part a broader market rally, said ING, with Shell's confirmation that some of its Gulf of Mexico capacity shut down by Hurricane Ida may remain offline for some time, supporting oil's gains.

Meanwhile, European gas storage is at about 72% capacity compared with a 5-year average of 88%, ING's Warren Patterson said. "The tightness in the European market suggests that prices are likely to remain elevated, as well as volatile."

Gold ticked higher but has continued to trade in a narrow range this week. "The firm dollar, coupled with expectations of the Fed, appears to have been keeping the gold price in check," Commerzbank's metals analyst Daniel Briesemann said.

Copper prices rose 1.5% on the LME, recovering some of Monday's losses but market participants remain concerned about the ramifications of an Evergrande default.

"Markets are still waiting for clarity [on] how Evergrande will be able to manage its $300 billion of liabilities," Anna Stablum, at brokerage Marex, said.

Separately, the International Copper Study Group said the global refined copper market had a 90,000-ton deficit in June compared with a 4,000 ton surplus the previous month.

TODAY'S TOP HEADLINES

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Using an array of sensor data that includes mobility, physical activity, sleep patterns, typing behavior and more, researchers hope they can tease out digital signals associated with the target conditions so that algorithms can be created to detect them reliably, the people said. Apple hopes that would become the basis for unique features for its devices, according to the people and documents.

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Retailers Navigate Freight Costs, Scarce Inventory and Uncertain Future

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Honeywell at Odds With Asbestos Trust Over Bankruptcy Deal

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FedEx, UPS Rate Rises Are Making Online Shopping More Expensive

Shipping rates are going up faster than they have in nearly a decade, increasing pressure on merchants to raise prices or find other ways to offset higher costs.

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Universal Music Shares Soar in Market Debut

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Shell to Sell Permian Assets to ConocoPhillips for $9.5 Billion

Royal Dutch Shell PLC has agreed to sell all of its assets in the Permian basin, the most active U.S. oil field, to ConocoPhillips for around $9.5 billion in cash.

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Credit Suisse's Archegos Disaster Exposes Cracks in Bank Regulation

When Archegos Capital Management blew up, it saddled Credit Suisse Group AG with $5.5 billion in losses. One reason investors and regulators were blindsided: a gap in the regulatory oversight of big international banks.

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APA Bids More for AusNet Services, Competing With Brookfield

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Flying Taxis' Best Ride Is to the Helicopter Market

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Powell's Taper Tightrope Could Be Complicated by Fed 'Dots'

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U.S. Stock-Market Tumble Hasn't Quelled Optimism

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China Evergrande Fallout Hits Western Bond Funds

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Bank Indonesia Stands Pat as Economy Shows Signs of Recovery

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Biden to Stress Importance of Alliances in U.N. Speech

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U.S. Pledge to Vaccinate Poor Countries Stutters Amid Logistical Challenges

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Canada's Justin Trudeau Headed for Victory in National Vote

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In Mississippi Abortion Case, Supreme Court Sets Arguments for December

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Write to paul.larkins@wsj.com

TODAY IN CANADA

Earnings:

Aurora Cannabis 4Q

Economic Indicators (ET):

0830 Aug New Housing Price Index

Stocks to Watch:

APA Bids More for AusNet Services, Competing With Brookfield:

APA Group set a deadline of one week for AusNet Services to allow due diligence access after saying it's willing to trump an existing takeover proposal made by Brookfield Asset Management.

APA said it has made a non-binding proposal to acquire AusNet for $7.22 billion, or A$2.60 a share using a mix of cash and its own stock. The implied offer is higher than the A$2.50-a-share proposal made by Brookfield, which AusNet said on Monday that it intends to recommend to shareholders.

Other News:

Canada's Justin Trudeau Headed for Victory in National Vote

Canadian Prime Minister Justin Trudeau was headed toward a third straight electoral victory Monday night, although his bet that a snap vote would help him secure a majority government failed to materialize.

Both Canada's CTV Network and the Canadian Broadcasting Corp. said the incumbent Liberal Party was headed toward a minority government.

Preliminary results indicate the Liberals leading in 156 electoral districts, short of the 170 needed for a majority in Canada's parliament. The Conservative Party, led by Erin O'Toole, was running second with 123 seats. When the election was called, the Liberals held 155 seats, and the Tories 119.

While the Liberals have secured re-election, a minority result will be viewed as a setback. This will force Mr. Trudeau to rely on another party -- perhaps the left-leaning New Democratic Party -- to help implement a progressive agenda with a focus on expanded child care, affordable housing and climate change.

Expected Major Events for Tuesday

05:00/JPN: Aug Convenience Store Sales

06:00/UK: Aug Public sector finances

06:00/JPN: Aug Revised Machine Tool Orders

10:00/UK: Sep CBI Industrial Trends Survey

11:45/US: Weekly Chain Store Sales Index

12:30/US: Aug New Residential Construction - Housing Starts and Building Permits

12:30/US: 2Q International Transactions

12:30/CAN: Aug New Housing Price Index

12:55/US: 09/18 Johnson Redbook Retail Sales Index

20:30/US: 09/17 API Weekly Statistical Bulletin

All times in GMT. Powered by Kantar Media and Dow Jones.

Expected Earnings for Tuesday

Adobe Inc (ADBE) is expected to report $2.30 for 3Q.

Apogee Enterprises Inc (APOG) is expected to report $0.55 for 2Q.

Aurora Cannabis Inc (ACB,ACB.T) is expected to report for 4Q.

AutoZone Inc (AZO) is expected to report $30.06 for 4Q.

CCUR Holdings Inc (CCUR) is expected to report for 4Q.

Cracker Barrel Old Country Store Inc (CBRL) is expected to report $2.25 for 4Q.

FTI Consulting (FCN) is expected to report $1.49 for 4Q.

FedEx Corp (FDX) is expected to report $4.79 for 1Q.

InnovAge Holding Corp (INNV) is expected to report for 4Q.

IsoRay (ISR) is expected to report $-0.02 for 4Q.

Neogen Corp (NEOG) is expected to report $0.16 for 1Q.

Simply Inc (SIMP) is expected to report for 2Q.

Stitch Fix Inc (SFIX) is expected to report $-0.12 for 4Q.

View Inc (VIEW) is expected to report for 2Q.

bebe stores (BEBE) is expected to report for 4Q.

Powered by Kantar Media and Dow Jones.

ANALYST RATINGS ACTIONS

Acadia Healthcare Raised to Outperform From Neutral by Credit Suisse

American Homes 4 Rent Raised to Outperform From In-Line by Evercore ISI Group

BorgWarner Cut to Hold From Buy by Jefferies

Colgate-Palmolive Raised to Buy From Hold by Deutsche Bank

Equity Lifestyle Cut to In-Line From Outperform by Evercore ISI Group

Equity Residential Raised to Outperform From In-Line by Evercore ISI Group

Forte Biosciences Raised to Neutral From Sell by Chardan Capital

Hill-Rom Cut to Equal-Weight From Overweight by Morgan Stanley

Lear Cut to Hold From Buy by Jefferies

National Bank Holdings Raised to Overweight From Neutral by Piper Sandler

ONE Group Hospitality Raised to Overweight From Neutral by Piper Sandler

Prologis Cut to In-Line From Outperform by Evercore ISI Group

Protagonist Therapeutics Cut to Neutral From Overweight by JP Morgan

Ruth's Hospitality Raised to Overweight From Neutral by Piper Sandler

TCR2 Therapeutics Cut to Neutral from Outperform by Wedbush

Teradata Raised to Overweight From Equal-Weight by Morgan Stanley

Texas Instruments Cut to Neutral From Buy by Longbow Research

Urban Edge Properties Raised to Outperform From In-Line by Evercore ISI Group

Visteon Raised to Buy From Hold by Jefferies

WR Berkley Raised to Outperform From Neutral by Boenning & Scattergood

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


  (END) Dow Jones Newswires
  09-21-21 0603ET
  Copyright (c) 2021 Dow Jones & Company, Inc.

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