EUROPEAN MIDDAY BRIEFING: Inflation Fears Hold, But Stocks on the Rise

MARKET WRAPS

Stocks:

European stocks posted solid gains on Thursday as the debate over the impact of higher inflation remained front and center, while investors continued to look ahead to the coming wave of U.S. corporate earnings reports.

"Equity markets appear to have shaken off their caution of recent weeks and are moving higher in unison this morning," wrote Chris Beauchamp, Chief Market Analyst at IG.

"Yesterday's strong U.S. CPI print and this morning's robust Chinese PPI figure have not dented investor enthusiasm for stocks, after U.S. earnings season got off to a good start from JPMorgan."

Set against the future of central bank stimulus, investors continue to fret over whether recent spikes in inflation are transitory or more long-lasting-and what it means for monetary policy. The Federal Reserve is expected to announce that it will begin slowing, or tapering, its program of monthly asset purchases, which add liquidity to markets, in November.

Shares on the move: Publicis rose 3.6%, after reporting net revenue in the third quarter ahead of expectations. Citi said Publicis bumped up its revenue target for the year after a very encouraging set of trends in the third quarter, with new guidance ahead of expectations.

Publicis's new target is higher than Citi's estimate of 8.2% and consensus of 7.2%. The U.S. bank noted the new outlook implies organic growth between 4% and 6% in the fourth quarter, compared with a 3.9% decline last year.

Economic insight: Pantheon Macroeconomics said official and private forecasts for eurozone GDP growth will roll over, but inflation projections will continue climbing.

Growth forecasts for the eurozone have increased this year, especially since the end of the second quarter when Europe's vaccination drive accelerated, Pantheon's economists said. The consensus sees 2021 eurozone growth at 5%.

"We have no objection with the idea that eurozone GDP will rise 5% this year but the reopening bump in economic activity is now over, and downside risks are piling up," Pantheon said. For 2022, Pantheon has cut its forecast to 3.5% GDP growth.

Regarding inflation, Pantheon said it will peak soon, but economists see a distinct risk that it will remain higher than markets expect next year.

U.S. Markets:

Stock futures rose ahead of a wave of earnings, including from major banks, which investors will use to assess how companies are positioned to deal with risks including inflation and higher energy prices.

"Can companies weather those risks or was the entire rally only fueled by ultraloose monetary policy?" said Carsten Brzeski, ING's global head of macro research. Investors are looking to see "where are we in terms of the post-lockdown cycle and also to get some insights into how solid earnings and companies are going into this tapering period and this era of somewhat higher interest rates."

Data include jobless claims for the week ended Oct. 9, which are forecast to fall for a second consecutive week, according to economists surveyed by The Wall Street Journal.

Forex:

The dollar continued to weaken in Europe and although the market largely shrugged off the higher-than-expected CPI reading, inflation fears haven't gone away, said DBS. It noted that data due later Thursday may show PPI surged 8.7% on year in September. However, DBS said there is still room for the USD Index to rise further toward 96.00 in the coming months.

Unicredit said a drop in the 10-year Treasury-German Bund yield spread below 170 basis points was also likely to be contributing to the dollar's decline.

"EUR/USD is showing resilience again re-approaching the 1.16 handle but has to break above 1.1650 to reduce selling pressure in a more convincing way."

Sterling's gains on speculation about an imminent U.K. interest-rate rise are expected to be limited, reflecting concerns about the nation's particularly severe supply chain issues, labor shortages and high inflation, said Commerzbank.

Many of the supply shortages that the world is experiencing reflect pent-up demand in the wake of coronavirus so are expected to be temporary but this view doesn't apply to the U.K. due to Brexit, said Commerzbank's Ulrich Leuchtmann. The U.K. also faces further political and economic risks from its stubborn position in post-Brexit negotiations, he added.

"Those make a stronger sterling impossible, despite rapid Bank of England rate hikes."

The Turkish lira fell to a record low versus the dollar after President Recep Tayyip Erdogan fired three central bank officials. Erdogan removed deputy governors Ugur Namik Kucuk and Semih Tumen along with Monetary Policy Committee member Adullah Yavas.

"Erdogan believes that cutting interest rates causes inflation to fall, and he tends to fire central bank employees, including governors, who disagree with him in this respect," said Oanda analyst Jeffrey Halley. "Readers should be pencilling in USD/TRY trading on a 10.0000 handle sooner rather than later."

Bonds:

DZ Bank said inflation remains the strongest driver in eurozone government bond markets, causing investors significant total return losses.

On a monthly basis even government bonds of periphery countries suffered a more than one percent total return loss, because yield spreads over Bunds have hardly moved, while carry and rolldown are far from being sufficient to cushion rising bond yields, said analyst Sebastian Fellechner.

AXA Investment Managers said the latest inflation data from the U.S. and Germany shouldn't give central banks any reason to change their announced policy.

In the case of the Fed, it means a gradual scaling back of the bond-buying programs from November, followed by gradual rises of key interest rate from mid-2022, said Achim Stranz, chief investment officer. For the European Central Bank it means a similar strategy with a six- to 12-month time lag.

Commerzbank expects short-term consolidation in German Bunds to continue "as rates expectations already seem overstretched."

The bank's rates strategists suggest the selloff in the recent days may have been excessive: "Bunds are finally taking a breather from the vicious, front-end-driven sell-off over recent days, with the curve flattening from the long-end."

They added that significant impulses either from interest rate or inflation expectations are probably needed for the bearish trend to continue.

A softer stance about the path of interest rate rises in the U.K. from Bank of England rate-setters speaking on Thursday could prompt the gilt yield curve to steepen, said Mizuho.

"There's a strong chance that today's speakers could provide more clarity on where the consensus of the Monetary Policy Committee really is, and we'd expect this consensus to favour a more gradual path than is currently priced."

This could be a catalyst to steepen gilt forwards of intermediate maturities, which beyond 2 years are now extremely flat, Mizuho said, noting that the segments between 2-year 1-year forwards and four-year 1-year forwards are now inverted.

Track the latest analysts' comments on U.K. gilts here.

Commodities:

Oil prices extended their gains in Europe following the IEA's monthly market report release, showing forecasts for as much as 500,000 barrels a day of extra oil demand in the coming months as a result of gas-to-oil switching.

"An acute shortage of natural gas, LNG and coal supplies stemming from the gathering global economic recovery has sparked a precipitous run-up in prices for energy supplies and is triggering a massive switch to oil products and direct crude use for power generation," the IEA said, adding that power-generation plants, fertilizer producers, manufacturing operations and refineries are all affected.

Gold prices hovered close to a one-month high after the inflation data, which also pushed the dollar and Treasury yields lower, further helping bullion.

Zinc prices rose almost 3% after major producer Nyrstar said it would cut output at three of its European smelters by 50% due to rising energy costs. The Belgium-based company said it was no longer "economically feasible to operate the plant at full capacity."

Other metals were also rising, with aluminum up 2.9% and copper up 1.7%.

DOW JONES NEWSPLUS

EMEA HEADLINES

Gas Shortage Forces Power Plants to Switch to Oil, Boosting Demand

Soaring natural-gas and coal prices are forcing power-generation companies and manufacturers to switch to using oil, a move that could add half a million barrels a day to global demand, the International Energy Agency said Thursday.

In its monthly market report, the IEA increased its global oil-demand forecasts for this year and the next by 170,000 and 210,000 barrels a day, respectively, but added that the cumulative effect of the energy crisis could be as large as 500,000 barrels a day from September through next year's first quarter.

German Economy Forecast to Grow 2.4% in 2021 and 4.8% in 2022

A complete normalization of contact-intensive activities isn't expected in the short term in Germany and supply bottlenecks are hampering manufacturing for the time being, the country's leading economic-research institutes said in a joint report.

"The Corona pandemic still shapes the economic situation in Germany," according to the joint economic forecasts report by the Ifo Institute, DIW Berlin, IfW Kiel, IWH and RWI.

Publicis Raises Full-Year Revenue Forecast After Third-Quarter Growth

Publicis Groupe SA boosted its outlook for 2021 organic revenue growth thanks to strong demand for digital marketing services in the third quarter.

The Paris-based advertising company, which owns agencies such as Saatchi & Saatchi, Leo Burnett and Spark Foundry, said it expects organic revenue to grow 8.5% to 9% in 2021 from the previous year, up from an earlier forecast of 7% growth. Organic revenue growth is a common metric that strips out the effects of currency fluctuations, acquisitions and disposals.

TomTom 3Q Net Loss Narrowed; Lowers 2021 Free Cashflow Views on Supply-Chain Issues

TomTom NV said Thursday that its third quarter net loss narrowed, and that it was lowering its free cashflow guidance for the year due to supply-chain issues.

The Dutch navigational-technologies company said that although it backed its revenue guidance, car-production volumes would be affected due to these issues, and that will have a direct effect on operational revenue and on its cash flow.

Rio Tinto Developing Process to Use Biomass for Making Steel

Rio Tinto PLC said it is developing a way for biomass to replace coking coal in steelmaking as the mining giant seeks to safeguard demand for iron ore, its most lucrative business.

The world's second largest mining company by market value is testing a process at a small-scale pilot plant in Germany, which uses raw biomass with microwave technology to convert iron ore to metallic iron without the need for coal.

Bow-and-Arrow Attack in Norway Leaves at Least Five Dead, Two Injured

At least five people have been killed and two injured in Norway by a man wielding a bow and arrows, police said Wednesday evening.

The attack began after 6 p.m. local time at a supermarket in the town of Kongsberg near the capital Oslo, where the suspect shot arrows at shoppers and passersby, a police spokesman said.

GLOBAL NEWS

Gas Shortage Forces Power Plants to Switch to Oil, Boosting Demand

Soaring natural-gas and coal prices are forcing power-generation companies and manufacturers to switch to using oil, a move that could add half a million barrels a day to global demand, the International Energy Agency said Thursday.

In its monthly market report, the IEA increased its global oil-demand forecasts for this year and the next by 170,000 and 210,000 barrels a day, respectively, but added that the cumulative effect of the energy crisis could be as large as 500,000 barrels a day from September through next year's first quarter.

Tight Labor Market Keeping Jobless Claims in Check

Unemployment claims are holding near the lowest levels since early 2020, as employers cling to workers in a competitive labor market.

Economists surveyed by The Wall Street Journal estimate jobless claims fell to 318,000 last week from 326,000 a week earlier. Claims, a proxy for layoffs, remain near their lowest levels since the coronavirus pandemic's onset. Initial claims reached a pandemic low of 312,000 in the week ended Sept. 4.

U.S. SPAC Frenzy Inspires a Reboot in Asia

SPACs have lost some luster in America, but stock exchanges in Singapore and Hong Kong are betting the vehicles will boost their allure to global investors and startups in the region.

The two Asian financial hubs have been pushing forward with competing plans to enable listings of special-purpose acquisition companies, which raise money and go public before finding businesses to merge with. Singapore launched its SPAC rules in September, while Hong Kong is seeking public comment on its proposed regulations until the end of this month.

Fed Official Sees Risks of More Persistent Inflation

A Federal Reserve official warned in a speech Wednesday night of growing risks that supply-chain disruptions could keep inflation elevated for longer than forecasters have anticipated.

While monthly inflation readings should decline from high rates observed in the spring, "I still see a material risk that supply-related pricing pressures could last longer than expected," said Fed governor Michelle Bowman in remarks prepared for delivery at South Dakota State University in Brookings, S.D.

China's Factory-Gate Prices Rise at Record Pace

HONG KONG-Cost pressures on Chinese factories continued to accumulate last month as energy prices soared, dimming hope that global inflation would ease in the near term.

China's producer-price index, a gauge of factory-gate prices, rose by 10.7% in September from a year ago, accelerating from a 9.5% increase in August, and grew at the fastest pace in 25 years, according to the National Bureau of Statistics.

Singapore Central Bank Surprises With Policy Tightening

Singapore's central bank unexpectedly tightened its currency policy to cushion against inflationary pressures arising from strengthening global demand amid a global supply-chain crunch.

The Monetary Authority of Singapore said Thursday that it will "slightly" increase the slope of the Singapore dollar nominal effective exchange rate policy band from the current slope of zero.

Fed Worried About Inflation Risk as It Firmed Up Tapering Plan

Federal Reserve officials last month worried that disrupted supply chains were raising the risks of more persistent inflation as they firmed up plans to reduce their bond-buying stimulus program next month and conclude it by the middle of next year.

Minutes of their Sept. 21-22 Fed meeting, released Wednesday, revealed a stronger consensus over scaling back the $120 billion in monthly purchases of Treasury and mortgage securities amid signs that higher inflation and strong demand could call for tighter monetary policy next year. The bond purchases have been a key piece of the Fed's effort to stimulate growth since the coronavirus pandemic disrupted the U.S. economy last year.

Biden Administration Seeks to Expand Wind Farms in Coastal Waters

WASHINGTON-The Biden administration is preparing to open up large sections of the U.S. coastline to wind-turbine projects as part of a plan to boost production of clean, renewable energy.

The U.S. is aiming by 2025 to lease up to seven tracts for wind farms in coastal waters between Maine and the Carolinas on the Atlantic Coast, off California and Oregon along the Pacific Coast and in the Gulf of Mexico, Interior Department Secretary Deb Haaland said.

WHO Creates New Team to Study Covid-19 Origins

The World Health Organization established a new panel of scientists whose mandate will include attempting to revive a stalled inquiry into the origins of the coronavirus that caused a global pandemic.

The 26-member team, drawn from countries including the U.S., China, India, Nigeria and Cambodia, is larger than a 10- member international group of scientists sent earlier this year to Wuhan, the Chinese city that was the site of the first confirmed Covid-19 outbreak in December 2019. The team will also have a broader mandate to lead investigations of future epidemics as well as Covid-19.

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