EUROPEAN MIDDAY BRIEFING: Airlines, Energy Majors Lift Stocks

MARKET WRAPS

Stocks:

European shares posted modest gains Friday, supported by travel, energy and bank stocks.

In London, the FTSE 100 continued to rally, hitting a 19-month high, as the travel sector was lifted by the easing of coronavirus testing rules for travelers returning to England. Energy shares rose on higher oil prices while U.K. banks rallied after strong earnings from U.S. rivals.

"After a choppy start to the week, equity markets appear to be leaning towards a narrative that companies can continue to grow profits, despite the combined pressures of higher energy prices, and supply chain disruptions," wrote Michael Hewson, Chief Market Analyst at CMC Markets UK.

"There still seems to be an element of complacency amongst investors that rising energy prices won't prompt a wave of demand destruction, especially if supply chain snarl-ups also feed into higher prices, which consumers then can't absorb."

Shares on the move:

Hugo Boss stock rose 1.8% afer it raised its 2021 targets following strong third-quarter results, which included above-forecast sales and earnings that also topped pre-pandemic levels. Track the analysts' views here.

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Shares in OVHcloud climbed 6.8% on their first day of trading on the Paris Euronext exchange. The French cloud- services provider had priced its IPO at 18.50 a share, the lower end of a previously-set indicative range of 18.50-20.

Shares in OVH seesawed in early trading, but subsequently rose as high as 19.75.

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Pearson shares fell 10% after the FTSE 100 education company said it was on target to meet the consensus 2021 operating profit forecast, but investors soured on its earnings, which showed higher-education sales declined even as total sales grew.

Interactive Investor said the nine-month update showed higher education sales have slipped 7% in 2021 to date, worrying investors. It said Pearson has seen higher education numbers slip with coronavirus infections in American colleges potentially deterring new enrolments and signs of strength in the U.S. jobs market offering an alternative.

Even after a significant decline in its share price since the summer peak, Pearson's price-to-earnings ratio still trades above three- and ten-year averages, suggesting shares are far from cheap, said Interactive Investor. "For now, and given the company's ongoing transition, analyst consensus opinion currently points to a hold."

Economic insight:

Oil and gas prices have "exploded," imposing a burden on consumers and businesses, said Commerzbank's chief economist Joerg Kraemer, adding that rising prices will give the already high inflation rates another push, while the headwind for growth will increase.

"The loss of purchasing power will leave traces on private consumption in the developed countries," said Kraemer. Even if private households finance part of the additional costs by drawing on savings made during the Corona-related lockdowns, private consumption is likely to lose momentum in the coming quarters, Commerzbank forecasts.

The economic slowdown expected in the U.S. and the eurozone this winter thus becomes even more likely.

U.S. Markets:

The U.S. stock market was set to rise as investors looked past concerns about inflation and supply-chain disruptions, confident that corporate earnings this season would be strong.

The market mood has been further buoyed by more certainty on the U.S. debt ceiling, after President Joe Biden signed a bill late Thursday extending the debt limit and averting a federal default. Looking ahead, limited catalysts next week in the form of economic data raise the prospect of volatility driven by corporate earnings -- and especially how companies view the outlook for 2022.

"The data calendar next week looks relatively quiet meaning that a week of schizophrenic tail-chasing by markets on daily mood swings in sentiment beckons," said Jeffrey Halley, an analyst at broker Oanda. "The buy-everything like it's 2020 sentiment could continue through next week though if U.S. earnings power higher."

Forex:

The euro's recent rally versus the dollar looks set to lose steam shortly as the European Central Bank isn't expected to change its ultra-loose policy stance any time soon, said ING.

"EUR/USD remains almost solely driven by dollar dynamics and the lack of any clear idiosyncratic upside catalyst for the euro is likely limiting the pair's upside."

Profit taking is behind the dollar's "soft momentum" but this won't last, said ING. The rebound in EUR/USD could follow a similar path to that seen in first few days of October, therefore stalling around the 1.1640 level.

Separately, ING said expectations of an aggressive U.K. interest-rate rise continue to support sterling but this is likely to prove temporary.

"Looking beyond today's price action, we still think sterling may have to give up some of its recent gains as our economist expects the Bank of England to underdeliver on monetary tightening."

Sterling also appears "somewhat complacent" to the new post-Brexit frictions and the material risk of the EU imposing retaliatory trade measures should the U.K. unilaterally suspend parts of the Northern Ireland protocol, said ING.

The dollar could weaken further on reduced safe haven flows if data on retail sales and consumer sentiment later boost confidence in the economic recovery, but any declines will be limited, said Oanda.

Heavy speculative long dollar positions will cap gains as investors look to trim those positions before the weekend, said Oanda's Jeffrey Halley.

"The dollar index could revisit [Thursday's] lows at 93.75, but only a weekly close under 93.50 suggests a deeper correction."

Bonds:

Inflation expectations have become a yield driver, said Helaba, and expects investors to be reluctant to buy government bonds in view of the high level of government debt.

Analysts at the bank expect the European Central Bank therefore to continue to buy government bonds on a large scale, even as risk premiums haven't widened, which is likely to ease the ECB's concerns to some extent. The bank's analysts see the "gravitational value" of 10-year Bund yields around 0%.

Citi said the yield differential between 10-year Portuguese and German government bonds around 50 basis points looks " rich."

Citi sees Portugal's economic fundamentals as continuing to be strong, benefiting from past reforms and from the fact that the economic hit from the pandemic has been smaller compared to that in periphery peers.

In addition, Portugal is returning to a conservative fiscal stance, targeting a budget deficit of around 3% of GDP in 2022, below the 5%-6% range targeted by Italy, Spain and France, said Citi's rates strategist Aman Bansal.

However, many of these positives seems to be in the price already "and we do not see meaningful scope for further tightening."

Societe Generale has shrugged off the excessive market pricing of tighter monetary policy faster than previously seen in the eurozone, considering the inflation spike to be temporary.

"The European Central Bank's strong forward guidance and the temporary nature of the spike in inflation should not be questioned at this point, " said Societe Generale's rates strategists Adam Kurpiel and Jorge Garayo.

Markets have started to price an acceleration in the rates-tightening cycle, led by the U.S. and the U.K., the strategists said, but added that euro rates should lag in this process because the ECB is well behind its peers in stepping away from policy accommodation. Accordingly, SocGen considers market pricing of an ECB rate rise excessive.

Greece might secure its next credit rating upgrade on Oct. 22 when it lines up for a review by S&P, said Danske Bank. "Greece is on positive outlook and we could see an upgrade." S&P's rating on Greece is at BB with positive outlook.

Commodities:

Crude oil futures continued to rally in Europe, breaking fresh multiyear highs after the IEA forecast on Thursday that gas-to-oil switching, amid the continuing natural gas-supply crunch, would add 500,000 barrels a day to global oil demand over the coming months.

Those bullish estimates were outweighing bearish inventory data from the EIA late Thursday, said Helge Andre Martinsen at DNB Markets. Gas markets were quieter Friday, with benchmark European prices edging up 0.4% and taking their gains over the past three months to 203%.

Base metals edged higher, supported by concerns that supply could be crimped by the global gas crunch.

Three month copper on the LME was last up 0.3% and on course to end the week 7.3% higher. That would be its biggest one-week jump since 2016. Copper breached the $10,000 ton level Thursday for the first time since June.

Other metals also rose, with aluminum up 0.5% and nickel rising 1.5%. Zinc added a further 0.7% to hit a three-year high, after a major producer said it was cutting output at three sites in Europe by half because of energy costs.

DOW JONES NEWSPLUS

EMEA HEADLINES

Rio Tinto Cuts 2021 Projection for Iron-Ore Shipments, Copper Output

Rio Tinto PLC Friday said it expects to ship less iron ore than previously anticipated from its Australian mining operations this year because of delays to projects caused by labor shortages in the country's west.

The world's second-largest miner by market value is also on track to produce less copper and bauxite than it projected this year in big part because of plant-related problems, the company said on Friday.

Volkswagen Group Global Deliveries Fell Sharply in 3Q

Volkswagen AG said Friday that vehicle deliveries declined in the third quarter amid the semiconductor shortage that is affecting automotive production world-wide.

The German car maker said total group deliveries to customers fell 24.5% to 1.97 million vehicles in the three months to September. However, in the first nine months of the year, global group deliveries were up 6.9% to 6.95 million vehicles.

Hugo Boss Lifts 2021 Targets After Strong Earnings, Sales Growth in 3Q

Hugo Boss AG raised its 2021 targets as its third-quarter sales and earnings exceeded pre-pandemic levels and market expectations, the company said Thursday, citing preliminary results.

The German premium-apparel maker said it was revising up its outlook and now expects sales adjusted for currency to rise by roughly 40% this year, which compares to a previous forecast of a growth of between 30% and 35%. Its earnings before interest and taxes should now come between 175 million and 200 million euros ($203 million-$232 million) for the year, it said. Hugo Boss previously said it was expecting EBIT between EUR125 million and EUR175 million.

Pearson Sees 2021 in Line With Market Views

Pearson PLC said Friday that it has made good strategic progress in the first nine months of the year, and that it was in line with full-year adjusted operating profit market consensus.

The FTSE 100 education company said it experienced a strong performance in Assessment and Qualifications over the period, offsetting declining enrolments in Higher Education, with group underlying revenue up 10%.

Eurozone Exports Rose on Month in August, Trade Surplus Declined

Eurozone exports rose in August for the second consecutive month, posting a modest increase amid slower global trade.

The European Union's statistics agency said Friday that the currency area's exports rose by 0.3% in August from July, while imports increased 1.6%, both adjusted for seasonal variations. The seasonally adjusted trade surplus was 11.1 billion euros ($12.9 billion) compared with EUR13.5 billion in July.

EU New Car Sales Fell in September Amid Chip Shortage

Passenger-car registrations in the European Union declined in September amid the current shortage of semiconductors, the European Automobile Manufacturers Association said on Friday.

New car registrations--a reflection of sales--declined 23% year-on-year to 718,598 vehicles for the month, said the association, also known as ACEA. The EU's major markets--Spain, France, Italy and Germany--all reported strong decreases.

U.S., European Nations Claim Progress on Path to Removing Digital Taxes

The U.S. and five European countries have reached an agreement on how those countries' digital-service taxes would be withdrawn as a broader international agreement moves forward, French Finance Minister Bruno Le Maire said on Thursday.

The deal isn't likely to yield an immediate withdrawal of those taxes because it is still linked to the broader global tax agreement being completed and implemented over the next few years. But having a path forward could ease tensions between the U.S. and France, Italy, the U.K., Austria and Spain.

GLOBAL NEWS

Consumer Spending Seems to Be Steady Despite Supply Crunch

U.S. consumers continue to spend, despite supply constraints causing a shortage of vehicles and other goods.

Economists surveyed by The Wall Street Journal estimate that September retail sales fell a seasonally adjusted 0.2% in September from the previous month, with car purchases declining as few vehicles were on dealer lots. Excluding autos, sales are estimated to have risen 0.5% as households shrugged off the end of enhanced unemployment benefits and high Covid-19 case levels caused by the Delta variant.

Trading Furor Complicates White House Decisions on Fed Leadership

Federal Reserve Chairman Jerome Powell's chances for a second term leading the central bank so far have been dented but not derailed by a reputational crisis over stock-trading disclosures by senior officials.

Mr. Powell, a Republican, has been the front-runner to keep the job when his term expires early next year. But questionable trading activities by two Fed bank presidents, first reported last month by The Wall Street Journal, cast a cloud over his prospects by giving a vocal minority of Democrats who already opposed his nomination new grounds to call for his replacement.

Fed's Thomas Barkin Unsure Economy Can Recover All Jobs Lost in Pandemic

Federal Reserve Bank of Richmond President Thomas Barkin said changes in the economy could mean that some workers who left the job market during the pandemic won't return.

Citing the number of pre-pandemic jobs that haven't been recovered, Mr. Barkin said, "I'm in the mood of giving a little more time to see whether these five million people come back" to the labor force, but added that might not happen, during a speech in New York on Thursday.

Biden to Press Climate Agenda on Wall Street

WASHINGTON-Calling climate change a systemic risk to the financial system, the White House will release a report Friday outlining its strategy for new rules that could affect investment disclosures, insurance policies and home loans.

The report outlines administration goals, including forcing financial firms to more directly address the risks of climate change, creating new protections for savings and pension plans and making climate change more a factor in federal budgeting and procurement.

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