EMEA Morning Briefing: Evergrande Woes, Fed Risks to Weigh on Europe's Mood

BY Dow Jones & Company, Inc. | ECONOMIC | 09/20/21 12:42 AM EDT


Watch For:

Germany PPI; Bundesbank Monthly Report; no major earnings scheduled

Opening Call:

Worries over China Evergrande's debt problems and caution at the start of a week packed with central bank meetings, will continue to hurt sentiment in Europe. In a holiday-thinned Asian session, Hong Kong stocks slid, the dollar and Treasury yields were firmer and commodities retreated.


European stocks face more losses on Monday after the Hang Seng fell 4%, with property companies hammered on persisting concerns over the potential fallout from the financial troubles of Evergrande.

The Chinese property giant, nursing more than $300 billion in debt, is seen as likely to default this week and analysts have warned the looming crunch has potential to shake up financial markets.

Analysts at UBS said in a note that the potential for market spillovers will depend on whether Evergrande restructures or fully liquidates. The analysts wrote what they remained confident that a restructuring remained the most probable outcome.

Other regional benchmarks in Asia also dropped after Wall Street closed last week with another decline, as investors anticipated whether the Federal Reserve will take any action this week to address the impact of rising inflation.

NAB said a slew of central bank meetings this week, including the Fed, along with virus developments and the debt problems of Evergrande will likely instil a cautious tone in financial markets.

"Those three risks are what's keeping markets relatively subdued," NAB director of economics Tapas Strickland said.

Aside from the Fed, the Bank of England, Bank of Japan, Swiss National Bank, Riksbank and Norges Bank have meetings.


The dollar and the yen strengthened in Asian trading, with risk appetite dented as investors awaited this week's Fed meeting, ANZ said.

CBA said risks for dollar are skewed to the downside. It expects the Fed to leave policy unchanged and any dovish messaging could weigh on the U.S. currency.

"The setback in the labor market recovery in August and the jump in serious infections will encourage the FOMC to wait before it announces it will taper its asset purchases," CBA said.

GBP/USD has an upside risk if more MPC members come out in support of curtailing the BOE's asset purchases, CBA said, while AUD and NZD will be largely driven by dollar direction. CBA added that USD/JPY is unlikely to be moved by Wednesday's Bank of Japan meeting.

TD Securities said that sterling has scope for "modest" gains against the euro as the BOE is unlikely to push back against market pricing of nearly 40 basis points in interest-rate rises by end-2022 at this week's policy decision.

Monetary-policy tightening by the BOE "is certainly plausible next year, " TD said. However, scope for sterling gains against the dollar will be "limited and constrained." The BOE is unlikely to make "material changes" and its announcement immediately follows the Fed decision.

"It doesn't strike us as sufficiently appealing to make the gamble against the USD with a hawkish risk at the Fed meeting," TD said, though it sees good prospects for sterling in 2022.


Treasury yields edged higher in Asia, after they hit their highest levels in at least a week, even as the latest U.S. consumer survey showed sentiment mired near decade lows.

Capital Economics expects long-dated yields to keep rising in developed markets, with U.S. sovereign bonds showing the biggest uptick. "This is based on our view that inflation will prove more persistent" in the U.S. than in the U.K. or in the EU.

Capital Economics forecasts U.S. inflation weakening in the short term but "it will ultimately settle at a higher level than in the eurozone and the U.K. in the next decade."

Bank of America said it expects the Fed this week to more clearly state that it would be appropriate to start reducing the pace of asset purchases this year. As for the Fed's much talked about dot plot, BofA said: "All eyes will be on the 2022 median dot. We expect it to be unchanged but there is a risk that it shows half a hike or one hike penciled in."

However, BofA also believes the weak August jobs report will keep "enough of the 11 participants who penciled in zero hikes for 2022 in June to remain on hold."

Euro-denominated corporate bonds keep outperforming German government debt as risk-appetite dominates, LBBW said. Measured in total returns--which comprise capital gains and income--euro high-yield corporate bonds have a lead of roughly six percentage points over Bunds so far this year.

Similarly, euro investment-grade corporate paper has also fared better than Bunds, as they are still two percentage points ahead in total return terms in the same time frame. This means that "high appetite for risk is still paying off," LBBW said.


Oil prices extended their declines in Asia, as crude production in the Gulf of Mexico makes a slow comeback from Hurricanes Ida and Nicholas.

"We see a production loss of about 850,000 bpd for the third week of September, then going down to 180,000-200,000 bpd in the fourth week," Rystad Energy said.

The easing of supply disruptions comes amid Covid-19 outbreaks in crude importers China and Japan, which are likely to hamper the oil demand recovery, Rystad Energy said.

An update Friday from Baker Hughes revealed that the number of active U.S. rigs drilling for oil rose for a second straight week, up 10 at 411. That followed a rise of 7 oil rigs the week before, but the oil-rig count had dropped by 16 for the week ended Sept. 3, in the wake of Hurricane Ida.

"As Gulf output recovers, that will put more pressure on WTI, and that could lead to a pullback in the near term" for oil, Marshall Steeves, energy markets analyst at IHS Markit, told MarketWatch. "Beyond that, demand growth will again be significant to price discovery."


Gold futures edged lower, extending Friday's weakness, as the dollar and Treasury yields strengthened ahead of the Fed policy meeting.

"Gold is still in trouble. It's worst enemy is surging Treasury yields and right now that trade is gaining momentum," Oanda said, adding that bullion remains vulnerable to technical selling and isn't likely to attract buyers until it falls to the $1,700-an-ounce mark.

Copper was also lower as China Evergrande's debt crisis weighed on investor sentiment in Asia. ANZ said China's real- estate industry accounts for a large proportion of copper and other base metals consumption, so any property-sector weakness is likely to spill over into industrial metals.

China's National Development and Reform Commission intends to release more copper, aluminum and zinc from state reserves into the market, which should further put downward pressure on metals prices, ANZ said.


Democrats Press Ahead With Debt-Limit Vote Amid Standoff With GOP

WASHINGTON-A partisan fight over raising the government's borrowing limit is expected to ratchet up this week, with Democrats moving ahead with a vote in the face of strident GOP opposition, raising doubts about whether Congress will take action before the federal government runs out of cash.

The standoff has alarmed Wall Street analysts and business leaders, who in recent weeks have issued warnings about a rising risk of a technical default, in which the government might be unable to make all of its regular payments in full and on time. The threat of such a default could derail markets and hit U.S. economic growth.

Junk-Debt Sales Soar Toward Record Year

The $3 trillion market for low-rated companies' debt is having its best year ever, powered by a rebounding economy and investors' demand for any extra yield.

U.S. companies including Crocs Inc. and SeaWorld Entertainment Inc. have sold more than $786 billion of junk-rated bonds and loans so far in 2021, according to S&P Global Market Intelligence's S&P. That tops the previous high for a full year in data going back to 2008.

Covid-19 Vaccinations Boost the Global Economy, but May Not Cure It Alone

The global recovery is slowing as Covid-19 resurges, spurring governments to try to raise vaccination rates in hopes of fueling stronger economic growth.

The thinking is, first, that vaccinations will ease consumers' worries about infection, prompting them to spend more on travel, dining out, going to concerts and other activities that involve proximity to other people. Second, reduced Covid-19 case counts would mean fewer government shutdowns of ports, factories and other operations critical to global supply chains.

Natural-Gas Prices Surge, and Winter Is Still Months Away

Natural-gas prices have surged, prompting worries about winter shortages and forecasts for the most expensive fuel since frackers flooded the market more than a decade ago.

U.S. natural-gas futures ended Friday at $5.105 per million British thermal units. They were about half that six months ago and have leapt 17% this month.

FDA Advisory Panel Votes Against Endorsing Covid-19 Booster Shots Widely

An advisory panel to the Food and Drug Administration offered a limited endorsement of booster shots of the Covid-19 vaccine from Pfizer Inc. and BioNTech SE, recommending injections for people 65 and older or at high risk of severe disease but stopping short of justifying them for the broader population.

The outside panel's action comes as the dangerous Delta variant of the coronavirus continues to spread in the U.S. and federal health officials hope that additional doses of approved vaccines will sustain protection in people who have been previously vaccinated.

Europe's OVHcloud Readies Possible $4.7 Billion IPO

European cloud-services provider OVHcloud plans to launch a possible initial public offering as soon as Monday that could value the business at more than $4.7 billion, according to people familiar with the matter.

Based in Roubaix, France, OVHcloud rents computing, storage and networking capability to users, overseeing a network of dozens of data centers across North America, Europe, Singapore and Australia. It also operates its own fiber-optic network globally that the company claims gives it a competitive edge.

Shell to Start Making Lower-Carbon Jet Fuel as Regulations Loom

Royal Dutch Shell PLC is the first major oil company to announce targets for low-emission jet-fuel output and sales as airlines look to buy more of the fuel to meet climate-change goals and get ahead of proposed European Union regulations.

The Anglo-Dutch energy giant, a top provider of jet fuel, said it plans to produce 2 million metric tons of so-called sustainable aviation fuel a year by 2025, up from none today. It wants SAF to account for at least 10% of the jet fuel it sells by 2030, including fuel it sources from outside suppliers. A Shell spokesman declined to say how much SAF it sells now.

Investment Firms Tiedemann and Alvarium Near Deal to Merge, Go Public Via SPAC

Investment firms Tiedemann Group and Alvarium Investments Ltd. are close to a deal to merge and go public through a special-purpose acquisition company, people familiar with the matter said.

The combined investment firm would be called Alvarium Tiedemann Holdings and be valued at roughly $1.4 billion in the deal with the SPAC Cartesian Growth Corp., the people said. The merger could be announced as soon as this week.

Prudential Plans to Raise Up to US$2.89B in Hong Kong Share Offer

Prudential PLC is planning to raise up to 22.49 billion Hong Kong dollars ($2.89 billion) by issuing new shares as the insurer looks to redeem high-coupon debt due in six months and invest for growth.

The U.K. insurer is planning to sell 130.78 million new shares in the Hong Kong offer and has set a maximum price of HK$172 per share, Prudential said Monday.

Universal Music Spinoff to Test Investors' Appetite for Music

Vivendi SE's spinoff of Universal Music Group, expected Tuesday, will leave the French conglomerate bereft of its most lucrative business and will test the market's appetite for music as an asset class.

The world's largest music company, behind stars including Taylor Swift, Drake and the Beatles, will debut on Amsterdam's Euronext stock exchange with shares to be distributed to Vivendi's investors. The move comes amid rising interest in the resurgent music business as an investment and following a recent boom in the value of music catalogs, music-streaming companies and technology for creators.

U.S. Spat With France Shows Challenge of Keeping Allies Unified

France stepped up its opposition to a security agreement the U.S. crafted with Australia and the U.K., criticizing the Biden administration's failure to keep its allies apprised of sweeping foreign policy initiatives after the pact led to the loss of a lucrative French submarine deal.

On Sunday, French Foreign Minister Jean-Yves Le Drian discussed "the strategic consequences of the current crisis" with its ambassadors from the U.S. and Australia who were recalled for consultations. French President Emmanuel Macron is also expected to speak in the coming days with President Biden, officials from both countries say, in a sign of the depth of France's frustration over the security pact. Mr. Le Drian likened French anger over the security pact to the blowback from American allies over the Biden administration's abrupt and messy withdrawal from Afghanistan.

Russia's Ruling Party Leading in Elections as Putin Looks to Tighten Grip

MOSCOW-Russia's ruling party appeared on course to maintain its majority in parliament, early results showed, in an outcome that would cement President Vladimir Putin's control over his country's main levers of power.

The preliminary tally showed pro-Kremlin United Russia won 45% of votes cast, followed by the Communist Party of the Russian Federation with 22% and the Liberal Democratic Party of Russia with around 8%, according to early results from Russia's electoral commission based on 30% of the ballots counted.

U.N. General Assembly Faces Climate Change, Covid-19 and New Tensions

WASHINGTON-World leaders gathering this week for an annual United Nations meeting will confront persisting global problems such as Covid-19 and climate change, while grappling with new tensions and conflicts dividing U.N. members.

Diplomats and leaders attending the U.N. General Assembly in New York will also contend with the return to power of the Taliban and the humanitarian situation in Afghanistan, as well as the challenge posed by Iran under a new, hard-line president, Ebrahim Raisi.

Write to paul.larkins@dowjones.com

Expected Major Events for Monday

06:00/GER: Aug PPI

07:00/SPN: Jul Trade Balance

08:00/POL: Aug PPI

08:00/POL: Aug Industrial Production Index

08:00/POL: Aug Agricultural prices

09:00/LUX: Aug Unemployment

10:00/IRL: Jul Goods Exports and Imports

10:00/UK: Aug Aluminium Production report

15:59/UKR: 2Q GDP

15:59/GRE: Jul Balance of Payments

16:59/SWI: 1Q Locational & Consolidated banking statistics

16:59/SWI: 2Q Exchange-traded derivatives statistics

16:59/SWI: 2Q International debt securities statistics

16:59/SWI: 1Q Domestic debt securities statistics

16:59/HUN: 2Q Balance of Payments

16:59/LUX: 2Q Balance of Payments

17:59/POR: Jul Balance of Payments

17:59/POR: Jun ICSG Copper Report

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

  (END) Dow Jones Newswires
  09-20-21 0042ET
  Copyright (c) 2021 Dow Jones & Company, Inc.

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