EMEA Morning Briefing: Steady Gains Likely for Stocks Despite Evergrande, Fed Concerns

BY Dow Jones & Company, Inc. | TREASURY | 09/22/21 12:42 AM EDT

MARKET WRAPS

Watch For:

Eurozone Flash Consumer Confidence Indicator; Germany Ifo Economic Forecast; Italy Industrial Turnover/Orders; U.S., Japan Monetary Policy Decisions; updates from Legrand, Babcock, Sainsbury's, Halma, Sasol

Opening Call:

Continued caution over China Evergrande and worries ahead of the Fed policy update will likely cap gains for European shares on Wednesday. In Asia, stock markets were mostly lower, the dollar, Treasury yields and gold were little changed, while oil extended its advance.

Equities:

Cautious gains are likely for European stocks on Wednesday, following a choppy session on Wall Street, as the market slowly attempts to recover from the China Evergrande rout

The Dow and S&P 500 extended losses to a fourth day in a row on Tuesday, marking the worst stretch for the S&P 500 since mid-May, with investors testing the market's low from the day before when concerns over the heavy debt burden of China Evergrande sparked a selloff.

"It's not surprising that September brings a little volatility to the market," Jay Pestrichelli, chief executive officer of ZEGA Financial, said. He viewed the "noise" around Evergrande as a buying opportunity. "We put money to work yesterday," he said. "We like the S&P 500."

In Asia, shares were mostly lower on Wednesday, tracking the mixed performance on Wall Street.

Later Wednesday, the Federal Reserve is expected to send its clearest signal yet that it will start reining in its ultra-low-interest rate policies later this year. The FOMC policy meeting could lay the groundwork for an announcement of a pullback in November.

Back in Asia, the Bank of Japan kept its ultra-supportive monetary policy unchanged, as expected.

Forex:

The dollar held steady in Asia with traders mostly on hold for the FOMC meeting, IG said. Near-term catalysts include whether there'll be a hawkish stance from the Fed, and if developments in China Evergrande drive further risk-off moves, IG added.

CBA expects the dollar to remain in a tight range ahead of the Fed but thinks monetary policy settings are likely to remain unchanged, with the setback in the U.S. labor market recovery in August and the jump in serious Covid infections, likely to encourage the FOMC to wait before it announces any tapering measures.

The FOMC may discuss how delta-related disruptions are delaying many workers' return to the labor market, CBA added.

Still, elevated underlying inflation may also encourage more FOMC members to forecast the start of a rate tightening cycle in 2022 in the dot plot.

Bonds:

Moves in Treasury yields were capped in Asia, as the market's focus continued to shift away from the Chinese property crisis to the Fed meeting.

Although a tapering announcement is basically ruled out, according to Amherst Pierpont, "momentum continues to build toward a reduction in the pace of QE soon."

The firm noted that only two more 2021 meetings are left if indeed no tapering is announced Wednesday. "That leaves the top agenda item for this week's meeting as offering the 'advance notice' that Powell has promised," Amherst said, adding that details are more likely to come in the press conference than in the statement.

At the start of this week, investors sold euro-denominated corporate bonds with higher beta, or volatility relative to a benchmark, amid fears that the possible collapse of China Evergrande could ripple through global markets.

Commerzbank advised clients to wait until after the Fed decision before starting to buy debt where the price has fallen. "We would wait before making use of setbacks in the high-beta space," credit strategist Cem Keltek said.

There is "limited" visibility on any future impact on high-beta cash corporate bonds from any possible default of Evergrande, while if the Fed outlines plans to taper asset purchases Wednesday this could damage feeble risk sentiment further, he said.

Commerzbank said riskier, more volatile euro-denominated corporate debt should remain vulnerable to souring market sentiment on the back of China Evergrande's default prospects.

"While direct exposure to the Chinese real estate sector is limited in euro-credit benchmarks, particularly higher beta segments should remain sensitive to deteriorating risk sentiment on the back of further turmoil in China," Keltek said.

Energy:

Oil climbed further in Asia, with prices extending Tuesday's gains, as traders grapple with a slower-than-expected return of U.S. crude supply from the Gulf of Mexico after Hurricane Ida, Rystad Energy said.

"Total production loss in the U.S. Gulf of Mexico in September now seems likely to stand at about 790,000 bpd, higher than our previous estimates, " Rystad said.

Prices could be weighed by China Evergrande's debt problems which may have a knock-on bearish effect on commodity prices, but traders think that oil supply news from the U.S. is more significant, Rystad added.

"Bringing a bullish tailwind" are expectations for a drawdown of U.S. crude inventories and reports that OPEC+ is 116% compliant in August with their oil production curbs, analysts at Blue Line Futures wrote in their latest note.

"We expect bullish tailwinds to show up from the risk-landscape in the near term," analysts at Blue Line Futures said. "From there, we do believe a subsiding delta narrative can bring a strong year-end rally," as the U.S. has begun "laying a plan to lift travel bans for international travelers and we expect this to be an ongoing narrative in Q4."

Metals:

Gold futures were flat despite some support demand for safe-haven assets stemming from China Evergrande's debt problems.

ANZ said investors are looking out for signals from the Fed on any changes to its asset-purchasing activity. "While many uncertainties are still looming, investors would be looking out for cues on timing and duration of Fed tapering to build fresh longs."

Copper rose 3%, breaking a four-day losing streak on the LME on strong Chinese buying interest due to further signs of market tightness, Marex said.

The broker noted the copper market flipped to a global deficit of 90,000 tons in June compared with a 4,000-ton surplus in May, with the tightness showing little signs of abating. After recent price declines, "we saw strong evidence of a Chinese bid into the dip," Marex said.

TODAY'S TOP HEADLINES

Evergrande Onshore Unit Set to Pay Bond Interest on Time

An onshore unit of China Evergrande Group is set to make an interest payment on time on Thursday, offering the debt- ridden conglomerate a sliver of breathing room as it struggles to fix its capital structure and repair its global image.

The unit, Hengda Real Estate Group Co., will pay 232 million yuan ($35.9 million) of interest on its 5.80% September 2025 bond, it said Wednesday in a filing.

BOJ Sticks to Ultra-Easy Monetary Policy Path

TOKYO--The Bank of Japan on Wednesday confirmed it would stick to an ultra-easy monetary policy, while other major central banks are moving toward scaling back their asset purchases.

The Japanese central bank maintained its target for short-term interest rates at minus 0.1% and its target for the 10- year Japanese government bond yield at around zero. It also reiterated that it would purchase JGBs without an upper limit.

Debt-Limit Suspension Passes House, Faces Standoff in Senate

WASHINGTON-The House passed Tuesday a measure keeping the government funded until early December and suspending its borrowing limit through 2022, but without having resolved the partisan standoff poised to derail it in the Senate.

With less than two weeks before the government's current funding expires at 12:01 a.m. Oct. 1, the House passed in a 220-211 party-line vote a package unveiled earlier in the day that would fund the government through Dec. 3, 2021, and suspend the debt limit through Dec. 16, 2022. The Treasury Department is currently using emergency measures to cover America's bills for several months until the debt limit is raised or suspended again.

Infrastructure Plan Faces Fresh Uncertainty as Democrats Remain Divided

WASHINGTON-Persistent divisions among Democrats over the size of their climate and social-welfare plan are threatening to derail much of President Biden's agenda, as progressives signal that they could block passage of a roughly $1 trillion infrastructure package next week.

As the party struggles to find a path forward, Mr. Biden plans to meet Wednesday with Senate Majority Leader Chuck Schumer (D., N.Y.) and House Speaker Nancy Pelosi (D., Calif.) at the White House to discuss the two proposals, according to a person familiar with his schedule. Mr. Biden was also expected to convene a group of House and Senate Democrats to discuss the proposals as he takes a more prominent role in steering his legislative agenda through Congress.

SEC's Gensler Doesn't See Cryptocurrencies Lasting Long

WASHINGTON-Securities and Exchange Commission Chair Gary Gensler said Tuesday he doesn't see much long-term viability for cryptocurrencies, underscoring the importance of protecting investors in the market and bringing it under regulatory oversight.

Mr. Gensler likened the thousands of cryptocurrencies in existence to the so-called wildcat banking era that took hold in the U.S. from 1837 until 1863 in the absence of federal bank regulation. Before President Abraham Lincoln created the Office of the Comptroller of the Currency, banks issued their own currencies, which they sometimes refused to redeem for their purported value in gold or silver.

China's Xi Commits to Stop Building Coal Plants Abroad

Chinese President Xi Jinping on Tuesday said Beijing would stop building coal-fired power plants abroad, in a public commitment to redirect the country's huge engineering industry away from adding to a source of global pollution.

Beijing has faced pressure from the U.S., the European Union and environmental groups for having continued to finance and build coal-fired power plants in many developing countries, even as it said it would cut greenhouse emissions at home.

DraftKings Makes Bid for Gambling Company Entain

U.S. sports-betting operator DraftKings Inc. has made a cash and stock offer for global gambling company Entain PLC in a deal valued at more than $20 billion, according to people familiar with the matter.

The move would give DraftKings a fast expansion into international gambling markets, with Entain's licenses to operate in 27 countries and its online technology. The deal could face hurdles, as Entain is a key partner to one of DraftKings' biggest rivals, MGM Resorts International, which said that completing the deal would require its support.

Swedbank Launches Search for New Compliance Chief

STOCKHOLM-Swedbank AB said Tuesday it has launched a search process to find a new chief compliance officer after its current compliance officer, Ingrid Harbo, decided to retire.

Ms. Harbo, who has been a member of the Swedish bank's group executive committee since 2019, will leave the company on March 31, 2022, and remain in her role until then, Swedbank said in a statement Tuesday.

Write to paul.larkins@dowjones.com

Expected Major Events for Wednesday

04:30/NED: Sep Consumer confidence survey

04:30/NED: Jul Consumer Spending

06:00/DEN: Sep Consumer expectations

07:00/SWI: 2Q Balance of Payments

07:00/SPN: Jul Industrial Orders & Turnover

08:00/GER: Ifo Economic Forecast

09:00/ITA: Jul Industrial turnover & orders

09:00/MLT: Aug RPI

10:00/IRL: Aug WPI

12:00/POL: Aug Broad money M3

14:00/EU: Sep FCCI Flash Consumer Confidence Indicator

14:00/DEN: Aug Central Government Finance & Debt

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


  (END) Dow Jones Newswires
  09-22-21 0042ET
  Copyright (c) 2021 Dow Jones & Company, Inc.

In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible.

Lower-quality debt securities generally offer higher yields, but also involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Any fixed income security sold or redeemed prior to maturity may be subject to loss.

Before investing, consider the funds' investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.

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