EUROPEAN MIDDAY BRIEFING: Stocks Fall as Evergrande Payment Deadline Passes

BY Dow Jones & Company, Inc. | CORPORATE | 09/24/21 06:31 AM EDT

MARKET WRAPS

Stocks:

European stocks were lower Friday as bond yields continued to rise and investors kept an eye on troubled real estate giant China Evergrande headed into the weekend.

Stocks had enjoyed two strong days of gains following the Federal Reserve's policy meeting on Wednesday, as markets seemed to welcome a delay to the start of tapering and ignored the hawkish undertones of the central bank's outlook. But a delayed taper tantrum appeared to show up for bonds on Thursday, as yields shot higher and remained elevated on Friday.

"Something has clearly changed and positioning on rates is shifting. U.S. 10yr yields jumped to 1.44%, posting their biggest one-day gain since March, whilst 30yr bond yields jumped the most in a single day since March 2020," said Neil Wilson, chief market analyst for Markets.com.

"Although the Fed and BoE remain fairly cautious and the dogma of transitory inflation persists, they're starting to move beyond pandemic-era emergency mode. Investors see this and are moving too - rates steepening again as they did earlier this year," said Wilson.

Major indexes were holding on to slim weekly gains, in a week that began with sharp losses linked to fears over global contagion from troubles surrounding property group China Evergrande.

Shares on the move:

German sportswear companies Adidas and Puma both slip in opening trade Friday after U.S. peer Nike missed 1Q sales expectations and said continued supply-chain disruptions would mean lower revenue for the fiscal year than previously thought.

Nike pointed to pandemic-related restrictions in Vietnam, where much footwear production is based, as it cut full-year sales targets to single-digit growth, and warned of longer delivery times affecting the key U.S. holiday season.

Adidas also highlighted Vietnam when it set out full-year guidance this summer, although analysts at the time said supply-chain issues looked largely factored into the company's targets. Adidas traded 3.5% lower, while Puma fell 2.3%.

Drugmaker AstraZeneca rose nearly 3% after reporting results on a prostate cancer treatment.

Data in focus:

Germany's manufacturing sector is taking an expected blow from supply shortages and worries about China, its most important market, said Christian Schulz, European economist at Citi.

However, the hit wasn't as bad as feared and the domestic economy showed signs of resilience in the Ifo index, the economist said.

For Schulz, the Ifo index surprised to the upside because the drop was almost entirely driven by the current assessment component, which Citi treats like a measure of the output gap. The expectations component, which leads business investment growth by a quarter, fell less than expected by Citi.

"Growth momentum has faded, but a solid further recovery remains on the cards once supply constraints and price pressures are addressed," Schulz said.

The third successive decline in the Ifo business climate index in September provides further evidence that Germany's recovery is losing steam, as supply chain difficulties persist and the surge in gas prices piles additional pressure on prices and production, Capital Economics said.

Both the current conditions index and expectations index declined, as the surge in high gas and coal prices and supply shortages took their toll, Capital Economics' assistant economist Michael Tran said.

Nevertheless, the current conditions index remained high by past standards and is well above its average over the past decade, Tran said. Capital Economics expects GDP growth of 3.0% in the third quarter, given the low base at the start of 2Q.

U.S. Markets:

Stock futures wavered and bond yields ticked up to multi-month highs, as uncertainty lingered about the future of heavily indebted property giant China Evergrande Group.

"There has been a growing feeling that there is a pullback waiting," said Seema Shah, chief strategist at Principal Global Investors. "The market is so vulnerable to any kind of shock right now given growth is slowing and valuations are looking stretched."

Markets have been whipsawed this week by fears that the possible collapse of Evergrande could spill over into global markets and add to an already darkening outlook for global growth. Evergrande inched closer to a potential default Friday as a deadline on a key interest payment to its U.S. dollar bondholders passed without any announcement.

"It is one of the largest companies in the second largest economy in the world and if something pulls down Chinese growth it is going to pull down global growth," said Ms. Shah.

In U.S. off hours trading, Meredith Corp. surged 19% off hours after The Wall Street Journal reported the People Magazine publisher was in talks to be acquired by Barry Diller's IAC/InterActiveCorp.

Shares of Nike fell 4% in premarket trading after the sportswear giant lowered revenue guidance, citing supply-chain disruptions in Asia. Shares in warehouse grocery chain Costco ticked up 0.8% after the warehouse grocery giant reported quarterly sales.

Forex:

The DXY dollar index fell, erasing some of the gains in the wake of Wednesday's U.S. Federal Reserve announcement that took it to a one-month high, but investors should return to buy the currency due to prospects of tighter monetary policy, ING said.

"We are still inclined to think markets will buy the dips in the dollar given the reinforced backdrop of policy normalisation in the U.S.," it said.

The Fed said it could start tapering asset purchases as early as November while interest rates could rise by the end of next year. ING said markets for now seem reluctant to "trust" the Fed's interest-rate projections and may need more evidence from U.S. data.

The pound traded steady, failing to build on Thursday's gains after a Bank of England policy statement suggested the central bank was moving closer to tightening monetary policy, and MUFG said it could reverse these gains due to near- term risks to the U.K. economy.

These include reduced pandemic-related support, surging gas prices and continuing supply bottlenecks. The hit to real incomes from surging utility bills just as an increase to benefit payments added during the pandemic is taken away " could undermine consumer confidence and weaken consumer spending," said MUFG's Derek Halpenny.

Sterling advanced nearly 1% versus the dollar Thursday "but near-term elevated risks leave us more wary of the move reversing," he said.

Bonds:

Markets were contending with a rise in government bond yields, after several central banks-including the Fed-this week signaled they were on the path toward removing pandemic-era stimulus measures.

The yield on the benchmark 10-Year U.S. Treasury note rose to 1.437% Friday, from 1.408% Thursday, hitting its highest level since July.

OFI Asset Management expects a gradual rise in U.S. and eurozone bond yields by year-end as central banks intend to gradually remove some monetary stimulus, said Jean-Marie Mercadal, head of investment strategies.

OFI AM's year-end targets for the 10-year U.S. Treasury and German Bund yields are 1.75% and -0.20%, respectively, with the expected increases not triggering any major price fluctuations in markets.

Markets seem to have priced in the Fed's intention to scale back asset purchases, he said.

The European Central Bank also decided in September to continue asset purchases at a "moderately lower" level in the coming quarter compared with 2Q and 3Q.

A new German government with a softer stance on austerity and no strong opposition against a permanent EU debt capacity would argue for tighter eurozone periphery spreads, said Christoph Rieger, head of rates and credit research at Commerzbank.

Germany will hold elections on Sunday, with recent polls showing the Social Democratic Party (SPD) in the lead. "While a moderate shift to the left under an SPD-led German government should not come as a surprise at this stage, the FDP [ Free Democratic Party] counterweight in a traffic light coalition may turn out to be weaker than some expect," he said.

The traffic light coalition scenario refers to a government formed by SPD, FDP and the Greens.

Euro-denominated corporate bonds are tightly priced suggesting limited scope for further gains until the end of the year, said UniCredit. "Tight spread levels across European credit market segments suggest only limited scope for tightening until the end of the year," analysts at the bank said.

The market is set to hold steady Friday, as little-changed equity and Bund futures this morning suggests that European credit market spreads are likely "to close the week pretty flat today," they said.

Commodities:

Oil prices rose, with both benchmarks on course for weekly gains. Brent's trading close to its October 2018 high, with UBS's Giovanni Staunovo pointing to the supply disruptions and recovering oil demand that have caused volatility in the market since August.

On top of Hurricane Ida, maintenance work in Kazakhstan, as well as outages in Nigeria, Mexico, and Libya have all contributed to rising prices in recent weeks, he added, forecasting a Brent price of $80 a barrel for the end of the month.

Gold rebounded after a steep fall on Thursday that was prompted by rising bond yields and signs that global central banks could soon hike rates to tame inflation. The precious metal slumped as low as $1,739.70 in the previous session as U.S. treasury yields rose to their highest level since July.

"The market is showing a little bit of a taper tantrum," says Seema Shah, chief strategist at Principal Global Investors, of the rising bond yields. Signs that global central banks were moving to remove pandemic-era stimulus measures are behind the move in bond markets, she said.

EMEA HEADLINES

Talking Markets: Europe Faces Challenging Winter Amid Energy Squeeze

Europe is in for a difficult winter: Energy prices are soaring, and power supply may not stretch far enough, threatening to cause outages, disrupt the continent's industry and hurt the economic recovery.

Electricity prices have risen to their highest levels in more than a decade in recent weeks, according to the International Energy Agency. This is largely attributable to prices for natural gas world-wide, which have soared due to demand being higher than expected, spurred by the global economic rebound, and because of crimped supply.

German Business Sentiment Falls for Third Month Running in September

German business sentiment worsened again in September, as supply-chain bottlenecks clouded the short-term outlook.

The Ifo business-climate index decreased to 98.8 points in September from 99.6 points in August, data from the Ifo Institute showed Friday. This marks the third consecutive month of decline after it peaked at 101.8 in June.

Naturgy's Largest Shareholder Opposes $5.7 Bln Partial Takeover Bid

Naturgy Energy Group SA's single largest shareholder said Friday that it would reject an offer for a stake in the company launched by IFM Global Infrastructure Fund, arguing that the move isn't in the company's long-term interests.

CriteriaCaixa, an investment holding company linked to CaixaBank SA, said it opposed the offer to acquire a 22.69% stake made by IFM through its investment vehicle Global InfraCo 0 (2). The offer was first made in January, with the bid later revised downward from 23 euros to EUR22.07 a share, or total 4.86 billion euros ($5.70 billion.) The offer was approved by Spanish regulator the CNMV earlier this month.

Apple Insists EU Push for Universal Charger Would Repress Innovation, Create Waste

Apple Inc. hit back at European Union moves to introduce a universal charger for smartphones, tablets and other electronic devices, saying such legislation would be anti-innovation and would serve to increase waste.

The European Commission, the bloc's executive arm, said Thursday that it is proposing USB-C as the standard port for smartphones, tablets, headphones, portable speakers, cameras, and some videogame consoles, regardless of the device brand. The move aims to cut waste related to the production and disposal of chargers.

U.K. Consumer Confidence Wanes in September on Inflation Fears

Confidence among British consumers took a hit in September, falling to a five-month low, as concerns over high inflation and the end of government support soured consumers' mood.

GfK's consumer-confidence barometer came in at minus 13 in September, down five points from August and missing economists expectations, who had forecast a reading of minus seven when polled by The Wall Street Journal.

U.S. and European Economies Slowed by Delta Variant, Supply Chain Bottlenecks

The U.S. and European economies slowed in September as supply-chain bottlenecks and worries over the Delta variant weighed on businesses, adding to signs the global economy is experiencing a soft patch amid an uneven recovery, purchasing managers' surveys showed.

Manufacturing and services businesses in both the U.S. and Eurozone reported slower growth in activity this month, although the pullback was more pronounced in Europe.

Turkish Lira Falls Near Record Lows After Rate Cut

Turkey's central bank cut its key interest rate on Thursday in a move that could complicate the country's path to economic recovery from the Covid-19 pandemic and a prolonged inflation problem.

Officials cut Turkey's key policy rate, its one-week repo rate, to 18% from 19%. Following the announcement, the Turkish lira fell 1.3% against the dollar, with one dollar buying 8.767901 lira, just shy of record lows hit in June.

Migrant Candidates Face Racism in German Election

BERLIN-More German Turks will run for election this year than at any time in the past two decades, but candidates from Germany's largest ethnic minority say they often face racism, underlining the difficulties the country faces in integrating its diverse migrant communities.

"I had 400 campaign posters, and I think 250 of them are already destroyed with racist slurs," said Orkan Özdemir, a center-left candidate for the Berlin House of Representatives, which elects its members Sunday, the same day as the country's general election.

CDC Chief Backs Pfizer Boosters for At-Risk Workers in Break With Panel

The director of Centers for Disease Control and Prevention said workers at high risk of Covid-19 infection should receive a booster of Pfizer Inc.'s vaccine, in a decision that deviated from the recommendation of an advisory panel that the CDC typically follows.

CDC Director Rochelle Walensky signed off on a series of recommendations from the panel, saying boosters should be offered to people 65 and over as well as those 50 to 64 years with underlying medical conditions, according to the Associated Press. The extra dose would be given at least six months after the last shot.

GLOBAL NEWS

Buying a Share of a Collectible Guitar? In This Market, You May Get Shredded.

Space-tourism companies, flying-taxi startups and pizza-related cryptocurrencies are among the unlikely ventures to have recently reached public markets. Now it is the turn of electric guitars.

This month, American guitar maker Gibson said it would use Rally, a site specializing in collectibles, to issue shares in prototype instruments designed in collaboration with famous players. Ownership of an EDS-1275 doubleneck model approved by Slash, of the band Guns N' Roses, was chopped into 13,000 parts and sold for $5 apiece to 562 investors in just two hours.

China Evergrande Keeps Dollar Bondholders Guessing on Key Interest Payment

Global investors who own China Evergrande Group's U.S. dollar bonds were in the dark Thursday about whether the property giant would make a key interest payment, a major test of the highly indebted developer's ability to avoid a default.

Evergrande was on the hook to make $83.5 million in coupon payments on Sept. 23 on dollar bonds with a face value of $ 2.03 billion. As of late afternoon in New York on Thursday, bondholders hadn't received the money, according to people familiar with the matter.

Democratic Leaders Scramble to Find Areas of Agreement on $3.5 Trillion Spending Bill

WASHINGTON-Democratic leaders raced Thursday to find enough agreement around a roughly $3.5 trillion spending package to assuage concerns between the party's dueling centrist and liberal factions that threatened to derail a separate vote on an infrastructure package next week.

Liberal Democrats have said the two bills are linked and have balked at voting for the roughly $1 trillion infrastructure package on Monday in the House unless the broader healthcare, education and climate-change package has passed. The infrastructure bill has already cleared the Senate with bipartisan support, and moderates have urged leadership to bring it to the floor in the House.

IMF Calls for Lending Clamps to Cool Australia's Housing Price Surge

SYDNEY--The International Monetary Fund has added to calls for regulatory steps to be taken to cool surging house price growth in Australia, warning of building "incipient risks" in the market.

In an Article IV discussion paper, the IMF said so-called macroprudential policy should be tightened to address gradually rising financial stability risks.

America's Cash Might Stay on the Sidelines

If Americans ever feel comfortable again, they have a lot of money that they can spend. But who knows when that comfort will come?

The Federal Reserve on Thursday reported that the net worth of U.S. households was $134 trillion in the second quarter-up from $128.4 trillion in the first quarter. That figure stood at $110 trillion In the fourth quarter of 2019, before the pandemic took hold. Including nonprofits, accumulated household net worth in the second quarter hit a record $141.7 trillion.

Trapped in Kabul, Prominent Afghan Women Fear Retribution Under Taliban Rule

KABUL-Nabila, a 31-year-old Afghan judge, used to grant divorces to the wives of militants while their husbands languished in prison. Two days after the Taliban captured Kabul on Aug. 15 and emptied prisons across the country, she received threatening calls from several of these men.

She broke her SIM card, packed light and went into hiding.

North Korea Calls Peace-Deal Proposal by South's Moon Jae-in Premature

SEOUL-North Korea dismissed a proposal by South Korea's president for a peace declaration, calling the proposition premature as Pyongyang sees what it calls continuing aggression from Washington and Seoul.

During a speech Tuesday at the United Nations General Assembly, South Korean President Moon Jae-in suggested the adoption of a peace deal that would replace the armistice that halted hostilities in the 1950-1953 Korean War. He proposed that the U.S., along with the two Koreas and possibly China, agree to declare the war over.

U.S. Officials Call for Fines Against Companies That Don't Report Hacks

Top U.S. cyber officials on Thursday urged Congress to add more teeth to any legislation forcing firms that operate critical infrastructure to disclose hacks, calling for a narrow reporting window after a breach and fines against companies that don't comply.

Such mandates could help federal agencies and critical economic sectors to respond to incidents, security experts say. But many businesses and some lawmakers are wary of the tighter regulation and potential penalties for which the Biden administration is advocating.

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


  (END) Dow Jones Newswires
  09-24-21 0631ET
  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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