EMEA Morning Briefing:Shares to Waver as Surging Oil Stokes Inflation Worries

BY Dow Jones & Company, Inc. | TREASURY | 09/28/21 12:45 AM EDT

MARKET WRAPS

Watch For:

Germany GfK Survey; France Consumer Confidence; OPEC World Oil Outlook launch; Powell, Yellen testify to Senate Banking Committee; updates from Air France-KLM, TUI, Covestro, Aggreko, Smiths Group, Ferguson, Petrofac, United Utilities, Pennon, Adyen, Rentokil Initial

Opening Call:

Worries about inflation, as oil prices continue to rise, will likely drag on European shares early Tuesday. In Asia, stocks struggled for direction; the dollar, Treasury yields and oil all extended gains, while gold edged lower.

Equities:

European shares may struggle for momentum on Tuesday, following a mixed finish on Wall Street and as concerns about China dragged on investor optimism in Asia.

Rising Treasury yields and surging energy prices have stoked inflation worries and Jerome Powell is set to tell Congress at a hearing on Tuesday, that inflation is likely to stay high in the coming months before moderating.

In testimony released by the central bank on Monday, Mr. Powell largely repeated remarks he made at a news conference last week after the central bank indicated it was likely to begin reversing its easy-money policies at its next meeting, Nov. 2-3.

A surge in inflation because of supply-chain bottlenecks and other challenges related to the reopening of the economy has been larger and longer-lasting than anticipated, Mr. Powell said in his prepared remarks. "But they will abate, and as they do, inflation is expected to drop back toward" the Fed's 2% goal, Mr. Powell said.

Mr. Powell acknowledged that there are risks that price pressures are higher than anticipated or more enduring. The Fed would raise interest rates "if sustained higher inflation were to become a serious concern," he said.

Forex:

Supported by rising Treasury yields, the dollar remained firm against other major currencies in Asian trade.

"We remain pretty confident that the direction of travel for the dollar remains upward: there is plenty of headroom for a continued grind higher in U.S. yields to widen out rate differentials against low-yielders including the euro," JPMorgan said.

"Meanwhile, given the ongoing growth downgrades, the dollar is now cheap and under positioned against cyclical models and further downgrades should more meaningfully drag the dollar higher."

EUR/USD edged lower still in Asia after it dropped 22 pips to around 1.1698 on Monday, as the dust settles after Germany's election.

CBA said Germany now heads for many weeks, if not months, of coalition talks to form a government. Overall, the high likelihood of a political shift to the left suggests Germany's fiscal stance could become less of a drag on the economy over the next few years than is currently projected. This would ultimately benefit the euro, CBA said.

The pound remained in demand, reflecting some expectations the Bank of England could raise interest rates as soon as February but such a move is unlikely until 2023 and the currency's gains may fizzle out, Rabobank said.

"The U.K. economy will be too fragile for the Bank to hike rates before 2023," Rabobank forex strategist Jane Foley said, which means sterling faces headwinds in coming months. Rabobank has a long-standing year-end forecast of 0.84 for EUR/GBP but this could prove overly optimistic, Foley said.

The Swedish krona is set to weaken further after the Riksbank indicated that it is in no rush to tighten monetary policy, Danske Bank said.

Sweden's central bank last week made it clear that it will err on the side of caution while the Norges Bank raised interest rates and the Federal Reserve signalled that it could start unwinding stimulus soon, analysts at the Danske said.

The export-exposed and risk-sensitive krona also faces a hit from the global industrial recovery reaching its peak and fading support from equities. Danske Bank raised its 12-month forecast for EUR/SEK to 10.50 from 10.40.

Bonds:

The yield on the benchmark 10-year Treasury note topped 1.5% in Asia, lifted by optimism about the economic outlook and the prospects of tighter monetary policy.

The 10-year yield "is breaking out to the upside...on rising oil prices and respectable macro-economic data," Spartan's Peter Cardillo said. He sees increasing signs of "inflation becoming a serious threat to the Fed's plans." Cardillo added: "[The Fed] may be forced to change monetary policy sooner than anticipated."

Adam Crisafulli, founder of market-intelligence firm Vital Knowledge, said rising yields indicate investors' improving optimism about global growth, with central banks planning to reduce the pandemic monetary stimulus. "Bond yields are rising further, not just in the U.S. but globally, too," Mr. Crisafulli said.

Energy:

Oil continued to climb in Asia, with Brent topping $80, as a shortage of natural gas in some countries helped push crude prices higher, said CBA.

"Oil demand could pick up by an additional 0.5 million b/d [0.5% of global oil supply] as high gas prices force a switch from gas to oil consumption," CBA said.

ANZ Research said upward pressure on oil prices remains amid widening fuel shortages, as inventory withdrawals have been strong across the U.S. and other OECD countries. U.S. oil production has yet to be fully restored after Hurricane Ida, while another storm is threatening to hit the country's east coast.

Goldman Sachs has boosted its Brent oil price year-end target to $90 a barrel, citing the lingering impact of Hurricane Ida on supply while demand ramps up, particularly in Covid-averse Asia.

"From a futures market standpoint, bullish energy calls from big banks including Goldman Sachs and major oil traders like Trafigura are helping invite speculative bids into the market as well," said Tyler Richey, co-editor at Sevens Report Research.

Metals:

Gold edged lower in Asia, as rising bond yields continued to take the shine from the precious metal, said Phillip Futures senior commodities manager Avtar Sandu.

Nonetheless, downside is capped by the Evergrande debt crisis, which had been supportive of bullion as a safe-haven asset, Sandu said.

Prices of industrial base metals were also lower, as deepening power shortages in China further added to concerns about slowing economic growth, ANZ said. It noted that several provinces were dealing with blackouts and manufacturing hubs were being told to reduce power consumption.

TODAY'S TOP HEADLINES

Fed Chief Jerome Powell Says Inflation Is Elevated but Likely to Moderate

Inflation is likely to stay high in the coming months before moderating, Federal Reserve Chairman Jerome Powell is set to tell Congress at a hearing on Tuesday morning.

In testimony released by the central bank on Monday, Mr. Powell largely repeated remarks he made at a news conference last week after the central bank indicated it was likely to begin reversing its easy-money policies at its next meeting, Nov. 2-3.

GOP Senators Block Democratic Bill to Fund Government and Suspend Debt Ceiling

WASHINGTON-Senate Republicans blocked a Democratic bill that would both fund the government and raise the country's borrowing limit, escalating a political showdown over the government's finances just days before it runs out of money.

Senate Democrats sought to pass a House-approved stopgap measure that funds the government through Dec. 3, 2021, and suspends the debt limit through Dec. 16, 2022. They are racing to send the legislation to President Biden's desk before the government's current funding expires at 12:01 a.m. Oct. 1.

China Power Outages Pose New Threat to Supplies of Chips and Other Goods

Government efforts to curb energy consumption and reduce carbon emissions, along with surging coal prices, are leading to power outages across many of China's manufacturing hubs, threatening to further disrupt strained global supply chains for semiconductors and other vital goods.

Over the past week, local officials have forced factories in China's Guangdong and Jiangsu provinces to curtail operation hours or shut down temporarily as officials try to rein in energy use, according to company filings and interviews with company officials by The Wall Street Journal.

Fed's Williams: Tapering Bond Buying 'May Soon Be Warranted'

Federal Reserve Bank of New York President John Williams said Monday the time for the central bank to pull back on asset buying is coming up, but he indicated rate rises still lie well off.

"It's clear that we have made substantial further progress on achieving our inflation goal" and "there has also been very good progress toward maximum employment," Mr. Williams said in a virtual appearance. "Assuming the economy continues to improve as I anticipate, a moderation in the pace of asset purchases may soon be warranted."

Fed Leaders Eric Rosengren, Robert Kaplan to Resign Following Trading Controversy

The Federal Reserve banks of Boston and Dallas said their presidents were resigning, following reports of the two leaders' investment trading that prompted calls for their departures and a central-bank review of its ethics rules.

The two banks gave different reasons for the exits. Dallas Fed President Robert Kaplan, a 64-year-old who is resigning effective Oct. 8., acknowledged in a statement released by the bank that his stock trading distracted from the Federal Reserve's work.

Maersk to Sell Refrigeration Businesses to China's CIMC for $1.08 Billion

Denmark's A.P. Moeller-Maersk AS plans to sell its refrigerated containers manufacturing and refrigeration businesses to China International Marine Containers (Group) Co. for $1.08 billion.

CIMC is buying the China and Denmark units of the Nasdaq-listed company which operates the two companies under Maersk Container Industry Qingdao Ltd. and Maersk Container Industry A/S respectively, CIMC said Tuesday.

West Virginia Gov. Jim Justice Offers $300 Million Settlement Payment to Credit Suisse

West Virginia Gov. Jim Justice has offered a $300 million payment and half the value of his family coal businesses to settle loans from the now-defunct Greensill Capital, according to people familiar with the deliberations.

The proposal is part of talks between the governor's family business, Bluestone Resources Inc., and Credit Suisse Group AG, which manages investment funds that were Greensill's main source of cash for its lending business.

Write to paul.larkins@dowjones.com

Expected Major Events for Tuesday

04:30/NED: Sep Producer confidence survey

06:00/GER: Oct GfK consumer climate survey

06:00/NOR: Aug Retail Sales

06:45/FRA: Sep Consumer confidence survey

07:00/SVK: Aug PPI

07:00/HUN: Aug Employment & unemployment

07:30/SWE: Aug Foreign trade

07:30/SWE: Aug Retail sales

08:00/ICE: Aug PPI

08:00/AUT: Sep Austria Manufacturing PMI

08:00/ICE: Sep CPI

09:00/MLT: Aug PPI

10:00/IRL: Aug Retail Sales Index

23:01/UK: Sep REC JobsOutlook survey

23:01/UK: Sep Shop Price Index

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


  (END) Dow Jones Newswires
  09-28-21 0045ET
  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.

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