EMEA Morning Briefing: Shares to Extend Rebound as Risk Rally Persists | Morningstar

2022-10-02 06:18:20 By : Mr. curry zhang

EU Long Term Interest Rates; Germany Ifo Forecast, Balance of Payments; UK Trade, Index of Services, Monthly GDP Estimates, NIESR Monthly GDP Tracker; Italy Industrial Production; OECD Composite Leading Indicators; no major corporate updates

Shares should rally again in Europe as investors consider the odds of another 75 basis point Fed rate hike. In Asia, stocks made solid gains in holiday-thinned trading; the dollar extended its losses; Treasury yields were little changed; and oil and gold prices weakened.

European stocks look likely to add to Friday's gains after Wall Street closed sharply higher, as investors appear to have priced in another jumbo rate hike from the Federal Reserve.

Markets have absorbed a barrage of hawkish speeches from Fed officials recently, as well as 75-basis point interest rate hikes from the European Central Bank and a similar move by the Bank of Canada.

"The rally that we've seen...is partly based on an oversold market" following the selloff sparked by Jerome Powell's Jackson Hole speech, said Truist Advisory Services.

"But we've bounced already a decent amount, so there's not much of a short-term edge here."

Still, Truist said it believes "people are getting more hopeful about inflation, with lower oil prices being a support for this market right now," along with what appears to be some stabilization in the 10-year Treasury yield after its recent jump.

There has been no pushback from any Fed official on the market view that a 75bp hike at the September FOMC meeting is a near sure thing, ANZ said.

Fed officials are tilted to doing too much tightening rather than too little, as the latter may lead to an unmooring of inflation expectations. The economic cost to reanchor inflation expectations would be substantial and far greater than tightening too much now, ANZ added.

A likely profile would be a 75bp hike in September and 50bp increases in November and December.

U.K. government plans to ease the country's energy crisis won't stop households' real incomes shrinking, while potential tax cuts could lead to higher interest rates, Davy said.

Prime Minister Liz Truss announced proposals to limit average annual household bills to GBP2,500 in the next two years by capping the unit cost of energy, meaning bills would vary depending on gas and electricity use. The plan, estimated to cost GBP150 billion, is likely to result in CPI inflation peaking around 11.5%, rather than up to 20%, Davy added.

"However, U.K. households' real incomes will still contract and the fiscal stimulus will put more pressure on the Bank of England to raise rates," Davy said.

The dollar has extended its losses in Asia following a rebound in risk appetite.

Capital Economics said the U.S. CPI release will set the tone for the dollar leading up to this month's FOMC meeting.

"If, as we expect, CPI continues to edge lower, it might reinforce expectations for a Fed 'pivot' and push the greenback lower. But we think falling inflation in the U.S. is consistent with our view that the backdrop remains favorable for the dollar, as it stands to benefit from higher real rates while the global economy slows."

Corpay said the dollar has tumbled "as currency traders unwind wagers on ever-widening gaps between the world's major central banks."

Read: Why Is the Dollar So Strong? American Innovation

The Swedish krona's recovery looks set to be delayed as Europe's energy crisis impacts Sweden and global risk sentiment remains unstable, ING said.

Sweden is just as exposed as many of its neighbors to energy price spikes this winter and that means Sweden is likely heading for a recession, ING added.

"The Riksbank's foreign exchange reserve build-up may also get in the way of a near-term recovery."

EUR/USD is unlikely to climb back to 1.05 before early next year while EUR/SEK could trade at 10.60 in the fourth quarter, little changed from current levels, ING said.

Treasury yields were little changed in Asia, with the two-year yield hovering around its highest level since 2007.

Investors remain focused on the outlook for interest rates, with the Fed underlining its intention to aggressively tightening monetary policy until it gets inflation back under control.

"The market is pricing in Fed remarks suggesting the 75 basis point hike is likely," TD Securities said.

"We think the curve will stay inverted for quite some time as the Fed continues to talk up rate hikes and the market prices higher odds of the economy slowing."

Read: Inflation Showed Signs of Easing in Several Industries in August

Oil prices were down more than 1.5%, reversing some of Friday's gains.

Demand concerns are likely to persist as investors continue to assess the impact of rising interest rates to combat inflation and the effects of China's zero-Covid policy, CBA said.

"Oil consumption [in China] is particularly sensitive to Covid--19 lockdowns since transportation, the major use of oil, is heavily restricted," CBA said, adding that China accounted for around 16% of global oil demand in 2021.

Oil futures settled around 4% higher on Friday, with supply worries and a pullback in the dollar contributing to a bounce off seven-month lows, but prices still posted a weekly loss.

Gold futures were weaker despite the dollar extending its decline.

"Gold is finding a home above the $1,700 level and that could continue if investors continue to look beyond hawkish central bank speak," OANDA said.

Gold settled 0,5% higher on Friday, even as the Fed's Christopher Waller said the U.S. central bank may have to raise its benchmark interest rate well above 4% if inflation does not moderate or rises further this year.

Read: Fed Officials Back Another Large Rate Increase

Aluminum futures were little changed in thin trading due to holidays in China, Hong Kong and South Korea, although losses could be limited by worries about supply.

High energy costs remain a threat to supply, ANZ Research said. Some aluminum smelters in China's Yunnan province, which accounts for more than 12% of the country's production, may begin reducing operating rates by 20%-30% this month amid a drought-induced shortage of hydropower.

Fed Officials Back Another Large Rate Increase

A Federal Reserve official suggested he would support raising interest rates by another 0.75-percentage point later this month to combat inflation, the latest policy maker to do so.

Officials have been debating whether to raise rates by 0.5 point and 0.75 point at their coming Sept. 20-21 policy meeting, but they haven't pushed back against market expectations of the bigger move.

Inflation Showed Signs of Easing in Several Industries in August

U.S. consumer-price inflation showed signs of moderating in August for the second straight month, though the decrease was uneven across sectors and it remains unclear whether the slowdown will continue.

Gasoline prices fell sharply in August, airfares dropped and used cars and hotels ebbed, while rent increases also gave hints of slowing, according to private firms that track such data.

Oil Prices Slump as Recession Fears Grow

Another turbulent week in oil markets carried crude prices to their lowest point since January, with thin trading and a blurry outlook for supply and demand driving a fitful 30% decline from this year's highs.

A 5.9% gain since Wednesday notwithstanding, the main U.S. oil benchmark has shed about $35 a barrel since peaking above $122 three months ago. West Texas Intermediate closed Friday at $86.79. Brent crude futures, the primary international price gauge, ended at $92.84.

For Wall Street, a Strong Dollar Is Front and Center

The strong dollar is now one of Wall Street's main concerns.

On Main Street, a rising dollar boosts Americans' relative purchasing power by making imports cheaper. But the dollar is also at the center of world financial markets, and a stronger U.S. currency can have unforeseen consequences.

Global Drought Saps Hydropower, Complicating Clean-Energy Push

Record drought across the globe this year dried up rivers and reservoirs and sapped the world's largest source of renewable electricity: hydropower.

The dip in electricity generated by the flow of water across dams in China, Europe and the U.S. stifled power production. In some places, it has caused factories and smelters to shut down for weeks on end.

Outlook for Tech Stocks Darkens After Rocky Stretch

A rally in technology shares helped the stock market snap a three-week losing streak. There are already signs that reprieve may be short lived.

Investors are bailing out of technology-focused mutual and exchange-traded funds at the fastest clip since early February, when the tech selloff was first intensifying, according to data from Refinitiv Lipper. They yanked about $2.4 billion from such funds in the three weeks ended Wednesday.

Sweden's Right-Wing Opposition Takes Narrow Election Lead

The nationalist Sweden Democrats took their biggest-ever share of votes in a general election Sunday, with preliminary results giving the center-right bloc of parties a slim majority over the incumbent center-left government.

However a large number of overseas and postal votes are still to be counted, and the outcome could change, with a definitive result not expected for several days.

European Manufacturers Reel From Russian Gas Shutoff

European industry thrived for decades on a steady supply of cheap Russian gas, which flowed uninterrupted throughout the Cold War and other times of tension between Moscow and the West.

Since invading Ukraine, Russian President Vladimir Putin has weaponized the country's vast stores of energy to undermine support for Kyiv. He turned off the taps to the biggest natural-gas pipeline, Nord Stream, completely this month.

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