Bank of America – EMEA Morning Briefing: Evergrande Woes, Fed Risks to Weigh on Europe’s Mood
Germany PPI; Bundesbank Monthly Report; no major earnings scheduled
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.
C(BA) 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,” C(BA) said.
GBP/USD has an upside risk if more MPC members come out in support of curtailing the BOE’s asset purchases, C(BA) said, while AUD and NZD will be largely driven by dollar direction. C(BA) 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 UK. 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 UK. 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.
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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.
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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.
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Natural-Gas Prices Surge, and Winter Is Still Months Away
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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.
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September 20, 2021 00:42 ET (04:42 GMT)
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Bank of America – EMEA Morning Briefing: Evergrande Woes, Fed Risks to Weigh on Europe’s Mood
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