EMEA Morning Briefing: Worries Over Rising Covid Cases, Delta Variant to Dent Stocks


MARKET ENVELOPES

Monitor:

Surveys of businesses and consumers in the euro area; Germany Provisional CPI; France ILO Unemployment, Housing starts, Survey on consumer confidence; UK National House Price Index, monetary and financial statistics, BOE effective interest rates, money and credit, figures from supermarkets; Brussels Economic Forum; Meeting of G20 Foreign Ministers; updates from Accor, Volkswagen

Opening call:

Concerns about increasing coronavirus outbreaks and the Delta variant could rock European stocks, despite the S&P 500 and Nasdaq record closing on Monday. In Asia, stocks struggled, the dollar and Treasury yields were a bit firmer but commodities weakened.

Actions:

European stocks could face early pressure on Tuesday, with futures in the red as concerns weigh that increasing Covid-19 cases and the Delta variant of the virus will continue to impose restrictions travel and curb economic recovery.

Shares of UK airlines will remain in the spotlight after falling on Monday as Angela Merkel reportedly called for limits on UK travel as Spain, Portugal and Malta impose new restrictions. Hong Kong took the decision to completely ban flights to the UK.

Wall Street had a mixed day on Monday as the Nasdaq and S&P 500 hit record highs, fueled by gains in tech stocks. However, the Dow Jones fell 150 points, weighed down by losses from Boeing and Chevron.

Some investors are concerned that the market will have a rough time due to signs of spike in growth as well as nervousness about inflation and monetary policy.

“This recovery still has a long way to go and there is still strong growth,” said Frank Øland, chief strategist at Danske Bank. “But of course you’ve probably passed peak growth in the US, so the data will start to look less impressive, and that might be a concern.”

Danske has reduced its holdings of US stocks and bought more stocks in Europe, where Øland said the economic recovery is still gaining momentum.

Stocks to watch: The sale of BHP and Anglo American’s 33.3% stakes in the Cerrejon coal mine to its partner Glencore is a win-win deal, Jefferies said. For Anglo, this allows the miner to completely exit thermal coal and for BHP, it brings the company closer to the desired exit from the sector. This will ease some negative ESG-related pressures on their stocks, he said. “Glencore is tripling in Colombia but will mine the asset for cash until exhaustion,” Jefferies said.

Forex:

The dollar continued to strengthen in cautious trading in Asia, with concerns over the delta variant of Covid-19 weighing on assets perceived to be riskier.

Mizuho Bank said the continued outbreaks of Covid-19 fueled by the more transmissible and virulent Delta variant have led to further lockdowns in places like Australia and South Africa, while also thwarting various corridor plans from trip.

JPMorgan said the dollar last week retraced two-thirds of its post-FOMC rally for several reasons: very mixed rhetoric from the Fed, including reiterating Powell’s interpretation of “transient inflation” and Williams; position-induced rate volatility that caused 10-year yields to temporarily fall below pre-FOMC levels.

The bank said its forex strategists still see U.S. cyclical outperformance leading to higher real yields and trend outperformance of the dollar against many low-yielding peers with no prospect of political normalization, particularly the yen and the euro.

The Federal Reserve’s June 16 decision to advance interest rate hike expectations prompted speculators to reduce bets on the euro and the strengthening of the pound in the week to June 22, said ING.

The latest data from the CFTC showed that the British Pound and the Euro saw a sharp reduction in long positions in the week until last Tuesday, with the currencies “clearly suffering from a biased net positioning to the side. overbought spectrum ahead of FOMC meeting, ”said Francesco Pesole, forex strategist at ING.

The fact that the fall in long positions in the British pound was larger than the euro is likely due to concerns about the spread of the Delta coronavirus variant in the UK, he said.

Rabobank said the euro is expected to continue to decline against the dollar over the next few months, with the latest Fed policy meeting indicating that interest rates could rise as early as 2022. the euro during the year . ”

Rabobank lowered its one-month forecast for EUR / USD to 1.19 from 1.20, noting that the euro has recently underperformed some of its G-10 peers against the dollar. He continued to expect the currency pair to drop to 1.17 in six months.

TD Securities said the resignation of UK Health Secretary Matt Hancock over the weekend was positive for the pound.

“This could mark a significant shift in the UK government’s approach to dealing with the pandemic – and the impact it could have on the economy from here,” said Ned Rumpeltin, forex strategist at TD Securities.

The GBP could continue to follow the general direction of the dollar, but the EUR / GBP is worth watching as the currency pair continues to trade in a narrow range, he said.

A central bank digital currency could expose the public to “a host of unintended and unwanted consequences,” said Randal Quarles, the Fed’s front man on financial regulation, casting cold water on the prospects for the project nascent.

In a speech, Quarles said the potential benefits of a digital dollar are unclear, but the downsides are “significant and tangible.” An arrangement where the Fed replaces commercial banks as the main provider of money to the general public could restrict the availability of credit and “fundamentally change the economy,” he said.

Obligations :

U.S. Treasury yields were flat in Asia after retreating on Monday, with some attributing buying debt to positioning before month end and the end of the second quarter. Some strategists have also pointed to a resumption of global tensions after the overnight US airstrikes in Iraq and Syria.

Fixed-income investors mostly wait for Friday’s monthly labor market report, as investors focus on the health of the U.S. economy amid its recovery from Covid. Investors also analyzed the latest developments related to a $ 1 trillion infrastructure bill.

“The Treasury yield curve flattened sharply in an initial overreaction to the FOMC’s more hawkish-than-expected median federal funds rate projections,” John Canavan, senior analyst at Oxford Economics, wrote in a research note from Monday.

“Rates have stabilized in ranges since, but we expect yields to rise further in the second half of the year.”

Nuveen, in the asset manager’s mid-year outlook, said rising bond yields would likely be a headwind for the overall global fixed income market.

Nuveen expects yields to rise as global growth increases and said most spread markets are fully valued. He sees little room for a spread squeeze over the next few months.

In this context, Nuveen has focused on the shorter duration and higher yield segments of the market, which implies higher risk. Between sovereign bond risk and corporate bond risk, the manager largely favors the latter.

Riskier euro-denominated corporate bonds are expected to continue to outperform safer, higher-quality corporate papers in the second half of this year, Commerzbank said.

High-yield corporate debt in euros recorded the most in the first half of the year “and given the strength of the economic recovery as well as the segment’s lower sensitivity to interest rates, we continue to favor it over to the euro investment grade [bonds]”said Marco Stoeckle, Head of Corporate Credit Research at Commerzbank.

Inflation fears sparked a massive sell-off in government bonds, leading investors to turn to riskier assets to grab yield.

Energy:

Oil prices added to Monday’s losses in Asian trade, amid fears that OPEC + may decide at its meeting this week to significantly increase production, analysts said. These concerns come just as the Delta variant of Covid-19 is spreading, the CBA has said, resulting in blockages and restrictions on travel and movement.

Mobility restrictions are particularly negative for oil demand, given that two-thirds of global oil consumption is linked to transportation, the ABC said.

Oil hit its lowest level in more than a week on Monday, retreating after a recent rally to its highest levels since October 2018.

“Forecasts of a recovery in demand for oil over the summer may be a bit overestimated and traders face a reality check this week as the Delta variant hits Europe and an increase in prices. infections in Southeast Asia and Australia are bringing back the blockages, ”said Rystad Energy. “The lifting of public health measures across Europe in June may have to be reversed.”

Rystad added that OPEC + will likely increase production cautiously at its meeting on Thursday.

Metals:

Gold fell slightly in Asia as a slightly higher 10-year Treasury yield increased the attractiveness of US fixed income assets.

The OCBC expects the precious metal to resume its downtrend this week amid the outlook for the Fed’s tightening monetary policy and risk sentiment. The bank recommended selling gold at $ 1,792 / oz, with a take profit order at $ 1,720 / oz and a stop-loss order at $ 1,815 / oz.

Copper was also down as traders saw the near-term risks to demand. The recent slowdown in activity in areas such as real estate and durable goods is creating headwinds for demand in the near term, ANZ said. China’s crackdown on the commodities market to curb rising prices has also hurt sentiment, with rumors of further releases of metals such as copper and zinc from China’s strategic reserves swirling around the market.

Recently, the three-month LME copper contract was down 0.1% to $ 9,379 per metric tonne.

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June 29, 2021 00:27 ET (04:27 GMT)

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