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Europe faces a slightly negative start to a week in which U.S. consumer prices are expected to show further heating for October. In Asia, shares were mostly lower, while the dollar, Treasury yields, oil and gold all posted gains.
European stocks will dip into the red on Monday, despite a record finish on Wall Street, with markets facing another economic test later in the week from a reading on U.S. inflation.
U.S. consumer prices this year have been rising at the fastest rate in more than a decade, complicating efforts to get the economy back on track after Covid-19-related disruptions. Economists forecast yet another pickup for inflation in October, fueled by higher energy costs, rising rents, costlier used vehicles, and the mix of supply-chain snarls and wage increases that have marked the latest stages of the recovery. The key data is due on Wednesday.
In Asia, shares were mostly lower Monday, although China’s Shanghai Composite bucked the trend after weekend data showed China’s exports rose at a faster pace than expected in October, with the nation’s monthly trade surplus hitting a record high.
China’s exports rose 27.1% from a year earlier in October, down from September’s 28.1% growth. However, the outbound shipments beat market expectations of a 22.6% increase, signaling global demand for Chinese goods remained robust.
Stocks to Watch: BHP said it would sell its controlling interest in two metallurgical coal mines to Stanmore Resources for up to $1.35 billion, shifting focus to high-quality coal that it expects to be in demand as the global steel industry decarbonizes.
RBC Capital Markets said that with BHP generating strong cash flow and its balance sheet “arguably too conservative,” it is likely to give shareholders the profits from its BMC stake sale via a special dividend.
The deal with Stanmore includes a $1.1 billion cash payment on completion. The deal reflects BHP’s “orderly [and lengthy] exit from coal,” which RBC reckons will include a previously flagged sale of the Australian thermal-coal operations, despite BHP saying all options for that asset–including retaining it–remain on the table.
The miner will keep and likely manage down its circa $14 billion BMA metallurgical coal business and advocate for high-quality steelmaking coal, versus low-quality metallurgical coal or thermal coal, said RBC.
The dollar was held its post-jobs-data gains in Asia. Westpac said the decent October nonfarm payrolls data, the Fed’s decision to proceed with QE tapering and the U.S. infrastructure deal were all factors supporting the dollar.
It added that short-term German bund-Treasury yield spreads continued to move in the greenback’s favor and a likely strong U.S. October CPI report due later this week could keep this trend intact.
CBA said GBP/USD is likely to remain weighed down by negative U.K. yields while EUR/USD probably can’t advance alongside the ECB’s “ultra-dovish” guidance.
Scott Colyer of Advisors Asset Management said the dollar is at top of its range over the last couple of years but it’s moving sideways. He expects the ICE U.S. Dollar Index to break to the upside if it rises above 95.00, “and I think more and more that’s what people are expecting, but it’s not what I’m expecting.”
MUFG Bank has recommended selling the pound against the Swiss franc, targeting a level of 1.1900 and placing a stop loss at 1.2550. “We believe that risks for the GBP remain to the downside in the near-term.”
U.K. real yields adjusted for inflation should remain under pressure as the Bank of England plans to raise interest rates gradually and as inflation expectations continue to rise, said MUFG. There is also a “heightened risk of a more disruptive Brexit outcome from the ongoing EU-U.K. tensions over the Northern Ireland protocol.”
In contrast, the safe haven franc should benefit from building inflation concerns and increased Brexit risks.
Treasury yields nudged higher in Asia but the 10-year note yield remained below 1.50% after it hit a one-month low on Friday.
Economic data over the next several months will determine how fast the Fed’s tapering will go, with some pundits saying the central bank is behind the curve and likely to speed up the process so rates can be raised sooner.
“We don’t expect the fall in the 10-year Treasury yield to last,” said Nicholas Farr, an economist at Capital Economics, in a note. “In our view, markets are underestimating the likely strength of U.S. inflation in the medium term. Regardless of the timing of the first hike, we also think that the fed-funds rate will ultimately rise much further than is currently discounted in swap markets.”
Societe Generale’s conservative target for 10-year Bund yields in 2022 is 0.25%, with risks skewed toward higher yields such as 0.50% or more.
The bank’s rates strategists said they expect the euro curve to re-steepen in all segments over the coming months, but added that year-end trading conditions could still generate volatility.
“A higher inflation regime going forward compared to the 2013-20 period calls for eventual normalization of European Central Bank policy, meaning higher yields and a steeper curve,” said Societe Generale, maintaining its constructive stance toward noncore eurozone government bonds.
Oil prices gained around 1% in Asia, continuing Friday’s rebound, on signs of strong demand.
This after Saudi Arabia’s state oil producer Aramco raised the December official selling prices to its customers in all regions, said ANZ.
Its flagship December Arab Light crude is priced at a $2.70/bbl premium against the Oman-Dubai benchmark, up by $1.40/bbl from November. ANZ said the higher price signals strong demand, adding that the recent OPEC decision to stick with its scheduled 400,000 barrel-a-day production hike, despite calls to raise it further, also supported prices.
Data from Baker Hughes on Friday showed the number of active U.S. oil-drilling rigs climbed by six to 450 last week- the biggest increase since the week ended Oct. 15 – implying a future uptick in production.
Gold futures remained firmly above $1,800, after they posted the highest finish since early September on Friday.
Following the strong jobs data Treasury yields fell, lowering the opportunity cost of holding nonyielding assets such as bullion.
Gold likely is “benefitting from the labor participation rate still holding steady below 62%; an overheated labor market would be about 1% higher,” Jeff Wright, chief investment officer at Wolfpack Capital, told MarketWatch. Data on Friday showed the labor participation rate at 61.6%.
Copper also edged higher, with the modest gains underpinned by positive economic data from the U.S. last Friday and from China over the weekend.
Copper has also been supported by the continued decline in inventories, suggesting demand remains strong, said ANZ, noting that stockpiles on the Shanghai Futures Exchange fell 11,845 tons last week to hit a 12-year low of 37,482 tons.
TODAY’S TOP HEADLINES
Government-Bond Swings Burn Wall Street Investors
A rapid U-turn in government-bond markets has sparked deep losses for some of Wall Street’s biggest investors, a stark demonstration of how even small shifts in expectations for economic growth and central-bank policy can upend the most carefully laid bets.
Behind the losses are recent abrupt moves in government-bond prices. With central banks signaling plans to end their extraordinary stimulus measures, short-term bonds have tumbled in price, sending yields-which rise when prices fall-to touch their highest levels since March 2020.
China Trade Surplus Hits Record High in October
BEIJING — China’s exports rose at a faster pace than expected in October, with the nation’s monthly trade surplus hitting a record high, official data showed.
China’s exports rose 27.1% from a year earlier in October, down from September’s 28.1% growth, the General Administration of Customs said Sunday.
Biden Gets $1 Trillion Down Payment on Domestic Agenda; Obstacles Loom for Spending Bill
WASHINGTON-President Biden notched a big win with the House passage of the $1 trillion public-works bill late Friday, but political obstacles loom ahead for the White House as attention shifts to an even bigger spending bill and next year’s midterm elections.
Congress is set to take a weeklong recess and return on Nov. 15 with a litany of items to complete in short order to avert a government shutdown and move forward on the roughly $2 trillion education, healthcare and climate package that has proven difficult to negotiate with the party’s slim majority in Congress.
BHP to Sell Controlling Stake in Two Coal Mines for Up to $1.35 Billion
ADELAIDE, Australia-BHP Group Ltd. said it would sell its controlling interest in two metallurgical coal mines to Stanmore Resources Ltd. for up to $1.35 billion, shifting focus to high-quality coal that it expects to be in demand as the global steel industry decarbonizes.
BHP said Stanmore will buy its 80% stake in BHP Mitsui Coal, or BMC, which operates the South Walker Creek and the Poitrel coal mines in Queensland, a coal-rich Australian state located in the northeastern part of the country. Japan’s Mitsui and Co. owns the remaining stake. The Wall Street Journal recently reported that a deal for BHP to sell the interest to Stanmore was close.
Abrdn in Talks to Acquire Interactive Investor for $2 Billion
Scottish fund manager Abrdn PLC is in talks to acquire online broker Interactive Investor, the companies said Saturday, the latest bet on the growth of individual-investor trading.
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