EUROPEAN MIDDAY BRIEFING – Caution Dominates Ahead of U.S. Jobs Report – Marketscreener.com

MARKET WRAPS

Stocks:

Most European stocks eased lower Friday, although energy majors gained following the rise in crude prices, helping support London’s FTSE 100.

Investors remained cautious ahead of fresh U.S. data on job growth that is expected to provide insight into the recovery of the labor market and economy. Economists are projecting solid growth, expecting the end to federal Covid-related jobless benefits and reopened schools to have driven more workers back into the labor force.

The Federal Reserve has said the labor market’s recovery is the key variable driving monetary policy and investors are watching closely to see if this report could affect their plans to taper stimulus.

“Markets have been stirred but not completely shaken this week and yesterday they continued to rebound thanks to the near-term resolution on the U.S. debt ceiling alongside subsiding gas prices, which took the sting out of two of the most prominent risks for investors over the last couple of weeks,” said Jim Reid, a strategist at Deutsche Bank.

“Attention will today focus squarely on the U.S. jobs report,” Reid confirmed, “which is the last one before the Fed’s next decision in early November, where a potential tapering announcement is likely bar an extraordinarily poor number today, or an exogenous event in the next few weeks.”

Shares on the move:

Daimler rose 3% after analysts at UBS upgraded the stock to buy from neutral, citing catalysts ahead, even as the company reported a fall in Mercedes-Benz deliveries and impacts from the global chip shortage.

UBS said Mercedes-Benz is expected to see strong revenue and earnings momentum in 2022 thanks to customer demand that hasn’t been met yet and production beginning to recover from lows caused by the chip supply shortage. “While we factor in margin headwinds from a higher EV share, lower residual value gains and higher raw mats, we are very confident that consensus is too cautious for next year,” said UBS.

Vivendi rose 0.9% but Citi said the company doesn’t look too exciting in operational terms after spinning off Universal Music Group, leaving the remaining parent smaller and growing slower with an asset range that isn’t inspiring.

“That said, as the value of UMG rose at the time of the distribution in September so the value of Vivendi has fallen, creating an extraordinary opportunity,” Citi said. It added that in risk-reward terms, the French media company’s stock looks attractive, upgrading it to buy from neutral, and lifting the price target to EUR16 from EUR14.50.

U.S. Markets:

Stock futures paused, although they are on track for their best weekly performance in six weeks. Volatility returned to markets in recent days, with the S&P 500 swinging at least 1% for three out of four days this week. Investors were focused on surging energy prices, concerns about inflation and negotiations on the U.S. debt ceiling. Lawmakers struck a deal for a short-term extension to the debt limit in the Senate on Thursday, which helped boost market sentiment, investors said.

“Any pullback we’ve seen attracts investors. It seems to us that any 1-3% fall in equity markets just has investors coming back in,” said John O’Toole, head of multiasset fund solutions at Amundi. “The relief rally that we’ve seen, that probably stays for a bit.” His strategy is also to wait for pullbacks to add equity risk, he said.

Forex:

The dollar was around 0.1% higher, boosted by the Senate vote and above-forecast non-farm payrolls data could “rapidly spark stronger demand for the dollar” against other G-10 and emerging-market currencies, said UniCredit. EUR/USD should “rapidly breach 1.15, with 1.1450 representing the next support level.”

A strong reading is expected following Wednesday’s above-forecast ADP private payrolls figures. The consensus forecast in a WSJ poll is that the U.S. added 500,000 jobs in September, likely enough to allow the Fed to begin tapering asset purchases in November as planned. UniCredit forecasts a 600,000 increase.

Bonds:

Eurozone government bond yields were trading higher, signaling some risk-on sentiment, with the day’s key data to watch being the U.S. employment report.

“The still extremely high number of vacancies shows that the level of underlying demand for labour remains huge,” said DZ Bank’s analyst Christian Reicherter. He said a solid report would be likely to persuade the Fed to press ahead with tapering of asset purchases, with DZ Bank expecting a start of the scaling back from January onward.

Societe Generale said the rise in bond yields is likely to continue, particularly in the U.S.

“While U.S. yield increases… will pull up European yields too, the U.S.-Europe yield differential looks likely to rise significantly,” said Guy Stear, head of fixed income research. Societe Generale remains under-allocated in rates in general but in the U.S. in particular.

Stear said the priorities of the Federal Reserve and the European Central Bank seem to diverge, with the former more worried about the medium-term inflation outlook and the latter about growth.

Meantime, Julius Baer is cautious toward longer-dated Treasuries, and prefers to wait for better entry points. “We still have a bias towards shorter duration fixed income instruments and are waiting for better yield levels to add long-date Treasuries to our portfolio,” said Yves Bonzon, group chief investment officer.

Commerzbank affirmed its target for the 10-year Bund yield at year-end, expecting it at -0.20%.

German Bunds are expected to continue to outperform Treasuries, “justified by the PMI and GDP disappointments and a less hawkish ECB,” said Christoph Rieger, head of rates and credit research at Commerzbank.

BNP Paribas Markets 360 sees the 10-year Italian BTP-German Bund yield spread remaining rangebound in the fourth quarter, expecting its trading range between 100 and 110 basis points.

The expected spread stability is set to benefit from reduced European political risks and lower gross supply in BTPs, said Sumati Semavoine-Jain, G-10 rates strategist, adding that the spread would stabilize at lower levels in 2022 thanks to improved Italian fundamentals.

Specifically, BNP Paribas Markets 360 forecasts the 10-year BTP-Bund yield spread at 100 basis points in 2Q 2022 and also in 4Q 2022, as well as on a longer horizon, in 4Q 2023.

Commodities:

Crude futures resumed their rally and after the U.S. took the Strategic Petroleum Reserve tap off the table on Thursday, DNB Markets said oil bulls could return their focus to the global energy crunch, and positive gas-to-oil switching effects for the coming winter months.

European benchmark gas prices were up 7% and are on course for weekly gains of 10%. That’s relatively mild compared with September’s vertiginous gains, with Vladimir Putin’s comments about additional supply this week having to an extent calmed fears about the ongoing gas crunch.

While Goldman Sachs’s Samantha Dart said she believes Russian officials’ remarks about bringing more supply to markets, she added that the period between now and November — when supply through existing pipelines should normalise — could see European prices “well above current levels, ” due to the fact that Gazprom might have to supplement its pipeline gas with physical delivery at the Dutch TTF hub given that its local storage sites are nearly empty.

Gold is set to end the week largely where it began, and while it has found some support from concerns over inflation, Delta and geopolitical tensions, Fed tapering, strong global growth and a firmer dollar are all reasons why bullion has been unable to climb from its narrow range.

Elsewhere, copper prices were little changed despite Chinese traders returning to their desks following a week-long holiday. TD Securities said downside risks were intensifying “as Chinese tailwinds morph into headwinds, while the nation’s power crisis also expands further into downstream sectors, threatening the world’s manufacturing engine.”

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10-08-21 0600ET

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