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EMEA Morning Briefing: Shares to Tumble After Fed Minutes Show Taper Plans This Year - Morningstar.com

MARKET WRAPS

Watch For:

Eurozone, Italy Balance of Payments; U.K. Consumer Confidence Survey; Norges Bank Monetary Policy Decision; updates from Geberit, Antofagasta, BAM, Adyen, Gold Fields, Boskalis Westminster, Bang & Olufsen

Opening Call:

Europe looks set for a sharply-weaker open, after U.S. stocks slid in the final hour of trading on Wednesday following Fed minutes that showed officials increasingly in agreement about pulling back on the central bank's asset purchases this year. In Asia, shares and oil sold off, the dollar's advance strengthened, Treasury yields extended their losses and gold futures dipped.

Equities:

European shares face steep opening losses on Thursday after U.S. stock benchmarks finished lower for a second day, with losses accelerating after the Federal Reserve's July policy meeting minutes showed plans to reduce the central bank's monetary support late this year.

Fed officials ramped up debate around the timing of an eventual pull back of the central bank's easy monetary policies, according to minutes of the central bank's July 27-28 policy meeting. The minutes showed plans to consider reducing the central bank's monthly asset purchases of $120 billion in Treasurys and mortgage-backed securities, likely by the end of the year, but they also suggested interest rates could still stay near zero for some time.

"I've been in the camp that they will tip their hat more clearly next week," said Randy Frederick, vice president of trading and derivatives for Charles Schwab, speaking of next week's symposium on monetary policy in Jackson Hole.

Although, light options trading also suggests that "most people either don't think the Fed is going to say a whole lot, or they don't think the markets will react much," during next week's summit, Frederick told MarketWatch.

"Since the July FOMC meeting, the probability of a September announcement and an October, or November, start date to tapering those purchases has increased considerably, in our view, with the August payroll release coming out in early September likely to be the most important factor to tip the scales," wrote BlackRock's Bob Miller, head of Americas fundamental fixed income.

Forex:

The dollar remained in demand in Asia on rising prospects for Fed tapering spurred by the FOMC meeting's minutes.

Overall, the near-term uptrend for the dollar remains intact with ongoing higher highs and higher lows since June, and the closing-in of tapering timeline ahead could possibly act as a tailwind for further currency strength, said IG.

Peter Ng, senior FX trader at Silicon Valley Bank thinks the FOMC minutes "came in slightly more dovish than people were expecting. The minutes seem to lack consensus over tapering and a lot of questions weren't addressed, he said.

The next jobs data and September FOMC will probably hold more weight now." He said that Fed doves seem to be kicking the can down the road. "They prefer to see more data before committing to tapering."

The pound's modest decline versus the euro after the U.K. inflation data for July was short-lived, suggesting the market sees little reason for the outlook on consumer prices to change, said Rabobank.

While the data may provide some evidence to support the Bank of England's view that post-pandemic price increases will be temporary, there are also plenty of signals that the inflation path will not be smooth, said Rabobank forex strategist Jane Foley.

"Since the Bank of England is on a slightly more hawkish path than the European Central Bank, we remain of the view that EUR/GBP can edge lower by year end."

The Norwegian krone could rise in the near-term as the Norges Bank has signalled an interest rate rise in September but the currency is likely to weaken in the longer run, said Danske Bank.

While higher rates in isolation are supportive of the krone, relative short-end rates are an "inferior driver" of the currency compared to global risk appetite, said Danske Bank analyst Kristoffer Kjaer Lomholt.

"We still struggle to see a catalyst for a much stronger NOK and still see the balance of risk skewed towards a weaker NOK in the medium to long-term." Danske expects EUR/NOK to rise to 10.50 in 12 months.

The Norges Bank releases its interest-rate decision later Thursday.

Bonds:

Treasury yields moved lower still in Asia after they gave back some of their early gains following the FOMC minutes.

Despite the overall hawkish tone, "the minutes also noted that 'several' officials thought that 'an earlier start to tapering could be accompanied by more gradual reductions in the purchase pace'," said Capital Economics.

"It's clear from the minutes that the Fed isn't ready to start tapering yet, but they are leaning towards making an announcement by the end of the year at the latest," said Chris Zaccarelli, chief investment officer for Independent Advisor Alliance.

"In the short run, the market is going to remain focused on growth and delta variant concerns, but as we move past those challenges, the good news about the economy and job market should give investors a renewed boost of confidence."

Also on Wednesday, James Bullard, president of the Fed's regional bank in St. Louis, said in a Barron's Live interview with MarketWatch that the U.S. economy won't be derailed by the spreading delta variant of the coronavirus because businesses and households have adapted to the pandemic. His remarks came a day after Fed Chairman Jerome Powell was more cautious on Tuesday, saying it was still unclear how it might impact the economy.

A negative yield curve for German government bonds with maturities of up to 30 years--implying the whole yield curve--is evidence of the resulting imbalance in supply and demand, said Yves Bonzon, group chief investment officer at Julius Baer.

Scarcity of bonds, however, isn't limited to the eurozone, it's an issue for Treasuries, too. "We strongly argue that even in the case of a rapid reduction of monthly Fed purchases, there will be a scarcity of safe assets with positive yield." He said that as long as the world needs Treasuries as a "building block" in a multi-asset context, upward pressure on yields will remain limited.

Energy:

Oil futures extended their retreat in Asian trade after they posted their lowest settlement since May, with concerns about Covid's impact on energy demand pressuring prices even as U.S. government data revealed a more than three million-barrel weekly decline in domestic crude inventories.

CBA said worries regarding demand from China, the world's largest oil importer, remained in focus, as the country imposes Covid restrictions to quell the latest outbreak.

"We see downside risks to our Brent oil price forecast of $85 in the fourth quarter of 2021 as demand is clearly weaker than we anticipated."

Metals:

Gold prices were lower in Asia after they moved up following the Fed minutes. Bullion futures had settled lower before the release of the minutes.

"Tapering would reduce the supply of money on the economy, which is typically supportive of the metal," Jason Teed, co-portfolio manager of the Gold Bullion Strategy Fund, told MarketWatch. "It appears that the markets may have thought recent selling may be overdone, and the release of minutes by the Fed suggest that some support for gold will remain."

OANDA said demand for safe-haven assets like gold will likely remain strong given the backdrop of global growth concerns amid the pandemic. "If bullish momentum continues for bullion, the $1,850 level should be the next key resistance level."

Copper prices rose 0.6%, rebounding somewhat after two consecutive losing sessions, as a strike by miners at Chile's Andina mine brought supply issues into focus.

LME copper on Wednesday hit an intraday low of $9,022, the lowest level since June, weighed by weak Chinese metals import data, said ING. Further bearishness seems likely, with ING pointing to signs of strong Chinese domestic supply of the metal.

China's July refined copper output rose 10% on-year to 846,000 tons. Increased domestic production means China would rely less on international markets to meet its copper demand.

Iron ore fell almost 7% on the Dalian Commodity Exchange, after BHP Group warned of further weakness in China's steelmaking sector. ANZ said this is mainly due to environmental concerns as China seeks to decarbonize. This policy goal is already having a material impact, with ANZ noting that China's July steel production fell 8.4% on year to 86.8 million tons.

 

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August 19, 2021 00:24 ET (04:24 GMT)

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