EMEA Morning Briefing : Stocks to Drop as New Variant Dents Appetite

11/26/2021 | 12:31am

MARKET WRAPS

Watch For:

Monetary developments in the euro area; CBI discussion event with BOE's Bailey; BOE's Pill speaks; U.S. financial markets close early after Thanksgiving.

Opening Call:

European stocks could drop as market sentiment sours. U.S. stock futures are pointing to opening losses as markets reopen after the Thanksgiving holiday. Japanese yen strengthens while the U.S. Dollar Index is lower. Oil falls and gold gains.

Equities:

European stocks are set to open sharply lower Friday as the emergence of a new Covid-19 variant in South Africa dented risk appetite.

Scientists have said that the new variant has a high number of mutations that could make it more transmissible and allow it to evade some of the immune responses triggered by prior infection or vaccination. The WHO has called a meeting of experts for Friday to discuss whether to declare the new strain a "variant of concern."

"With US markets closed for holidays, investors are voting with their feet this morning," said Jeffrey Halley at OANDA.

In Asia, regional equity markets and currencies also were sharply lower. Markets are sensitive to any developments that suggest vaccines could lose efficacy, said Stuart Williams, head of equities at Nikko Asset Management in Auckland.

In Europe, monthly data continue to show a gradual but persistent slowdown in eurozone economic activity moving deeper into 4Q, Oxford Economics said.

"While we still expect the eurozone economy to experience above-average growth over the coming quarters, it is clear that growth rates have already peaked," OE's head of European economics, Angel Talavera, said.

Moreover, the sharp rise in inflation and the persistent issues with global supply chains continue to add downside risks to the 4Q outlook, the economist said.

The industrial sector remains a headwind for growth and equally concerning is the fact that activity in the services sector, while still robust, is also showing signs of easing, Talavera added.

Meanwhile, Germany's new Social Democrat-Free Democrat-Green governing coalition is expected to be cautious macroeconomically, in line with its predecessors, the coalition agreement suggests. You can read what economists said about the German Coalition here .

Forex:

The Japanese yen strengthened markedly against G-10 and Asian currencies amid rising risk-off sentiment spurred by falling regional equity markets and a new Covid-19 variant detected in South Africa.

The Swedish krona has appreciated somewhat following Thursday's Riksbank rate decision, mainly because the currency has weakened substantially over the past two weeks, but the announcement is likely to be negative for the currency, said SEB.

"Going forward, the central bank's decision to be amongst the last developed central banks to raise the repo rate will be negative for SEK." A return of EUR/SEK to well below 10.00 is dependent on seeing either the U.S. dollar fall substantially again or Sweden adopting a much more aggressive expansionary fiscal stance.

Bonds:

The time looks ripe to turn cautious on bonds as the market is signalling a swift rise in interest rates amid strong inflationary pressures and more aggressive monetary policies, said Althea Spinozzi, fixed income strategist at Saxo Bank.

"As the Federal Reserve prepares to hike interest rates, we expect breakeven rates to drop and real yields to accelerate their rise, posing a threat to risky assets," she said.

Saxo Bank doesn't rule out 10-year U.S. inflation-linked Treasury yields rising to 0.5% and 10-year nominal Treasury yields rising to 2% by the end of the year. The current levels are around -1.00% and 1.642%, respectively, according to Tradeweb.

Better U.K. economic news underpins prospects for interest-rate rises, JPMorgan said after meeting with the country's biggest banks this week. Based on data visible to U.K. banks, U.K. employment and spending trends continue to improve, supporting the outlook for rate hikes, the U.S. investment bank said.

Still, while continuing productivity and restructuring actions are partly mitigating wage-inflation pressure in specific roles, higher costs look set to partially offset higher net-interest income from rates in 2022, JPM said.

"Capital return will be the focus for the FY updates, with the stress-test results on Dec. 13--a key milestone. We retain our positive view on the sector, with Barclays our top pick," JPM analyst Raul Sinha says.

Energy:

Oil slipped in early Asia trade as the resurgence of Covid-19 in Europe and pandemic-related restrictions in European countries could weaken demand for the commodity.

The potential for more European countries to go into lockdown has intensified market speculation about weaker demand, CBA said.

Lockdowns are especially negative for oil demand because transportation accounts for two-thirds of global oil consumption, CBA said. For next week, markets are likely to pay attention to the OPEC+ meeting, where the group will decide oil production plans for January, the bank said.

Metals:

Gold gained in early Asian trade, amid worries over the rising number of Covid-19 cases world-wide. The precious metal may trade between $1,780/oz and $1,810/oz for the rest of the week, amid the thanksgiving festive mood in the U.S., Oanda said.

However, it expects gold to have challenging technical outlook in the short term, as it may be vulnerable to some losses should the U.S. treasury yields remain firm.

Rio Tinto reckons there will be some softness in iron-ore prices following the Beijing Winter Olympics and Chinese New Year, but that underlying demand for the steel ingredient remains reasonably robust. That is Macquarie's takeaway from a sell-side roundtable with the miner's iron-ore boss, Simon Trott.

"He [Trott] believed the Chinese government would try to avoid a hard landing," Macquarie said. The bank noted iron ore's "losing streak" appears to have ended, with prices bouncing back above $100 a ton.

Base metals were broadly lower in early Asian trade, with copper leading losses among major industrial metals, as the prospect of a Fed tightening weighs on the macroeconomic outlook, ANZ said.

The bank said prices were under pressure due to expectations of a withdrawal of stimulus by the U.S. Federal Reserve, after the minutes of the FOMC's last meeting revealed a hawkish tone.

The three-month LME copper contract was 0.6% lower Friday, but is still 1.0% higher from a week ago, as a gradually improving outlook for the Chinese property sector offers support, ANZ added.

TODAY'S TOP HEADLINES

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Antitrust Tech Bills Gain Bipartisan Momentum in Senate

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Lawmakers say they are responding to public concerns over the size and influence of the tech companies.

What Inflation? Small Investors Keep Piling Into Flashy Growth Stocks

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11-26-21 0030ET

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