EUROPEAN MIDDAY BRIEFING: Caution Dominates as Fed Minutes Awaited

08/18/2021 | 06:00am



European stock markets gave up modest opening gains Wednesday to trade broadly lower, with investors looking ahead to an update from the Federal Reserve on possible plans to reduce U.S. stimulus.

A string of strong employment reports has strengthened the case for the rate-setting FOMC to announce its intentions to begin tapering its monthly purchases of Treasurys and mortgage-backed securities at its next meeting in September. Some strategists think the Fed may use an annual economic symposium in Jackson Hole on Aug. 26-28 as an opportunity to hint at tapering timing.

"Despite splintering views within the FOMC, we look for the committee to announce plans for QE tapering as soon as the Sep. 21-22 policy meeting, with tapering commencing in early 2022, or possibly earlier in late 2021," wrote Kathy Bostjancic, chief U.S. financial economist, in a research note.

Michael Hewson, Chief Market Analyst at CMC Markets UK, wrote: "It would be surprising if today's minutes altered the market perception of when a taper is likely to happen given the more recent commentary of various Fed policymakers, in light of the recent improvements in the U.S. jobs data, which wasn't available to members back in July."

Shares on the move:

Carlsberg raised its 2021 earnings expectations but also showed some conservatism given increased volatility in Asia due to the coronavirus pandemic, said Jefferies.

The company now expects organic growth in operating profit to be 8%-11%, up from its previous 5%-10% range. Given that consensus expectations already stand at 10.9%, Carlsberg's guidance seems an acknowledgment that the market has crept above its previous guidance, said Jefferies.

"We do not rule out a further guidance upgrade at 3Q if pandemic headwinds ease," said the bank's analysts.


Persimmon posted a sharp rise in first-half profits on strong growth in completions and said so far in the second half its forward sales were up around 9% on the more normal trading year of 2019. The housebuilder has seen improvement from the levels it experienced pre-pandemic, and is strongly ahead of last year's comparatives. It warned, however, it was facing increased costs.

Richard Hunter at Interactive Investor said the current cost inflation of building, which is running between 4.5% and 5%, is seen as a red flag. Furthermore, the company's first-half results didn't encompass any effects that the end of the stamp duty holiday may have had. Additionally, the forthcoming removal of the U.K. government's furlough scheme may put pressure on both unemployment levels and consumer confidence.

"Persimmon continues to build on its strengths, with a healthy order book, robust balance sheet and careful management of the factors within its control all underpinning progress," Hunter said.

Data in focus:

U.K. inflation slowed to an annual rate of 2% in July from 2.5% in June, data showed Wednesday, in line with the level expected by economists in a WSJ survey.

Pantheon Macroeconomics said inflation remains on course to rise sharply in the coming months but it is unlikely to reach the Bank of England's forecast of 4% by year-end.

"We think that the headline rate of CPI inflation will peak at 3.7% in November, before falling back to the 2% target in the second half of next year, a year earlier than the BOE expects," said Pantheon economist Samuel Tombs.

Other News:

Oxford Economics' eurozone recovery tracker returned to growth at the start of August, rising by 1.1 points to 86.2 and erasing the losses seen in the previous two weeks.

The gains were broad-based, with five of the six components increasing, while the health indicator remained flat, said Oxford Economics' Tomas Dvorak. Consumption saw another solid increase and the labor market saw solid gains, but mobility seems to have peaked, he said.

Industry is "stuck in a rut," weighed down by persistent supply constraints, he added. "The eurozone economy is still on an upward trajectory, but the momentum is visibly fading, which is corroborated by a degree of reversal in previously buoyant sentiment surveys."

U.S. Markets:

U.S. stock futures ticked down, indicating the broader market may post a tepid decline at the opening bell.

The notes from the Fed meeting, due after Europe closes, will offer more indications of when the central bank may begin scaling back easy-money policies.

"As long as policy remains reasonably supportive, growth continues and we keep increasing our vaccination, it is a strange environment where conditions are good for equities," said Fahad Kamal, chief investment officer at Kleinwort Hambros. "There is genuine economic strength."

Ahead of the opening bell, giant retailers including Lowe's, Target and TJX are slated to report quarterly earnings. Cisco Systems and Nvidia are set to post earnings after markets close.


The dollar should rise if the minutes of the Federal Reserve's last policy meeting signal the central bank could start tapering asset purchases soon, said ING.

The focus of the minutes will be on any discussion about the timeline for unwinding quantitative easing, especially after some Fed members said they expected tapering to begin this autumn, said ING forex strategist Francesco Pesole.

"Any confirmation on this side should cement the view that the Fed will unveil more details of its tapering plan at the 26-28 August Jackson Hole symposium, and ultimately offer yet another supportive narrative for the dollar."

Danske Bank expects the dollar to strengthen over the coming quarters and any weakness to be transitory, forecasting that EUR/USD will reach 1.15 in both six months and 12 months.

"We expect to see lower PMIs, a further move towards tightening global liquidity conditions, peak inflation expectations and a strong U.S. jobs recovery and for these factors to support the dollar over coming quarters," said senior analyst Lars Merklin.

Fundamentally, higher U.S. interest-rate markets and U.S. equities "continue to appeal to foreign investors," he said, adding that risks to Danske's forecasts are tilted toward a stronger-than-expected dollar. Danske forecasts EUR/USD at 1.17 in one month and 1.16 in three months.

Ebury said the euro is likely to rise against the dollar in the near-term but only modestly as the eurozone's economic recovery catches up with the U.S.

"We think that the recent move lower in EUR/USD has perhaps been excessive, and think that the likely convergence in economic performance between the U.S. and Euro Area in the third quarter should support the euro in the near-term," said Ebury analyst Matthew Ryan.

However, inflationary pressures in the euro-area are lagging and the European Central Bank appears in no rush to scale back stimulus, he said. Ebury expects EUR/USD to rise to 1.19 by year-end.

Sterling briefly fell after data showed the annual rate of U.K. inflation fell to 2% in July from 2.5% in June, as expected.

Core inflation, which strips out volatile items such as food and energy, eased to an annual rate of 1.8% from 2.3% a month ago, versus a forecast of 2%.


Eurozone government bond yields were little changed, as there is still a low volume of supply, the data calendar features only final inflation data for July, and the Fed's latest minutes release may not be a major market mover.

"Bunds are struggling to overcome important resistance at the -0.5% level in 10-year yields--with memories still fresh how lower intraday yields were rejected earlier this month," said Christoph Rieger, head of rates and credit research at Commerzbank.

The German Finance Agency will tap the 0% August 2050 Bund with EUR1 billion, and Rieger expects the tap to be taken down well ahead of the launch of a new 30-year Bund in September, despite some lofty valuations.

DZ Bank analyst, Rene Albrecht said the recent turn of the yield of Germany's 0% August 2050 Bund into negative territory may weigh on demand for this bond at Wednesday's auction.

"Since the yield recently turned negative, and since the 10/30-year spread on the Bund curve has also tightened by four basis points since the end of July, demand is unlikely to be overwhelming."

Wells Fargo Asset Management remains cautious on duration in emerging markets, while it has increased duration in a number of core and smaller developed markets in recent months.

"The more hawkish central banks are clustered here...and longer-dated bonds can be more volatile when it comes to systemic and idiosyncratic market reactions," said portfolio manager Lauren van Biljon. In some countries the steepness of the domestic yield curves "suggests that sufficient political and monetary policy risk is already baked into asset prices."

Duration in the Czech Republic, Hungary and Poland in particular looks "decidedly unattractive," with central banks turning more hawkish and longer-dated bonds offering little in the way of pickup from their shorter-dated peers, she said.

Danish government bonds are "struggling" and have been underperforming versus other curves since the last auction two weeks ago, said Nordea's analysts ahead of Wednesday's auction. Nordea observes that the recent auction of the 0% November 2031 bond went slightly below the pre-auction prices, "which is the indication that investors currently have the upper hand."

Still, Nordea analysts said that Danish government bonds continue to look attractive compared with the alternatives. They added that the situation for the bonds remains the same as at the recent auction two weeks ago, "namely that the Danish central bank needs to sell DKK5 billion to reach its target." The central bank will tap 2024-, 2031- and 2052-dated bonds.


Oil futures pushed higher in Europe, reversing some of their early week losses that came amid broader market selling, with the latest API data showing slightly smaller-than-expected falls in crude and gasoline inventories.

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08-18-21 0559ET

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