EUROPEAN MIDDAY BRIEFING: Stocks Continue Winning Streak

09/17/2021 | 06:04am

MARKET WRAPS

Stocks:

European stocks advanced Friday for a two-session winning streak.

Industrials and energy sectors led gains while the materials sector lost ground.

Stocks have been wobbly all month as investor concerns flit from central bank policy to inflation to economic growth prospects. The past few days have seen markets chiefly react-positively or negatively-to mixed economic data, whether those be industrial production, retail sales, or jobless claims.

"It is becoming increasingly apparent that there is little in the way of direction for equity markets at the moment," said Michael Hewson, an analyst at broker CMC Markets. "Investors are increasingly looking for a narrative, whether it be positive or negative to drive the next move, and are coming up empty-handed."

Recent political shifts have increased the odds of Germany loosening its tight national fiscal rules after the September elections, Oxford Economics said.

This could be good news given the drag from secular stagnation and the investment needed for the green and digital transitions, Oxford Economics chief German economist Oliver Rakau said.

Several proposals to tweak Germany's fiscal rules have been developed, which could generate fiscal space of 1%-2% of GDP annually, he said.

But these options are more likely to be explored fully under a left-leaning government, which still appears unlikely, and would also face legal and technical hurdles, Rakau said. "A wholesale revision of the constitutional public debt brake as favored by the Green party looks highly improbable," he said.

Shares on the move:

Travel stocks rallied on reports that the U.K. will ease restrictions. International Consolidated Airlines rose 3.5% and InterContinental Hotels added 3%.

Commerzbank moved 4.4% higher, after local German media reported that U.S. private-equity group Cerberus was considering building a greater stake in the bank after the German elections later this month.

Data in focus:

August's fall in U.K. retail sales reflects demand rotating into services, HSBC's senior economist Elizabeth Martins said. U.K. retail sales fell 0.9% on month in August, the third decline in four months.

"U.K. retail sales volumes are still higher than pre-pandemic, but having had a roaring start to the reopening period, they have lost some momentum," Martins said.

The rotation into services is evident on the food sales side, she said.

Sales in food stores fell 1.2% on the month in August, while Open Table data showed restaurant bookings increased and, according to the Office of National Statistics, social spending did too.

The drop in retail sales also reflects supply constraints, as consumers can't buy what isn't on the shelves, Martin said.

Elsewhere, the price adjusted stock of orders in Germany in manufacturing increased a seasonally and calendar adjusted 2.4% in July on the previous month, according to provisional data from the German statistics office Destatis.

The stock of orders has continuously increased since July 2020, and in July 2021 it reached its highest level since the set of statistics was introduced in January 2015, Destatis said.

However, in the past few months, new orders rose faster than turnover, the statistics office said.

The range of the stock continued to increase, rising to 7.2 months in July, the highest level ever recorded. This range indicates for how many months establishments would have to produce goods until all orders on hand are filled, Destatis said.

U.S. Markets:

Stock futures edged up ahead of fresh data on consumer sentiment, pointing to a subdued end to a choppy week in markets.

Stocks have seesawed this week as investors grappled with mixed economic data in the U.S. and China and the spread of the Covid-19 Delta variant. This week brought the first sign of inflation easing and an unexpected boost to retail sales, but also a slight rise in Americans applying for initial jobless claims, a proxy for layoffs.

"What this week tells us is that there's going to be this bumpy normalization for the foreseeable future. All this mixed data puts us a bit in limbo," said Ludovic Subran, chief economist at Allianz. "The return of volatility in an environment that is a bit of an in-between time is very probable."

Investors are awaiting a preliminary reading of the Michigan consumer sentiment index for September, which is set to go out at 10 a.m. ET.

Invesco jumped over 9% in after hours trading after The Wall Street Journal reported the company is in talks to merge with State Street's asset management business. State Street rose 0.5%.

Forex:

A rally which took the DXY dollar index to a three-week high of 92.9640 on Thursday pauses, leaving the DXY last down 0.1% at 92.8200, with investors lacking the impetus to push it higher, UniCredit said.

The dollar has been lifted by safe-haven demand due to concerns over slowing growth, rising inflation and "growing fears about a possible international financial shock, potentially coming from China," alongside better U.S. data such as retail sales, UniCredit said.

Yet the uncertain outlook leaves investors "reluctant to ride a more sustained USD recovery," it said.

The DXY index is therefore stuck below 93 for now while EUR/USD has support above 1.1760, it said.

Bitcoin climbed about 2% from the level at 5 p.m. Thursday, trading around $48,000, according to data from CoinDesk. The cryptocurrency fell below $44,000 earlier in the week before recovering some ground.

Data showing an unexpected 0.9% fall in U.K. retail sales in August, against the consensus forecast in a WSJ poll for a rise of 0.8%, "may take some of the momentum out of the rise in U.K. money market rates and also GBP," ING said.

The impact may be limited, however, as the weak figures are unlikely to prompt the Bank of England to "deliver a 'rate protest'" against market pricing of future interest-rate rises at next week's meeting, ING said.

This is likely to leave GBP/USD gravitating around 1.3800 and EUR/GBP near 0.8500, it said.

Bonds:

European credit markets look poised for a good trading session Friday, with cash spreads likely to remain unchanged or even tighten slightly, said UniCredit.

"Despite robust activity in primary markets, European corporate cash remains on a strong footing" analysts at the bank said. Gains in stock markets this morning suggest volatile, riskier corporate debt is likely to outperform during today's session, they said.

Meanwhile, the Treasury yield curve has been flattening this week, signaling that investors are positioning ahead of the Federal Reserve monetary policy meeting that begins Tuesday, according to Chris Jeffery, head of rates and inflation strategy at Legal & General Investment Management.

"That's telling us the market is starting to worry more about the Fed," he said.

Commodities:

Oil prices were ticking lower as supply from U.S. refiners shuttered by storms makes a slow return. Some analysts are betting that oil prices could struggle to rise significantly above the $75 a barrel mark.

"The Delta variant is taking a toll on the pace of the demand recovery across Asia, where vaccine rollouts and the lifting of restrictions have been slower than in Europe and North America," analysts at Fitch Solutions said.

Supply increases from OPEC+ will bring the market back to a position of oversupply next year, they added.

Gold prices ticked higher but are on course for a weekly loss, as gold investors remain on the sidelines. The precious metal is 1.5% lower for the week.

Inflows into gold ETFs have remained lackluster, said TD Securities. That is despite lingering concerns about high inflation coupled with slowing growth.

Stagflation "is increasingly capturing the market's share of mind, but the theme has yet to translate into inflows for gold," TD said.

Gold ETFs tracked by FactSet have seen a net outflow of $947 million over the last month.

Nonetheless, TD expects prices are unlikely to rout as positioning data suggests most investors have already sold their gold holdings, the bank said.

EMEA HEADLINES

Italy to Impose Strict Covid-19 Health Pass for All Workers

ROME-Italy is making Covid-19 health passes mandatory for all workers in the private and public sectors, in one of the toughest vaccine-promoting measures adopted by any major Western country.

Prime Minister Mario Draghi's government passed a decree Thursday requiring workers, including those who are self-employed, to have a digital certificate known as a green pass. This shows a person has been fully vaccinated, has recently recovered from Covid-19 or has freshly tested negative for the virus.

Hezbollah Brings Iranian Fuel to Lebanon as Shortages Deepen Crisis

BEIRUT-A convoy of trucks carrying Iranian fuel rolled into Lebanon from Syria on Thursday, a delivery arranged by Tehran-allied Hezbollah to help alleviate a domestic energy crisis and contain growing public anger against the ruling elite over the country's economic collapse.

The powerful militant and political group brought the fuel in via Syria in a likely effort to avoid embroiling Lebanon in U.S. sanctions targeting Iranian oil exports.

France Calls U.S.-Australia Submarine Deal a Betrayal

France said it had been betrayed by the U.S. after being pushed out of a multibillion-dollar deal to supply submarines to Australia, in a public rupture between NATO allies that is shaping up to be among the most bitter trans-Atlantic disputes of the Biden administration's first year.

French Foreign Minister Jean-Yves Le Drian on Thursday called the U.S.-backed deal a "stab in the back." President Biden on Wednesday announced a new security pact with Australia and the U.K. that would include a long-term agreement to build nuclear-powered submarines for Australia. Australia on Thursday confirmed it was withdrawing from the French contract.

France Says It Has Killed Islamic State Leader Responsible for Deaths of U.S. Soldiers

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09-17-21 0603ET

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