MARKET WRAPS

Stocks:

European stocks fell after downbeat Asia trading and as investors await economic events later.

"A largely downbeat session overnight has seen indices throughout China, Japan and Hong Kong lose ground," IG analysts said. "That comes as worries over the Chinese housing system remain elevated following the missed bond payment by Modern Land.

Tensions between Washington and Beijing were also in focus after U.S. regulators banned China Telecom Corp. from operating in the U.S. The Federal Communications Commission gave China Telecom 60 days to leave the U.S. market. Regulators cited a potential national security threat from the company, such as the disruption of U.S. communications, amid rising tensions between the countries.

Shares on the move:

Deutsche Bank shares traded 5.3% lower after posting 3Q earnings in which above-expectations revenue was partly offset by higher-than-expected costs, UBS analysts said.

The market is too bearish on the German lender, UBS said. Deutsche Bank backed its target of improving its return on tangible equity--a key measure of profitability--to 8% next year, while consensus expects it at 5.3%, it said.

UBS finds the target ambitious, but expects the bank's RoTE at 6.1% next year and says consensus views are too conservative. "Importantly, DB also reiterated its ambition to begin EUR5 billion capital distributions to shareholders from 2022 onward--that's a key cornerstone of our investment case and a big delta to the consensus view," UBS said.

Data in focus:

U.K. Treasury chief Rishi Sunak is likely to present a better state of the public finances than initially forecast when he announces the autumn Budget in parliament later Wednesday, said UniCredit.

The better situation may not last, however, as it's largely due to one-off factors, reflecting an underspend on Covid-19 support measures, analysts at the bank said.

Economic growth has slowed materially, while rising inflation and a higher yield curve will add to debt-servicing costs, analysts at the bank said.

Bank of England rate-setters said they will have to act to tackle stubbornly high inflation, raising the risk of higher interest rates fairly soon. This would increase the cost to the Treasury of the BOE remunerating reserve balances at the bank rate, they said.

The German economy has lost a little of its willingness to hire, the Ifo Institute said. The Ifo employment barometer fell to 103.6 points in October from 104.3 points in September. Nevertheless, the labor market continues to recover, Ifo added.

In manufacturing, the employment barometer remained almost unchanged. Supply problems with raw materials and intermediate products aren't yet reflected in companies' employment policies, Ifo said.

Among service providers, the indicator fell but the hospitality industry is still looking for new staff, as are recruitment agencies, the German institute said.

In trade, businesses would like to strengthen their personnel planning. There is also still demand for new employees in construction, albeit less than in the previous month, Ifo said.

German import prices rose 17.7% on year in September, marking the highest increase since August 1981, Destatis said. Energy imports were 107.1% more expensive than in September 2020, the German statistics office said.

This increase was driven by a 170.6% rise in the price of natural gas and a 75.5% increase in the price of crude oil. Import prices, excluding crude oil and mineral-oil products, increased by 14.7%, Destatis said.

Export prices rose 8.1% in September compared with the previous year. Compared with the previous month, German import prices rose 1.3% in September and export prices increased 0.9%, Destatis said.

U.S. Markets:

Stocks were poised to trade around record highs as investors awaited results from more of the biggest U.S. companies.

Solid quarterly earnings from American corporations have quelled the investor concerns about supply-chain problems, inflation and Chinese economic growth that rattled markets at the start of fall. The S&P 500 is up 6.2% for October and on course for its biggest monthly advance since November.

"Investors got fairly gloomy in September, clearly against the backdrop of all sorts of macro concerns," said Paul O'Connor, head of the multiasset team at Janus Henderson Investors. "The broader story from results is that companies are managing these dynamics pretty well, and also managing expectations fairly well."

Money managers still have worries, ranging from the fate of President Biden's infrastructure and social-spending plans to the potential unwind of Federal Reserve stimulus measures that have goosed markets since early 2020. For now, though, many investors say they are sticking with stocks in the expectation of modest if bumpy returns through the end of the year.

Results from Coca-Cola, McDonald's and Kraft Heinz, expected before the opening bell, will offer clues about how companies are navigating shortages of workers and raw materials. Harley-Davidson, Boeing and General Motors will also report before the stock market begins to trade, while Ford Motor and eBay are on the block after markets close.

On the economic front, data on orders of durable goods are due to be released at 8:30 a.m. ET. Economists polled by FactSet expect orders to have fallen 1% in September from August, reflecting disruption to supply chains in the auto industry and other sectors.

Forex:

The dollar faces a hit from potentially weaker-than-expected third-quarter U.S. economic growth data on Thursday as the recovery is likely to have lost considerable momentum over the summer, Commerzbank said.

"If the market was to be disappointed it might postpone its expectation of an imminent [interest rate] lift-off, with the dollar being sold off short-term," Commerzbank currency analyst Antje Praefcke said.

With Federal Reserve officials entering the blackout period in the run-up to the November 2-3 policy meeting, the market is relying on economic data to confirm its interest rate expectations, she said.

The European Central Bank is likely to deliver a neutral message at Thursday's policy meeting that prompts the market to scale back its interest rate rise expectations and weakens the euro, ING said.

Expectations for the deposit rate to be raised by 10 basis points in late 2022 face a "reality check" as the ECB will avoid suggesting the debate over the withdrawal of stimulus is "leaning in any clear direction," ING analysts said.

That could dent the euro, but only marginally as the currency has showed little reaction to recent policy decisions, they said. EUR/USD could fall below 1.15 in November, versus 1.1596 currently, although seasonality trends in December may see it recover towards 1.1700 at year-end, they said.

Bonds:

Volatility looms for global bond markets due to the prospect of asset-purchase tapering at the next Federal Reserve meeting in early November, said Simon Lue-Fong, head of fixed income at Vontobel.

However, any rise in yields will likely prove a blip within a larger downward trend in yields that is driven by powerful structural forces such as digitalization and demographics, he said.

"All eyes are currently on the Fed but in the greater scheme of things tapering won't be the catalyst for a real change in direction of yields, " he said.

Credit markets would gain from investors taking profits in stocks, said Mizuho. Analysts at the bank see potential for profit-taking flows out of equities.

"Equities continue to perform well and the question once again becomes how far do indices need to rise to induce profit-taking in size," they said. If equities "are indeed vulnerable to investors taking profit, credit is likely the place to be."

However, if the lasting impression is that of a relatively positive third-quarter earnings season, investors may decide to stay invested in equities rather than increase fixed-income exposure, they said.

Stressing policy persistence by the ECB at its meeting Thursday "could prompt some reappraisal of market policy rate expectations," said Peter Goves, fixed income research analyst at MFS Investment Management.

Markets are pricing an almost 10 basis-point interest-rate rise by the ECB before the end of 2022. As ECB Governing Council members continue to stress how the rise in HICP inflation is likely to be transitory, MFS IM expects ECB President Christine Lagarde's message this week to likely contrast with market pricing.

U.K. borrowing costs fell further Wednesday ahead of the government's presentation of its spending plans at midday. Treasury chief Rishi Sunak is expected to rein in the hefty stimulus deployed during the pandemic to prop up the economy as he begins fiscal tightening. A revision to the gilt remit for the current fiscal year 2021-22 is expected to follow the budget announcement, with a downward revision widely anticipated.

"Market expectations for the reduction in the Gilt remit likely fall in the range of GBP25-40bn," analysts at Mizuho said, adding that the division of the amount is slightly weighted towards gilts of shorter maturities.

Commodities:

Oil prices were down after the American Petroleum Institute released data late Tuesday showing rises in U.S. crude oil, gasoline, and distillate fuel inventories.

Those figures come despite recent fears over falling supply--the crucial distribution hub of Cushing, Oklahoma continues to see falling inventory numbers, and Saudi Aramco on Tuesday raised concerns about the world's falling spare oil capacity.

Still, though, those remarks from Aramco are "at odds with what OPEC+ are forecasting for next year," noted ING's Warren Patterson, adding that the group expects strong non-OPEC supply growth in 2022 and ING's forecasts show a market in surplus in 2022.

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10-27-21 0611ET