EUROPEAN MIDDAY BRIEFING : Stocks Led Lower by Retail, Travel and Leisure Companies

09/15/2021 | 06:21am

MARKET WRAPS

Stocks:

European stocks were led lower by shares of retail, travel and leisure companies.

Shares on the move:

H & M Hennes & Mauritz fell over 3% after the Swedish clothes retailer said sales in its third quarter fell short of analysts' expectations.

The luxury-goods sector remains under pressure for a second day amid concerns over the spread of Covid-19 in Asia -- the industry's most critical market. LVMH fell 2.5% in Paris, Burberry was down 1% in London, Richemont slipped 2.4% in Zurich and Kering declined 3% in Paris.

Data in focus:

Consumers in Germany can expect inflation to amount to 3% this year, the Ifo Institute said. The main reason for the comparatively high rate in 2021 is to be found in the previous year, the institute said.

"The temporary reduction in VAT in the second half of 2020 and the crash in energy prices during the coronavirus crisis led to exceptionally low prices in 2020," Ifo's head of forecasts Timo Wollmershaeuser said.

The study also shows that the inflation rate can be explained in part by an accelerated increase in prices over the course of 2021, which is especially apparent in energy, food, and some service industries, Wollmershaeuser said. In 2022, German inflation could stand between 2.0% and 2.5%, Ifo forecasts.

Consumer prices in the U.K. grew at their fastest pace in almost a decade in August, adding more pressure to the Bank of England to scale back pandemic-era monetary policy support, said Shane O'Neill, head of interest rates for Validus Risk Management.

Commenting on annual CPI inflation accelerating 3.2% in August, he said inflation and Tuesday's solid jobs data "will give some support to those members of the Monetary Policy Committee who want to starting reducing stimulus sooner rather than later."

Yesterday's labor data showed the number of payroll employees back above pre-pandemic levels.

The Bank of England is unlikely to speed up scaling back stimulus, despite a steep increase in consumer prices in August, which should be supportive for the rebound of corporate profits and the equity market, said Ben Laidler, global markets strategist at multi-asset investment platform eToro.

U.K. annual CPI inflation surged to a 9-year high of 3.2% in August, marking the biggest monthly jump in the annual rate on record. Yet Laidler expects the Bank of England to remove policy stimulus slowly as bank officials remain keen to support the economic recovery.

"We see this stimulus staying for an extended period, whilst growth uncertainties remain high, and much of the inflation acceleration one-off," he said.

U.S. Markets:

U.S. stock futures ticked up, signaling a tepid rebound for major indexes that have come under renewed pressure on concerns that the pace of the economic recovery is slowing.

Stocks have slipped in September amid worries that markets are ripe for a pullback after marching higher for much of the year. Just as concerns about high valuations are on the rise, investors say the economic rebound likely won't be as fast as they previously expected. The spread of the Delta variant of coronavirus, an economic slowdown in China and supply-chain difficulties have all dampened sentiment.

"We've shifted from worrying about premature tightening [by the Federal Reserve] killing off the recovery in equities to concerns about the strength of the recovery weighing on equities," said Sebastian Mackay, multiasset fund manager at Invesco. Mr. Mackay remains upbeat about the outlook for stocks, but said he has taken out insurance against volatility by buying put options.

Investors will parse data on U.S. industrial production at 9:15 a.m. for clues about the state of the economic recovery. Economists forecast that output rose in August.

Forex:

Tuesday's slightly weaker (although still-elevated) U.S. inflation figures had little impact on the dollar, which has kept to a tight range, MUFG said.

The figures keep the Federal Reserve on track to announce plans to taper asset purchases later this year, but this is now more likely in November than September. Next week's meeting is unlikely to "fuel any renewed FX volatility" as "any lingering expectations of something meaningful happening" are now gone, said Derek Halpenny, MUFG's head of research for global markets EMEA.

EUR/USD, last up 0.1% at 1.1817, should stay in a narrow range, with the euro supported by solid economic fundamentals but hampered by divergence between Fed policy and that of the European Central Bank, he said.

Federal elections in Germany could create shifts in terms of fiscal policy and monetary policy that "err on the side of probably more accommodation and expansion" and potentially cause the euro to fall, said Michael Hasenstab, chief investment officer for global macro at Franklin Templeton.

"I think that will have implications for the euro," he said. This doesn't only apply to the euro against the dollar and falls may be more pronounced against Scandinavian currencies, Hasenstab said.

He pointed to strong current accounts in Sweden and Norway, as well as good growth and probably tighter policy--the latter has already been signaled in Norway. "So, it's not just about euro-[US] dollar, but really euro-Scandinavia and euro to some of the other currencies that we think is equally interesting," he said.

Bonds:

In the bond market, the yield on 10-year Treasury notes ticked up to 1.280% from 1.276% Tuesday.

Commerzbank is upbeat about the strong performance of eurozone peripheral government bonds, saying it sees promising dynamics as yield spreads continue tightening regardless of market direction.

This has taken the 10-year Italian BTP-German Bund yield spread below the key 100-basis-point level, rates strategists at the German bank say. The 10-year BTP-Bund spread is trading at 99.4 basis points in early trade, with 10-year Spanish-German spreads at around 64 basis points and 10-year Portuguese-German spreads slightly below 55 basis points, according to Tradeweb.

Commodities:

Oil prices rose, with Hurricane Nicholas adding to disruption for U.S. Gulf of Mexico producers, who hadn't even fully ramped back up following Hurricane Ida. Those hurricanes are among the factors pushing oil higher Wednesday according to OANDA's Jeffrey Halley

Elsewhere, jumping natural gas prices in Europe may add indirect support for oil, he adds. Those factors come after OPEC raised its demand forecast for 2022 and the IEA on Tuesday slashed its supply forecast for this year--both of which suggest a tightening market

Gold prices edged lower, but hold on to most of the gains made on Wednesday after U.S. inflation data were weaker than expected. The weaker-than-expected CPI reading offered support to the Federal Reserve's view that inflation will be fleeting, leading investors to bet that the central bank's tapering and rate hikes won't happen imminently.

"The influence of the special effects caused by the pandemic [on inflation] appears to be gradually dwindling," Commerzbank said. The Fed "will not be in any great rush to scale back its bond purchases," the bank said.

Copper prices edged higher, halting two days of declines, driven by concerns about fresh Covid-19 outbreaks in China. Three-month copper on the LME is up 0.6% at $9,492 a metric ton. Prices rallied to a roughly six-week high on Monday but have slumped since.

"Investors are growing concerned about the spreading Delta variant, especially in China, which now seems to have more than its usual share of outbreaks," said Ed Meir, a metals consultant at ED&F Man.

Beijing has locked down the city of Xiamen, a manufacturing hub, Meir said.

Aluminum meanwhile rises 1.4% to $2,873.50 a ton. Data released Wednesday shows China's aluminum output fell for a fourth straight month, amid production restrictions.

EMEA HEADLINES

UK Annual Inflation Accelerated in August

Annual inflation in the U.K. accelerated in August to its highest level in almost a decade, adding to signs of inflationary pressure as the global economy recovers from the pandemic.

Consumer prices rose 3.2% on the year in August, the Office for National Statistics said Wednesday. That was the highest annual rate of inflation since March 2012 and well in excess of the Bank of England's 2% target.

Inditex Books Swing to 1H Profit as Sales Recover From Pandemic

Industria de Diseno Textil SA continued its momentum in the second quarter, with sales returning above pre-pandemic levels as the Spanish fashion company swung to a net profit for the first half of its fiscal year.

Inditex booked a net profit of 1.27 billion euros ($1.50 billion) in the six months to end-July swinging from a net loss of EUR195 million in the same period last fiscal year. Sales in the half rose almost 50% to EUR11.94 billion. In the second quarter, sales were 7% higher at constant currency than the same period of 2019.

H&M 3Q Sales Rose on Pandemic Recovery, But Fell Short of Expectations

Sweden's Hennes & Mauritz AB said Wednesday that third-quarter sales grew as stores reopened following the easing of restrictions put in place to combat the pandemic.

The fast-fashion retailer said sales were 55.59 billion Swedish kronor ($6.46 billion) in the three months to Aug. 31. That figure is slightly below estimates of SEK57.23 billion, according to a FactSet poll.

BHP Says Memorandums of Understanding in Place With Importers for Jansen Output

BHP Group Ltd., the world's largest mining company, said it has non-binding memorandums of understanding with major importers for up to 100% of future production from its Jansen project in Canada's Saskatchewan province.

BHP last month approved the first phase of the Jansen project, which is estimated to cost $5.7 billion to build. Potash is one of three major fertilizer ingredients, alongside nitrogen and phosphate, and BHP thinks mining at Jansen could last about 100 years.

Tullow Oil Swung to 1H Net Profit; Narrows 2021 Production Guidance Upward

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09-15-21 0620ET

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