European markets mostly fell while prices for crude oil and natural gas extended their climb.
U.S. crude rose more than 2% early Monday to a seven-year high, bringing its climb since the end of last October to more than 120%. If sustained, it will be the first time the U.S. oil benchmark closes above $80 a barrel since October 2014, when the shale revolution set off a multiyear slump in fossil-fuel prices.
Meanwhile, the British pound rose on Monday as two Bank of England officials dropped hints of a more hawkish policy over the weekend, with those comments weighing on U.K. stocks despite strength in energy prices.
The pound rose 0.2% after Michael Saunders, a member of the central bank's Monetary Policy Committee, said markets weren't wrong in betting on higher interest rates, with inflation creeping up above 4%.
"I'm not in favor of using code words or stating our intentions in advance of the meeting too precisely, the decisions get taken at the proper time. But markets have priced in over the last few months an earlier rise in Bank rate than previously and I think that's appropriate, " Saunders told The Telegraph in an interview that published on Saturday.
"The February one is fully priced in and for December, it's half priced in...I think it is appropriate that the markets have moved to pricing a significantly earlier path of tightening than they did previously," he said.
Also on Saturday, Bank of England Gov. Andrew Bailey told the Yorkshire Telegraph that he was concerned over above-target inflation. "We are going to have a very delicate and challenging job on our hands so we have got to in a sense prevent the thing becoming permanently embedded because that would obviously be very damaging," he said.
The comments come ahead of some key economic updates in the U.K. this week include employment data on Tuesday and August growth data on Wednesday.
"We think that the BoE's current narrative, in particular its failure to push back against markets pricing three hikes between now and mid-2022, is evidence that the MPC is attaching a sizable weight to the risk that (unobserved) trend growth is lower and the output gap (or labor market slack) higher than we think," said Barclays analysts Fabrice Montagne and Abbas Khan of Barclays, in a note to clients.
Shares on the move:
ASOS dropped 7% after the online fashion retailer warned of lower full-year earnings amid supply-chain pressures and higher costs and said chief executive Nick Beighton was stepping down.
"The market had a sense that life has been a bit of struggle for ASOS, given the gloomy update from rival Boohoo in recent days which seemed to confirm the fast-fashion industry was not enjoying the best of times," said AJ Bell investment director Russ Mould.
"The near-term outlook is somewhat bleak for the company. Sales growth is expected to slow quite dramatically, cost pressures and supply-chain problems could remain for a while, which means profit margins will be squeezed, and consumer uncertainty could result in volatile trading."
The biggest gainer in the FTSE 100 was mining giant Anglo American, which rose 3%. Other gainers included copper miner Antofagasta and silver miner Fresnillo.
Data in focus:
The U.K. economy gained some momentum in August after stalling in July, Pantheon Macroeconomics said. The country's gross domestic product is expected to have expanded 0.6% over the previous quarter in August, half the rate required for the Bank of England's forecast of 2.1% quarterly growth in 3Q to be realised, Pantheon said.
"Most indicators of overall activity suggest month-to-month growth in GDP was faster in August than in July, but well short of the pace seen in prior months," the economic-research firm said.
Pantheon expects monthly growth in GDP to slow and average just 0.4% in the final four months of this year as households' real incomes are squeezed by high inflation and fading fiscal support. U.K. GDP data for August is due Wednesday.
Stock futures ticked lower. Third-quarter earnings season will kick off this week, and investors are awaiting insight into the impact of stickier-than-anticipated inflation, brought on by supply-chain disruptions, labor shortages and surging energy prices. Some are worried that higher costs for products and energy could crimp demand, while winter could lead to a resurgence in Covid-19 infections and hospitalizations.
"If it wasn't for the huge amount of savings people are sitting on from the pandemic, I'd be more worried," said Mike Bell, global market strategist at J.P. Morgan Asset Management. "The obvious risk to that is winter. I don't think anyone knows if that will lead to another pickup in cases and hospitalizations."
With no economic releases due on Columbus Day, and the U.S. bond market closed, analysts were left dissecting the report that showed 194,000 nonfarm jobs added in September.
"Friday's U.S. employment report was sufficiently mixed to revive the debate over the whether the Fed will really go ahead with the planned tapering next month.
Despite the headline miss, the underlying numbers should just about meet Chair Powell's requirement of 'decent' and ensure that the existing schedule remains intact," said Ian Williams, strategist at U.K. broker Peel Hunt.
He added that the upcoming third-quarter earnings season will be even more crucial in supporting valuations as yields rise. Major U.S. banks including JPMorgan Chase, Bank of America and Citigroup are due to report results this week. No major earnings are due Monday.
The dollar should remain supported this week as the Fed stands ready to normalize monetary policy and as America's energy independence protects it from rising prices, ING said.
The dollar will rise particularly against energy importers and central banks that aren't prepared to react to higher prices, including Japan, ING analysts said.
USD/JPY is in the process of breaking above major resistance levels and could rise towards 115, they said.
"The DXY is consolidating below some major resistance at 94.50/70, but upside pressure should remain in place all week." USD/JPY rose 0.7% to 112.965, its highest level since December 2018, according to FactSet.
Bitcoin added to recent gains, rising almost 1.9% from its Sunday 5 p.m. ET level to $56,449.87. Speculation has been mounting that the Securities and Exchange Commission will approve a bitcoin futures exchange-traded fund in coming weeks, which could increase the number of firms able to gain exposure to the cryptocurrency.
Bond markets were closed for a federal holiday. Payrolls data, albeit weaker than expected for September, was probably not small enough to stop the Fed from tapering in November, said Joseph Marlow, assistant economist at Capital Economics.
"Although we would not expect a tapering announcement to have much impact on yields--in 2013, the majority of the volatility in the bond market occurred prior to the official announcement and an announcement this time around is already widely anticipated--we do think that a gradual reduction in the central bank's asset purchases over time would remove an obstacle to even higher Treasury yields," he said.
Capital Economics forecasts the 10-year U.S. Treasury yield will reach 2.5% by the end of 2023.
With the recent repricing, markets are essentially testing the European Central Bank's transitory inflation narrative, said Piet Haines Christiansen, chief strategist for ECB and EUR fixed income at Danske Bank. His base case is still for transitory inflation, though, he said.
The big unknown that still needs to see is underlying inflation, driven by wages, he said. "For ECB to react to inflation coming, we should still see underlying inflation and wages pick up (negotiated wages are crucial to follow)," he said.
The ECB is unlikely to tighten monetary policy if inflation spikes because of supply issues or energy prices, he said.
Downbeat sentiment Monday poses risks to European credit markets, said UniCredit. "A softer tone in Bunds and equity futures this morning presents a challenge to both investment grade and high yield European corporate credit performance today," analysts at the bank said.
However, trading activity is likely to be subdued in Europe as the U.S. bond market is closed for Columbus Day, they said, adding that the strong technical backdrop should moderate any weakness in corporate bonds.
Oil prices rose, with U.S. futures pushing back above $80 a barrel after briefly breaching that level on Friday for the first time since 2014. "Power concerns continue to offer support to the oil market," said ING's Warren Patterson, pointing to growing levels of gas-to-oil switching.
WTI investors seem to be confident of further gains, with managed money last week increasing their bets on rising prices to their largest position since July.
With China back from its public holiday, Beijing is pushing coal mines to increase output, but Patterson noted that heavy rains in Shanxi province have forced some mine closures. That could also feed through to oil prices.
European benchmark natural-gas prices were up 5% a megawatt hour, with the ascent of prices having slowed since Russian officials last week hinted at increased supply to Europe from November.
Despite that, prices still remain elevated, ING's Warren Patterson said. He pointed to the latest data from Gas Infrastructure Europe showing that gas storage in the continent is slightly more than 76% full at the moment, compared with a five-year average for this time of year of almost 91%.
LME three-month copper futures were up 1.4% at $9,483.50 a metric ton, with industrial metals moving higher across the board.
Those moves come as the U.S. dollar slips after U.S. job growth fell to the slowest pace of the year in September, with the Delta variant and worker shortages weighing on the economic recovery. A weaker dollar tends to make dollar-denominated commodities like copper less expensive for other currency holders.
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