MARKET WRAPS
Watch For:
Germany foreign trade; Bank of England Quarterly Bulletin; U.S. Employment Report. Updates from Repsol, Givaudan.
Opening Call:
Stocks should open higher after positive sessions on Wall Street and Asia after a debt-limit extension deal. Dollar stengthens slightly. Oil gains and gold is little changed.
Equities:
European stocks are set to continue to advance Friday after major U.S. stock indexes rose Thursday after Senate Majority Leader Chuck Schumer said lawmakers had reached a deal on a short-term debt-limit extension, potentially putting off a government default standoff for a couple of months.
Stocks in rallied following Sen. Schumer’s remarks from the Senate floor before closing below their session highs. While the Senate must still vote on the deal, investors appeared ready to remove the debt ceiling as an obstacle to further gains. Shares of technology companies, energy firms and others were up.
“Right now, there are loads of fears out there. It just takes a couple of positive developments and suddenly that picture changes,” said Lewis Grant, an equities portfolio manager at Federated Hermes.
Thursday’s gains put stocks on firm footing for the week. All three major benchmarks are up at least 0.6% over the past four trading days. That marks a full recovery from Monday losses, when a selloff in Facebook stock and shares of other big technology companies rippled through the market.
“A temporary deal should help reduce debt-ceiling related market volatility over the next few weeks as attention shifts toward December,” said Mark Haefele, chief investment officer at UBS Global Wealth Management, in a note to clients.
Investors will now turn their attention to today’s nonfarm payrolls report for September from the U.S. Labor Department. Economists, on average, are estimating that 500,000 jobs were created last month, with the unemployment rate falling to 5.1% from 5.2%.
In equities, iron-ore prices might be retreating, but for BHP, a surge in coal prices has given the world’s No. 1 miner a new earnings driver, said Macquarie.
Metallurgical coal prices have more than doubled since midyear, underpinned by a shortage of the steelmaking fuel in China, to levels that would have seemed implausible only a few months ago, said the bank.
“Buoyant coking coal prices have enabled BHP to maintain earnings upgrade momentum despite the recent volatility in iron-ore prices,” it said. The bank reckons BHP’s metallurgical coal business could account for as much as 24% of Ebitda in fiscal 2022, from roughly 11% over the past five years.
Forex:
The U.S. dollar was slightly stronger against the euro and firms 0.2% against the yen after Senate Majority Leader Chuck Schumer said earlier today Democrats and Republicans had reached a short-term debt-ceiling agreement. The WSJ Dollar Index fell slightly.
“I think that the market has become less sensitive to debt ceiling conversations,” Jeff Grills, head of emerging market debt at Aegon Asset Management, told WSJ. “You would’ve gotten a reaction,” if something adverse had happened, he added.
The recent rise in rates is allowing the dollar to appreciate against most currencies, Grills said. Emerging-market currencies have underperformed this year, although oil-exporting currencies have been able to buck the trend, he said.
—
Sterling should trade close to its current level versus the dollar in coming months as investors weigh the prospect of a U.K. interest rate rise against headwinds facing the economy, BMO Capital Markets said.
“With the Bank of England likely to join other early central bank movers on rate hikes, we look for GBP/USD to trade at 1.36 in three months,” BMO forex strategists said.
However, the U.K. economy is vulnerable to rate rises while inflation above the BOE’s 2% target could negatively impact the nation’s fiscal position and balance of payments, they said.
Simmering U.K.-EU tensions could also limit sterling’s appreciation, they said.
—
The European Central Bank appears to be more focused on dampening higher bond yields than controlling inflation and that could have negative implications for the euro, BMO Capital Markets said.
The ECB is reportedly studying a new bond buying program for when the pandemic scheme ends in March while ECB member Yannis Stournaras said investors shouldn’t expect premature interest rate rises, Bloomberg reported.
If that is an indication of where monetary policy is headed, the ECB is “effectively putting a higher short-term priority on the stability of the bond market over the mitigation of upside risks to inflation or inflation expectations,” BMO forex strategists said. This presents risks as investors aren’t certain of the ECB’s true inflation tolerance limit, they said.
Bonds:
U.S. government debt yields edged up Thursday, with the 10- and 30-year rates hitting their highest levels since June, as stocks advanced on a temporary debt-limit fix by Congress and a drop in weekly jobless benefit claims.
Energy:
Oil was higher in early Asian trade after the U.S. Department of Energy rebuffed claims that the country was ready to release its strategic reserves of oil, ANZ said.
“This saw the market’s focus return to stronger demand amid the energy crisis,” the bank said, adding that “an acceleration in gas-to-oil switching could boost crude oil demand used to generate power this coming northern hemisphere winter.”
—
U.S. coal demand could be up more than 20% in 2021, according to Jefferies. U.S. thermal-coal markets are booming, thanks to strong demand from utilities and an increase in exports, with high natural-gas prices adding fuel to the fire, it said.
“Miners have been unable to meet demand, and inventories at utilities are falling as a result,” said Jefferies.
The bank raises its U.S. thermal-coal price forecasts by as much as 24% for 2022, although it keeps its hold ratings on pure-play producers of the fuel. “We believe most of this ‘good news’ is already priced” into U.S. mining shares, it said.
Metals:
Gold was little changed in early Asian trade, after declining overnight on some pressure from a slight rise in U.S. Treasury yields.
Investors will likely focus on upcoming U.S. employment data, Oanda said. Gold may head south on a firm U.S. payrolls and potentially test $1,720.00, but weak payrolls data could spur a gold rally through $1,780.00 to $1,800.00, Oanda said.
—
Aluminum was higher as production disruptions continue amid China’s energy shortage, Commonwealth Bank of Australia said. China’s power crunch is leading to high energy prices and electricity rationing, which could crimp production of the metal, it said.
Base metals have also found support from the resolution of the U.S. debt ceiling and Russia offering to ease Europe’s energy crunch as these could support economic activity, CBA added. The three-month LME aluminum contract was 1.4% higher at $2,987.0 a ton.
—
Energy shortages are the most critical risk facing global demand for metals, according to Jefferies. As demand and prices for the likes of natural gas and coal surge, manufacturers are slowing production and putting the post-pandemic recovery at risk.
“While these conditions are clearly unsustainable, and prices may be at/near peak now, the immediate problem is that a cold winter in China and elsewhere in the Northern Hemisphere could be the straw that breaks the camel’s back,” said Jefferies, which views power rationing as having become a threat to global growth.
TODAY’S TOP HEADLINES
Debt-Limit Bill Passes Senate, Heads to House
WASHINGTON-The Senate voted along party lines Thursday to raise the U.S. borrowing limit into December, after Democrats struck a short-term agreement with Republican leaders that averted a looming default for now but sets up another showdown within months.
The key moment came earlier in the evening, when 11 Republicans joined all 50 Democrats in a vote to break the 60-vote filibuster threshold and proceed to final passage of the measure, which cleared the Senate 50 to 48, with two Republican absences.
China Services Activity Rebounded in September
A private gauge of China’s services sector rebounded strongly in September after slipping into contraction in August as the latest wave of coronavirus infections hit close-contact services and consumption demand.
The Caixin China services purchasing managers index rose to 53.4 from 46.7 in August, Caixin Media Co. and research company IHS Markit said Friday.
RBA Sees Financial Stability Risks From Record-Low Rates, Housing Boom
SYDNEY-Record low interest rates have contributed to higher house prices, creating the potential for excessive borrowing, the Reserve Bank of Australia said Friday in a report card on the stability of the country’s financial sector.
“Low interest rates have contributed to high prices for financial assets and housing. There has been some increased risk-taking and higher borrowing,” the RBA said.
Natural-Gas Shortage Sets Off Scramble Ahead of Winter
Myrina, a tanker chartered by Royal Dutch Shell PLC, set sail to Asia from the west coast of France last month carrying liquefied natural gas. When it was about to enter the Strait of Gibraltar, the captain received a call, according to people familiar with the matter.
“We have to go to Rotterdam now,” his boss in London told him, according to one of the people. The ship made a U-turn and backtracked up the coast of Spain and France to drop off part of its cargo at the Dutch port. On Thursday, it arrived in Bilbao, Spain, to deliver the rest of its load.
Ireland Signs On to Global Deal Seeking to Curb Tax Avoidance
A global agreement to set a minimum 15% corporate tax rate cleared its last major hurdle Thursday after Ireland, a low-tax country that is the European headquarters for some of the largest U.S. tech companies, said it would join the overhaul effort.
(MORE TO FOLLOW) Dow Jones Newswires
10-08-21 0017ET