MARKET WRAPS
Watch For:
Eurozone, Germany, France, U.K. Flash PMI; updates from
Mediaset, Berkeley, Babcock, NN Group, ASML, Provident
Financial
Opening Call:
The Fed's reassurance on inflation should buoy European stocks
this morning. In Asia, most shares rallied, while the dollar and
gold also gained. Oil was mixed, with Brent a touch firmer but
still below $75 and Treasury yields eased further lower.
Equities:
European equities should open higher on Wednesday, but may
struggle for solid gains, despite reassuring comments on inflation
from Jerome Powell.
The Federal Reserve Chairman said it's highly unlikely that
inflation will rise to levels seen in the 1970s but acknowledged
significant uncertainty as the economy reopens.
While the Fed anticipated that the end of the pandemic would
temporarily push up inflation this year, Mr. Powell said on Capitol
Hill that the increases in prices have been larger than central
bankers had expected and may prove more persistent. But he
underscored his view that shortages-including of used cars,
computer chips and workers-will fade over time, bringing inflation
closer to the Fed's 2% long-run target.
"If you look behind the headline and look at the categories
where these prices are really going up, you'll see that it tends to
be areas that are directly affected by the reopening," Mr. Powell
said in a hearing before a House subcommittee. "That's something
that we'll go through over a period. It will then be over. And it
should not leave much of a mark on the ongoing inflation
process."
Asian stock markets mostly rallied on Wednesday, following Wall
Street higher. Nasdaq closed at a record high, lifted by Big Tech,
as investors put their money in growth stocks. Other sectors had a
good day too, though, after two Fed members made comments that
reassured that interest rates will remain low-at least for now.
Stocks to Watch: It's catchup time for BHP's shares, said Morgan
Stanley, with the bank upgrading the miner's London-listed stock to
overweight from equalweight and its price target to GBP23.60 from
GBP21.10. That brings its view on BHP's U.K. shares in line with
its outlook for BHP's Australian stock.
The "merits of BHP's low-cost assets, strong free cash-flow
generation, oil-and-gas exposure, and capital-returns prospects
remain underappreciated," said Morgan Stanley.
BHP's London shares are implying a long-term iron-ore price of
$71/ton versus spot at $207/ton, it added. Plus, Morgan Stanley
reckons a partnership on BHP's Jansen potash project, which is
still being evaluated, could reduce project risk, and ongoing work
to jettison its thermal-coal assets could materially improve its
ESG credentials.
Forex:
The dollar was a touch firmer in Asia, steadying after a two-day
drop, as Jerome Powell played down the threat of surging inflation.
He also said that no currency could compete with the dollar's
reserve status.
MUFG said the currency may have scope to rise further in the
near term, although these gains won't last. "We still do not
believe this will mark a turning point and maintain that the dollar
will remain on a weak footing in the second half of the year," the
bank said, referring to the Fed's hawkish shift last week.
Although MUFG was "as surprised as the rest of the market" that
the Fed "shifted so markedly," it still expects the central bank
will "move cautiously to end QE."
Meantime, Pictet Wealth Management has cut its three-month
projection for EUR/USD to $1.17, from $1.21 previously, on the view
that short-term interest-rate and growth differentials will support
the dollar. Pictet has left its six-month projection unchanged at
$1.24, compared with a current EUR/USD rate of 1.1904.
In the medium term, Pictet expects the Fed will remain content
to stay behind the curve. Coupled with a narrowing of the U.S.'s
economic performance relative to the rest of the developed world,
this should weigh on the dollar.
Elsewhere, sterling is BNP Paribas's top pick among G10
currencies as markets start to anticipate a move by the Bank of
England to pull away from monetary stimulus.
"We expect earlier and more aggressive BOE policy tightening to
be priced into the GBP," analysts at BNP Paribas said. It has
forecast the currency at $1.40 against the dollar in the third
quarter, compared with the current rate of $1.3884. The BOE
announces its decision on Thursday.
Bonds:
Treasury yields continued to fall in Asia, extending Tuesday's
retreat, as Jerome Powell reaffirmed the go-slow approach to
peeling back easy money.
Short-dated rates saw their biggest climb in three months as
Powell said the central bank had to be patient and "very humble"
about its ability to draw signals out of pandemic-era economic data
given "such an unusual setting of reopening the economy."
Cleveland Fed President Loretta Mester, also speaking Tuesday,
said she didn't want to adjust the central bank's easy monetary
policy stance until the labor market made more progress over the
summer.
San Francisco Fed President Mary Daly also pointed to the fall
as a goal post, saying the economy was getting to the "substantial
further progress" benchmark more quickly than she had thought at
the start of the year.
"Day four post FOMC produced the first noticeable decline in
2-year and 3-year yields as portfolio managers gradually think
about valuations rather than panic trade," wrote Jim Vogel, a rates
strategist at FHN Financial.
The addition of EU bonds to benchmark euro government bond
indices would be a game changer for demand for the issuer's bonds
and flow in them, said Mizuho's rates strategist Peter
McCallum.
"Index providers may find it difficult to omit once it's the
fifth larger euro market in a couple of years' time, but while it
may trade like an EGB [eurozone government bond], it will still
very much be a supranational issuer structurally," he said.
He added that indices whose name or criteria revolves around
government bonds are unlikely to include the EU without undergoing
a rebranding, but for now it seems more likely to become its own
category amongst ETFs.
Energy:
Oil futures were mixed in Asia, with Brent nudging higher but
still below $75.
ANZ said oil may be supported in the near term on improving air
travel demand, thanks to progress in global Covid-19 vaccination
rollouts. The number of people passing through TSA checkpoints at
U.S. airports hit 2.1 million in recent days, the highest level
since the start of the pandemic.
Late Tuesday, the American Petroleum Institute reported
inventories of crude oil in the U.S. fell by 7.2 million barrels in
the latest week, according to a source, while gasoline supplies
rose by 959,000 barrels. The mostly bullish results were released
ahead of official inventories data from the Department of Energy
due later Wednesday.
Average forecasts in a WSJ survey indicate the DOE report will
show crude supplies fell by 4.1 million barrels and that gasoline
supplies rose by 800,000 barrels.
Metals:
Gold prices inched higher but OCBC said the precious metal may
break the crucial support at $1,770 this week if there is more
hawkish rhetoric from Fed officials in the coming days.
Jefferies said more sales of China's strategic reserves of
metals such as copper are highly likely and, combined with seasonal
market weakness, should put a lid on metals prices in the very near
term. But looking more than three months out, the bank expects the
rally to resume and reach new highs.
"The longer-term positive fundamental outlook for these base
metals is based on a combination of global cyclical demand growth
following a deep recession in 1H20, secular demand growth due to
the green energy transition, and major supply constraints," said
Jefferies. That outlook hasn't changed and consequently prices
should recover from recent weakness, even if they fall a little
further first.
TODAY'S TOP HEADLINES
Fed's Powell Plays Down Inflation Threat
WASHINGTON-Federal Reserve Chairman Jerome Powell said it's
highly unlikely that inflation will rise to levels seen in the
1970s but acknowledged significant uncertainty as the economy
reopens.
While the Fed anticipated that the end of the pandemic would
temporarily push up inflation this year, Mr. Powell said Tuesday on
Capitol Hill that the increases in prices have been larger than
central bankers had expected and may prove more persistent. But he
underscored his view that shortages-including of used cars,
computer chips and workers-will fade over time, bringing inflation
closer to the Fed's 2% long-run target.
Fed Officials Stress Bond Buying Isn't Aimed at Boosting Housing
Market
Federal Reserve Bank of New York President John Williams said
central bank bond buying is designed to help create widespread easy
credit conditions and isn't directly targeted at supporting the
housing market.
Mr. Williams, in a Bloomberg television interview Tuesday, was
responding to a question about whether the central bank may want to
rethink its $40 billion a month of mortgage bond purchases. This
buying, which is joined with $80 billion a month in Treasury
buying, is coming at a time of strength in the housing market,
which has caused some to question whether the central bank should
still offer such aid.
Daly Says It Is Critical for Fed to Understand Risks of Climate
Change
Federal Reserve Bank of San Francisco leader Mary Daly said
climate change has the potential to reshape the economy and because
of that, the issue is becoming a part of how central bankers need
to think about their monetary policy choices.
Climate change is on a path to bring "economic upheaval,
boosting innovation, output, and jobs in green sectors, while
reducing them in carbon-intensive ones," Ms. Daly said in a virtual
appearance.
Earnings Bonanza Could Dwarf Fed Worries
Investors rarely think of Federal Reserve tightening as a good
thing. But the reasons the Fed tightens can be great for corporate
earnings.
When Fed policy makers last week indicated they expected to
start raising rates in 2023-earlier than they had earlier
projected-markets had a bit of a fit. What had become of the Fed's
plan to look through transitory inflation, or its bid to see just
how low unemployment could go?
Why There Is No 'Taper Tantrum' This Time Around
The taper tantrum has become taper tranquility.
When Federal Reserve officials started talking about pulling
back on the central bank's easy-money policies back in 2013,
anxious investors sent markets into a tizzy. Yields on Treasury
bonds rose, emerging-markets stocks tumbled, junk bond prices fell
and stock volatility jumped, all in what came to be known as a
market "taper tantrum" that preoccupied the Fed for months and
played a role in delaying its plans.
Infrastructure Talks Focus on How to Pay for Bipartisan
Package
WASHINGTON-Lawmakers and the White House searched for ways to
finance a roughly $1 trillion infrastructure proposal without
raising the gas tax or placing fees on electric vehicles, debating
how much new revenue the Internal Revenue Service could generate
with enhanced enforcement efforts.
The infrastructure proposal, which includes $579 billion in
spending above expected federal levels and would total $973 billion
over five years, has won the backing of 11 Republican senators and
10 members of the Senate Democratic caucus. A group of 10 of the
lawmakers met repeatedly Tuesday with top White House officials as
the group aimed to prepare a plan for public release, with talks
set to continue.
Delta Covid-19 Variant Could Be Dominant in U.S. in Two to Three
Weeks, Study Says
The highly transmissible Delta variant of the Covid-19 virus is
spreading so rapidly in the U.S. that it could become the dominant
strain in the next two to three weeks, researchers said, adding
urgency to the nationwide vaccination drive.
The Delta strain, which first emerged in India in late 2020 and
is also known as B.1.617.2, will probably make up 50% of Covid-19
infections in the U.S. by early to mid-July, said William Lee, vice
president of science at population genomics company Helix and an
author of the new analysis.
France's Macron Pushes Controls on Religion to Pressure
Mosques
PARIS-President Emmanuel Macron is redrawing the line that
separates religion and state, in a battle to force Islamic
organizations into the mold of French secularism.
In recent months, his administration has ousted the leadership
of a mosque after temporarily closing it and poring over its
finances. Another mosque gave up millions in subsidies after the
government pressured local officials over the funding. A dozen
other mosques have faced orders to close temporarily for safety or
fire-code violations.
Write to paul.larkins@dowjones.com
Expected Major Events for Wednesday
06:00/NOR: Apr POSTPONED: Labour force survey SA, incl
unemployment
07:15/FRA: Jun France Flash PMI
07:30/GER: Jun Germany Flash PMI
08:00/EU: Jun Eurozone Flash PMI
08:30/UK: Mar Card Spending statistics
08:30/UK: Jun Flash UK PMI
09:00/MLT: May RPI
10:00/IRL: 1Q Labour Force Survey
10:00/IRL: May Monthly Unemployment
12:30/CZE: Czech interest rate decision
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(END) Dow Jones Newswires
June 23, 2021 00:33 ET (04:33 GMT)
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