EMEA Morning Briefing: Stocks to Pull back After S&P 500, Dow Notch Closing Records



Watch For:

Germany GfK consumer climate survey; Monetary developments in the euro area; U.K. Chancellor Rishi Sunak’s Autumn Budget and Spending Review; updates from Iberdrola, Banco Santander, Deutsche Bank, Puma, BASF, Sodexo, Telecom Italia, Unicredit, Vivendi, L’Oreal, GlaxoSmithKline. Electrolux, Equinor, Fresnillo, Heineken.

Opening Call:

European stocks could open lower, tracking most of Asian markets. Yen strengthens, while the dollar is lower in early Asia trade. Portuguese budget vote could weigh on government bonds. Oil edges lower and metals fall.


European stocks are set to pull back at the open Wednesday after S&P 500 and Dow Jones Industrial Average cruised to another pair of closing records Tuesday after solid earnings and upbeat consumer data gave investors a fresh dose of economic optimism.

Earnings season so far has beaten investors’ expectations and helped lift stocks out of a September slump.

Investors have been buoyed by strong earnings from major banks, consumer companies and manufacturers. Jitters about the labor market and inflation have somewhat given way to optimism about a recovering economy.

Consumer confidence also rose last month, halting a three-month decline, according to the Conference Board. The latest home-sales figures from the Commerce Department highlighted an increase in purchases across the country, topping analysts’ projections.

“Covid numbers have crested, the economic data has been pretty good, and the early read on third-quarter earnings is positive,” said David Donabedian, chief investment officer at CIBC Private Wealth. “The bottom line is this is still a buy-the-dips market.”

Now investors are turning their attention to the tech industry. Microsoft, Twitter, Google parent Alphabet and Robinhood Markets all reported results after markets closed. Microsoft and Twitter shares edged higher in after-hours trading, while Alphabet and Robinhood slipped.

European budget retailers can still cash in on rising prices despite cost hikes, said J.P. Morgan Cazenove, upgrading its recommendation on B&M European Value Retail to over-weight from neutral.

The overall number of non-food discount retail stores across Europe could double by 2029 and JPM expects discounters that it covers to increase revenue in double digits on a compound annual basis until 2023.

“While the market is concerned about the ability of value retailers to pass on higher fresh and raw materials/product cost to customers, we believe that–short-term gross-margin pressure aside–most value retailers under our coverage could ultimately benefit from a downtrading to value in times of consumer inflationary pressure,” JPM analysts said.


JPY strengthens against most G-10 and Asian currencies, as concerns over Chinese property developers’ debt woes support the safe-haven allure of the yen. Chinese authorities have reportedly told China Evergrande Group’s billionaire boss Hui Ka Yan to use his personal wealth to pay off the company’s massive debt, Phillip Securities Research said.

This demand comes as the property giant’s woes have spread to other developers, souring sentiment in China’s real estate market, the brokerage said.

The WSJ Dollar Index edged lower in early Asia trade. “The dollar’s been a bit of a mixed bag,” Silicon Valley Bank senior FX trader Minh Trang told WSJ. He said focus this week has been on earnings, with tech earnings creating optimism and “you’re seeing more of a risk-on sentiment.”

But there hasn’t been much economic news or dollar movement. “Third-quarter GDP is coming up, and the expectation there is that there will be a slowdown in economic growth from 2Q,” but that’s baked into expectations, he said.

The European Central Bank is likely to lean against expectations for interest-rate rises at Thursday’s policy meeting, sending the euro lower, Evercore ISI said. The market has “run ahead of itself” by pulling forward its expectations for the first rate rise to early 2023 with the possibility of a move in 2022, Evercore vice chairman Krishna Guha said.

“And, with some investors tactically positioned for an ECB pivot hawkish, we expect the meeting to come across dovish with rate hikes pushed back a bit and the euro lower.”

The current low cost of options that protect against big swings in the euro versus sterling–demonstrated by low levels of implied volatility–presents an attractive opportunity to bet on large moves, said Macro Hive chief executive Bilal Hafeez.

EUR/GBP could move sharply in either direction as there’s speculation the Bank of England could raise interest rates before year-end. The eurozone economy remains weak but at the same time U.K. growth is struggling, which “complicates the picture,” he said.

Macro Hive recommends buying a three-month EUR/GBP straddle, purchasing both a put and a call option at 0.85. This option would make a profit if the pair rises above 0.8704 or falls below 0.8296, he said. Puts bet on a price falling and calls expect it to rise.

The Turkish lira recovered after President Recep Tayyip Erdogan backed down from his threat to expel 10 Western ambassadors but that is only likely to provide the currency temporary relief, BDSwiss analyst Marshall Gittler said.

“One suspects that it’s only a matter of time before the next crisis occurs and USD/TRY breaks the record [highs] set on Monday,” he said. Erdogan said at the weekend that he had ordered 10 Western ambassadors to be declared persona non grata for seeking the release of jailed philanthropist Osman Kaval but he later backpedalled by saying the envoys could remain in Turkey.


Goldman Sachs forecasts year-on-year core PCE inflation of 4.3% at year-end, 3.0% in June 2022, and 2.15% in December 2022, compared to previous expectation of 4.25%, 2.7% and 2.0%, respectively.

“This slower resolution of supply constraints means that year-on-year inflation will be higher in the immediate aftermath of tapering than we had previously expected,” GS said. “This higher-for-longer path increases the risk of an earlier hike in 2022.”

Nevertheless, Goldman Sachs is already seeing signs that the bottlenecks are easing and notes that Delta-driven lockdowns in key manufacturing countries are loosening up which should improve automotive chip supply and US vehicle production in 4Q.

Wednesday’s vote in Portugal on the 2022 budget is a risk event for Portuguese bonds, said Citi’s rates strategist Aman Bansal. As a result the 10-year Portuguese-German government-bond yield spread looks to be stuck above 50 basis points, he said.

Portugal’s Prime Minister Antonio Costa’s minority government needs a simple majority to pass his budget. Without this, the President will dissolve parliament and call a snap election two years ahead of time, Bansal said.

Citi sees the risk of a snap election as relatively low, however. “We see more likely that Costa acquiesces to some of left wing demands, saving the government,” Bansal said, adding that this would result in a higher deficit target for 2022.

U.K. government bonds are unlikely to react much to economic data releases before the Bank of England’s next policy meeting on Nov. 4, said JPMorgan.

“Market sensitivity to data flow has declined substantially and will likely persist until we see the BoE delivery at the November meeting,” analysts at the bank said.

Investors have tepidly bought back gilts after last week’s selloff, driving yields lower, in reaction to comments by rate-setter Silvana Tenreyro Monday, suggesting the BOE should wait before raising interest rates as inflation pressure may ease.


Oil declined in Asian trading, pulling back from overnight gains that were supported by expectations for global supplies to remain tight. Investors will likely keep a close watch on upcoming talks between Iran and the European Union, which could eventually help revive a Iran nuclear deal, ANZ said.

This comes ahead of a meeting of the OPEC+ alliance, where members will discuss whether to increase output by more than scheduled under the current supply agreement, the bank said.


Gold inched lower in early Asian trade, as a positive earnings season in the U.S. helps to boost risk appetite across markets, ANZ said. The bank, however, expects U.S. inflation concerns will become more persistent, which could in…


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