MARKET WRAPS

Stocks:

European markets are broadly flat ahead of a meeting of oil cartel OPEC and its allies later Monday.

Global benchmark Brent crude wavered, retreating 0.4% before ticking up 0.2% as investors awaited a meeting Monday of OPEC members. Some traders are pricing in the possibility of a larger increase to production output, which would weigh on oil prices, according to analysts at Rystad Energy.

Investors are watching negotiations in Congress closely, as lawmakers debate the debt ceiling ahead of a deadline this month to raise it so the government can pay its bills.

Meanwhile, Democrats are considering scaling back the next spending package to improve its chances of being passed. The Biden administration is also set to unveil its China trade policy following a review of import tariffs.

"You've got a combination of uncertainty out of D.C., continued headlines out of China about Evergrande and against a backdrop where you've seen bond yields rise," said David Stubbs, global head of investment strategy at J.P. Morgan Private Bank. "This should all eventually be manageable but this is the problem with policy uncertainty, especially about the world's two largest economies."

Shares of China Evergrande and its property-management unit halted trading in Hong Kong on Monday. The subsidiary said it was pending an announcement about a possible takeover bid.

Another Chinese developer, Hopson Development, also halted its shares. It said this was pending an announcement about a transaction involving an unnamed Hong Kong-listed target company.

"While this could provide some shorter-term funding, markets are still going to question what the longer-term picture is for the company," said Kiran Ganesh, a multiasset strategist at UBS Asset Management.

Evergrande carries more than $300 billion of liabilities that investors think it is unlikely to pay.

Shares on the move:

Volvo Cars is completing plans for an initial public offering that may value the auto maker as much as $25 billion, The Wall Street Journal reported.

Data in focus:

Eurozone gross domestic product is likely to expand by 5% this year and by 4.3% in 2022, according to UniCredit. The Italian bank says activity is set to increase strongly in the third quarter of 2021, followed by slower growth at the turn of the year as the reopening boost fades and manufacturing output slows.

GDP will probably recover to its pre-pandemic level by year-end, UniCredit forecasts. Prospects for 2022 remain positive, supported by deployment of Next Generation EU funds, UniCredit's chief economist Erik Nielsen said.

Eurozone inflation will probably peak in November at close to 4%, before falling sharply over the course of next year, UniCredit forecasts.

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S&P Global Ratings Affirmed France's 'AA' rating with a stable outlook in a review on Friday, anticipating a GDP growth of 3.6% in 2022 after 6.2% in 2021, as the epidemiological situation improves and past reforms benefit employment growth, it said.

The ratings firm expects the withdrawal of one-off Covid-19 expenditure measures, along with cyclical recovery dynamics, to substantially reduce the budget deficit in 2022, but France's electoral calendar--with presidential elections coming up in spring 2022--pose a risk to S&P's projections, it says. The 10-year French government bond, or OAT, yield was trading 0.9 basis points lower at 0.119%, according to Tradeweb.

U.S. Markets:

U.S. stock futures edged down, as bond yields ticked up and investors weighed continued uncertainty about the debt ceiling and indebted property developer China Evergrande Group.

Tesla shares rose 1.7% in premarket trading after the auto maker reported record deliveries in the third quarter. Merck climbed more than 3%, suggesting an extension of Friday's gains into a second trading session, after the pharmaceutical company said its antiviral pill was effective against Covid-19 in a late-stage trial.

Forex:

The recent rally in the U.S. dollar "appears to have taken a pause," in line with a stabilization in U.S. Treasury yields, but lingering uncertainties could reignite risk aversion and lift the safe-haven currency back up, said UniCredit.

"Market signals remain quite mixed as risk aversion continues, and equities remain volatile," it said.

Monthly U.S. jobs data Friday are also expected to show further job creation in September. Investors will evaluate these not only in terms of the Federal Reserve's tapering plans but for indications on whether interest rates could start to rise in late 2022 rather than 2023, as some policymakers favor, the bank said.

MUFG Bank raised its year-end dollar forecast after the Fed recently indicated it was closer to reining in stimulus. It now expects EUR/USD to fall to 1.15, from 1.1620 at present, compared to its previous forecast of 1.20.

"The Fed is now planning a faster pace of policy normalization than we had previously expected," MUFG currency analyst Lee Hardman said. "The Fed has sent a clear signal that it will announce quantitative easing tapering plans 'soon' which most likely means at their next meeting on 3rd November."

The dollar's safe-haven status means it should also continue to benefit from the deteriorating global growth outlook as supply constraints are proving more persistent, Hardman said.

The Norwegian krone has scope to appreciate further as the Norges Bank is likely to follow September's interest rate rise with another increase in December, Commerzbank said, as EUR/NOK falls to a four-and-a-half-month low of 9.9793, according to FactSet.

Data on Friday showing Norway's unemployment rate fell further in September to 2.4%, which is more or less back at pre-pandemic levels, leave "little room for doubt" about a December rate rise, Commerzbank currency analyst You-Na Park-Heger said.

"If the economic data due at the end of the week (industrial production and monthly GDP for August) convince again, the krone might establish itself under the 10-mark against the euro for now."

Bonds:

The yield on the benchmark 10-year Treasury note ticked up to 1.482% Monday, from 1.464% on Friday.

An important consequence of an approaching tapering of asset purchases by the Fed in the Treasury market will be the reopening of relative value opportunities, said Morgan Stanley.

The back end of the yield curve, including the eight- to 10-year maturity bucket, as well as the 20- to 30-year maturity segment, "stand out as sectors in which relative value opportunities are increasing," said strategists Guneet Dhingra and Kelcie Gerson.

Unless there is a marked deterioration within Friday's U.S. payrolls report, this will likely be the catalyst to cement the November taper by the Federal Reserve, barring an exogenous or market shock, said Jim Reid, a strategist at Deutsche Bank.

Apart from that, investors will also increasingly focus on the U.S. debt-ceiling deadline, whilst Congress simultaneously grapples with the infrastructure bill and the reconciliation package, he said.

At its September meeting, the Fed signaled a planned start to tapering for November, and it also indicated that interest rates may start to rise during 2022.

UniCredit sees more room upward in U.S. Treasury yields than in eurozone government bond yields, with the expected increase in the former to be driven primarily by rising real rates.

UniCredit expects the upward momentum in eurozone government bond yields to slow as inflation compensation doesn't have much space left, said Michael Rottmann, head of fixed-income strategy.

"One of the most pressing questions after the quick increase in euro-area yields is whether European Central Bank rhetoric might heat up in the weeks ahead," he said.

Stabilizing risk sentiment could put German Bunds to the test in coming days, showing whether they remain supported, said Commerzbank's rates strategists. With the 10-year Bund yield trading below -0.20%, Commerzbank nonetheless still sees underlying safety bids lingering, strategists Rainer Guntermann and Hauke Siemssen said.

Greek government bonds could still benefit indirectly even if the European Central Bank decides not to buy them under the Asset Purchase Program once the Pandemic Emergency Purchase Program ends, Danske Bank said.

The ECB buys Greek government bonds under the PEPP with a waiver, despite the country's sub-investment-grade rating, but it doesn't buy them under the APP.

"To keep Greece in is politically difficult without the pandemic narrative ongoing," Piet Haines Christiansen, Danske Bank's chief strategist for ECB and EUR fixed income, said.

Plenty of ECB studies have shown that even bonds not included in the bond-buying programs indirectly benefit from the peers being bought, he says. The ECB will decide later whether to buy Greek bonds under the APP.

Commodities:

Oil prices were flat in early European trade. With Chinese markets closed for the public holiday, liquidity has been low in Asia.

Traders in Europe and the U.S. await clarity from OPEC+, which meets later, on whether it will stick to plans to relax production curbs by 400,000 barrels next month or go further in light of the rapid tightening in energy market supply initially caused by a supply crunch in the natural gas market.

A larger-than-planned production increase will likely put pressure on oil prices, said ING's Warren Patterson. He pointed to Chinese and European data showing that LNG imports are higher and inventories lower than at the same time last year.

Gold prices ticked lower, tracking rises in bond yields, which weaken the case for the precious metal. Speculative investors have continued to reduce their gold holdings as they get ready for the Federal Reserve's tapering, said TD Securities.

While gold's price action has been lackluster, the fact that investors have already offloaded a lot of their gold holdings suggests prices shouldn't drop much further, the bank said.

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10-04-21 0628ET