MARKET WRAPS

Stocks:

European stocks edged higher as rising crude prices boosted oil stocks.

"The energy sector unsurprisingly remains one of today's top performers, with companies like Total, BP and Shell still well-supported by bull traders, as most market operators continue to process the latest price surge in natural gas and crude oil," said ActivTrades analyst Pierre Veyret.

"Markets are likely to stay volatile this week and with no clear direction until there is significant progress on existing concerns," Veyret said.

Investors have confronted a raft of concerns including supply-chain snarls, a seven-year high in oil prices, and expectations that the Federal Reserve will begin to scale back stimulus to fight inflation. The declines have capped an almost uninterrupted rally for U.S. indexes that began in March last year. Investors are settling in for a more challenging period ahead.

"The equity markets today are worrying more about inflation, the possibility that we're going to then see higher rates, and the fact that that does undermine the very lofty levels that they have been trading at, " said Rob Carnell, head of research for Asia-Pacific at ING.

Shares on the move:

U.K. bakery-shop chain Greggs gained 4% after it reported higher third-quarter like-for-like sales versus the same period in 2019, despite disruption to staffing and supply chains, and said it expects to beat its full-year expectations.

Still, it said it expects costs to increase toward the end of 2021 and into 2022 due to inflation pressures. "The company remains understandably guarded on the outlook, with staffing and supply-chain disruption still rampant,"

Interactive Investor analyst Richard Hunter said. "At the same time, inflationary pressures are elevated, especially in food, though the fact that the group has been forward-buying has given it some short-term protection."

Data in focus:

Activity was still expanding at the end of the third quarter, but growth slowed sharply from July and August, the eurozone composite purchasing managers index suggests, Pantheon Macroeconomics said.

The eurozone composite PMI fell to 56.2 in September from 59.0 in August. Despite falling in August and September, the eurozone composite index averaged 58.5 in the third quarter as a whole, higher than 2Q's 56.8, when the economy expanded by 2.2% quarter-on-quarter, Pantheon Macroeconomics' senior Europe economist Melanie Debono said.

Pantheon forecasts a 2.5% to 3% on-quarter increase in eurozone GDP in 3Q. Eurozone GDP growth is bound to slow in 4Q, as demand cools and supply-side constraints continue to bite, Debono said.

The purchasing managers indexes are consistent with the eurozone's economic recovery losing some momentum as GDP approaches its pre-pandemic size and as supply shortages take their toll, especially in manufacturing, Capital Economics said.

Furthermore, the surveys provided more evidence that near-term price pressures are intensifying throughout the region, as supply chain difficulties persist and the costs of inputs, especially energy and labor, rise, Capital Economics senior Europe economist Jessica Hinds said.

"The PMIs suggest that the eurozone's services sector is also being affected, but that services firms are raising selling prices more slowly than their industrial counterparts," Hinds added.

A purchasing managers survey signaled that U.K. services-sector activity held up at strong levels in September, but severe supply constraints contributed to escalating inflationary pressures.

IHS Markit's services PMI stood at 55.4 in September, up from 55.0 in August. Despite the solid reading, survey respondents widely noted that shortages of staff, raw materials and transport had resulted in lost business opportunities over the month.

Rapid rises in fuel, energy and staff costs were passed on to customers, with prices for services accelerating at the fastest pace since the survey began in 1996, the report said.

"Many businesses report more frequent reviews of pricing due to escalating cost increases by suppliers," IHS Markit's economics director Tim Moore said.

U.S. Markets:

U.S. stock futures paused, a day after a selloff among some of America's biggest technology firms dragged down broader indexes, while investors also contended with surging energy prices.

Behind a big chunk of the recent declines: losses for some of America's biggest tech firms. Major tech stocks are especially sensitive to changes in bond yields, which affect the values that investors ascribe to far-off future profits.

Those falls took a breather early Tuesday. Facebook shares were up 1.3% in premarket trading, a day after an outage shut down its social media and messaging platforms. Facebook whistleblower Frances Haugen is set to testify before Congress on Tuesday.

Data on the U.S. trade deficit is due to be released at 8:30 a.m. ET. Economists expect the trade gap widened slightly in August after preliminary data showed exports hit record levels as the global economic recovery gathered pace and imports of consumer goods also rose.

Also in focus is a survey of service sector purchasing managers that is due at 10 a.m. ET. The Institute for Supply Management's survey is expected to show activity grew at a slower pace last month than in August amid consumer concerns about the Delta variant of Covid-19.

Forex:

The dollar recovered overnight, suggesting investors remain risk-averse and continue to favor safe havens, UniCredit said.

Meanwhile, markets are anticipating U.S. monthly jobs data Friday that is expected to show "much stronger" net job creation in September than in August.

"The dollar recovered some ground overnight, after the week began with the greenback loosening its grip somewhat, suggesting that markets remain nervous at present," it said.

The euro has weakened recently against the dollar, but should pick up towards $1.18 by the end of the year as risk appetite returns and the eurozone's growth outlook improves, Nordine Naam, currency and EM strategist at Natixis, told Dow Jones Newswires in an interview.

The dollar is currently supported by safe-haven demand due to falls on equity markets, stagflation concerns and higher bond yields. Risk appetite should return later in the year, however, lifting the euro, he said.

The eurozone's recovery should also be stronger than that of the U.S. due to widespread Covid vaccination rates, which hasn't been the case in a number of U.S. states. "We are more confident in eurozone growth next year," he said.

The pound doesn't seem to be factoring in any meaningful risk of renewed trade tensions with the EU, ING said.

The U.K.'s Brexit minister David Frost has reportedly drawn up proposals to permanently replace the Northern Protocol of the Brexit deal, which could create new frictions with the EU, ING analysts said.

"Our short-term fair value model indicates there is currently no risk-premium in EUR/GBP: over the past few years, Brexit-related risks have caused multiple overvaluation spikes (between 2% and 6%) in the pair."

EUR/GBP falls 0.3% to a two-and-a-half-week-low of 0.8512, according to FactSet.

Bonds:

BlackRock Investment Institute sees the recent spike in U.S. Treasury yields as resolving a disconnect between the economic restart and low yield levels, and not reflecting a "hawkish" pivot by central banks, it said.

While the recent rise in UST yields has spooked investors, BlackRock says not all yield rises are the same. "Yields driven up by rising policy rate expectations may harm equity valuations," BlackRock said.

"We see the recent yield spike as partially correcting the disconnect between the powerful restart and falling yields that had led to an overly compressed term premium," it said.

This should be considered as a more benign adjustment, BlackRock said, viewing continuing negative real yields and the broadening restart as supporting risk assets.

Spreads of eurozone noncore government bonds continue to benefit from the European Central Bank's very accommodative monetary policy and this is expected to remain so in the near term, keeping spreads at low levels in the coming months, Florian Spaete, senior bond strategist at Generali Investments, said.

"Looking into next year, this support will weaken, and spreads are likely to widen," he said. For now, given disbursements of the EU's Recovery Fund, foreign investors' confidence remains solid and bonds of noncore countries remain well bid, he said.

French OATs, however, may underperform in the coming months amid the campaign leading up to next year's presidential election, he said.

An anticipated decline in long- and ultra-long government bond issuance by Italy in the remainder of the year supports J.P.Morgan's view that the Italian bond curve will flatten, strategists Aditya Chordia and Elisabetta Ferrara said.

With that in mind, JPM affirms its expectations of 10-30-year Italian bond curve flattening, with the view "driven on search-for-yield dynamics pushing investor down the curve," the strategists said.

JPM sees low probability of long-end Italian government bond, or BTP, syndication in 4Q, "thus reducing supply pressure in the long-end and supporting our flattening view," Chordia and Ferrara said.

The 10-30-year BTP spread is around 97 basis points, according to Tradeweb, compared with a 86 to 100 basis point year-to-date range, with JPM targeting levels close to year-to-date lows.

Commodities:

Oil prices edged further into multi-year highs following the decision by OPEC+ to stick to its pre-existing plan to raise oil production by only 400,000 barrels a day in November.

That came despite the continuing gas crisis, with both Goldman Sachs and Saudi Aramco forecasting gas-to-oil switching for power generation in the hundreds of thousands of barrels in recent days.

OPEC's policy, high gas and coal prices and headlines of a winter energy crisis, "could potentially trigger FOMO-buying that pushes oil prices even higher," said DNB Markets's Helge Andre Martinsen.

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10-05-21 0634ET