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EUROPEAN MIDDAY BRIEFING : Stocks Rebound But Evergrande Fears Remain

09/21/2021 | 06:23am EDT

MARKET WRAPS

Stocks:

European shares recovered some equilibrium Tuesday, following the previous session's heavy losses.

Investors fretted in the last trading session over the implications of the potential failure of China Evergrande-the world's most indebted property developer.

Fears over what could come out of the looming collapse of Evergrande continue to make markets uneasy, but investors will have to wait until Wednesday, when Chinese exchanges come back online, to see the next major update.

"Even if the Evergrande case has sparked a wave of market fear, especially with traders worried that the consequences could spread to other countries, most investors now seem confident the PBoC will keep on providing support and inject cash to mitigate the global risk," ActivTrades analyst Pierre Veyret said. "Investors are still looking towards the Fed, anticipating a new tapering groundwork."

Investors are closely watching the Federal for clues as to how and when the central bank will begin slowing, or tapering, its Covid-19 pandemic-era program of monthly asset purchases, which add liquidity to markets.

Indications that a taper will come sooner rather than later could cause markets to wobble even more in the current environment, as broader fears persist.

"The market rout we're seeing is reflecting a wider set of risks than just Chinese property, and comes after increasing questions have been asked about whether current valuations could still be justified, with talk of a potential correction picking up," said Jim Reid, a strategist at Deutsche Bank.

Airlines, miners and oil stocks were among the biggest pan-European risers Tuesday.

Shares on the move:

Shares of Vivendi fell 13% after the spin-off and listing of Universal Music Group, for years its crown jewel that accounted for the lion's share of revenue growth.

Vivendi distributed a 59.87% stake in Universal as a special dividend to shareholders, leaving it with a 10.13% holding in the record label. The distribution will leave Vivendi with pay-TV business Canal+ Group, ad-holding firm Havas and publishing company Editis as its main businesses.

---

Shares in Stagecoach jumped more than 20% after the bus company said it was in talks about an all-share takeover by rival National Express. Its shares also rose 8.2%.

Competition authorities might have something to say about the two public-transport operators coming together, but otherwise the deal looks fairly sensible, AJ Bell said. "A key factor to consider is whether someone else might fancy owning Stagecoach, such as an overseas transport operator. It's not an easy feat to build up a large position in the U.K. public-transport market and Stagecoach now has 8,400 buses and coaches," Bell's investment director Russ Mould said.

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Sixt stock extended its advance, rising another 2.2% after Monday's 7% gain. This after the German car-rental company had raised its forecast for the current year as the development of the summer vacation in Europe and the U.S. was better than it had initially planned for.

Third-quarter revenue at the German car-rental company is expected at EUR741 million, M.M. Warburg said, which would mark a 60% increase compared with 2020 but would still be slightly lower than the same quarter in 2019. There could be further upside to 2021 estimates, however, and the recent lifting of U.S. restrictions on vaccinated travelers from Europe could further support Sixt's fourth-quarter performance.

U.S. Markets:

Wall Street was set for a cautious recovery, in line with global stocks that rose, with Wednesday's Fed announcement seen as key.

"We are at a pivot point: we are moving away from maximum policy accommodation and at the same time the V-shaped recovery is over and it poses some real questions about what is next," said David Donabedian, chief investment officer at CIBC Private Wealth. "We have had a great run but it is going to get tougher from here, with lower returns and more volatility."

Forex:

EUR/USD was largely flat, having fallen to a four-week low of 1.1701 on Monday, with the prospect the Fed will taper asset purchases in coming months having boosted the dollar recently.

Carlo Alberto De Casa, market analyst at Kinesis, said the European Central Bank's own "small tapering" has limited the euro falls. The ECB said earlier this month that pandemic-related asset purchases would continue at a moderately lower pace. This "is in some way helping the euro," De Casa said.

The Swedish krona edged lower, cutting earlier gains, after the Riksbank kept interest rates at zero percent and said it expects to keep rates at that level for the entire forecast period until the third quarter of 2024. However, moves were limited as most analysts had expected this, although they had said there was a small possibility of the Riksbank adding a rate increase into its rate-path forecast following recent strong inflation data for August.

The Riksbank revised up its inflation forecast, with inflation expected to be higher than 2% in the coming year before falling back later. It will continue to purchase securities in 2021 and forecasts that the holdings will be "more or less unchanged in 2022."

Bonds:

JPMorgan remains constructive on intra-eurozone government bond spreads.

"We remain convinced that for intra-EMU spreads the path of least resistance over the coming weeks is towards tighter spreads given our expectation of intensifying search-for-yield dynamics in a low volatility environment in the near-term," said strategists Aditya Chordia and Elisabetta Ferrara.

Near-term positive spread catalysts include favorable supply versus ECB purchase dynamics for the remainder of 2021, limited political noise over the next one to two months and still light investor positioning in intra-eurozone.

The JPMorgan strategists remain "broadly constructive" on Greece, and expect the country to come to the bond market one more time this year, likely with a syndicated tap for around EUR2 billion in the fourth quarter.

Their view is fuelled by attractive valuations, favorable supply versus ECB purchase dynamics, constructive macro outlook and stable political landscape. Even after the recent relative outperformance, the 10-year Greek-German spread trades around 15 basis points away from the tight levels reached over the summer, the strategists said, expecting it to return to these levels over coming weeks.

Rates markets are expected to give a relatively muted response to the coming German elections, TD Securities said.

"Recent polling suggests that markets are well-prepared to see a transformation within the German government, with the SPD [Social Democratic Party] polling ahead of the CDU/CSU [Christian Democratic Union/Christian Social Union]," TD Securities said.

The reaction of bond markets has been close to muted to incoming polls. A government led by SPD chancellor candidate Olaf Scholz is likely to experience the continuation of the current fiscal policy, TD Securities said, expecting other drivers near term. "In the near term, we expect the EUR rates reaction will be driven by the recalibration of the ECB's policy at the December meeting."

The U.K. government is likely to scale back fiscal stimulus in autumn, despite official data showing public finances have improved, Capital Economics said.

"August's public finance figures provided more evidence that the government's financial position isn't as bad as the Office for Budget Responsibility predicted back in March," senior U.K. economist Ruth Gregory said.

The GBP20.5 billion of public sector net borrowing in August was once again lower than the OBR's forecast of GBP21.6 billion, though it was higher than the a forecast in a WSJ pool of GBP14.0 billion. U.K.'s Treasury chief expected to signal the end of pandemic-era stimulus at his Budget on Oct. 27, when he presents the government's fiscal plans.

Commodities:

Crude futures rebounded as part a broader market rally, said ING, with Shell's confirmation that some of its Gulf of Mexico capacity shut down by Hurricane Ida may remain offline for some time, supporting oil's gains.

Meanwhile, European gas storage is at about 72% capacity compared with a 5-year average of 88%, ING's Warren Patterson said. "The tightness in the European market suggests that prices are likely to remain elevated, as well as volatile."

Gold ticked higher but has continued to trade in a narrow range this week. "The firm dollar, coupled with expectations of the Fed, appears to have been keeping the gold price in check," Commerzbank's metals analyst Daniel Briesemann said.

Copper prices rose 1.5% on the LME, recovering some of Monday's losses, but market participants remain concerned about the ramifications of an Evergrande default.

"Markets are still waiting for clarity [on] how Evergrande will be able to manage its $300 billion of liabilities," Anna Stablum, at brokerage Marex, said.

Separately, the International Copper Study Group said the global refined copper market had a 90,000-ton deficit in June compared with a 4,000 ton surplus the previous month.

EMEA HEADLINES

OECD Expects Delta Variant to Slow, But Not Derail, Global Economic Recovery

The fast-spreading Delta variant of Covid-19 has slowed the pace of the global economic recovery, but won't derail it, according to new forecasts released by the Organization for Economic Co-operation and Development on Tuesday.

In its latest quarterly report on the economic outlook, the Paris-based research body lowered its growth forecasts for the global and U.S. economies in 2021, the first downgrade since December last year, when new infections were surging.

Universal Music Shares Soar in Market Debut

Shares of Universal Music Group NV-behind stars including Taylor Swift, Drake and the Beatles-surged in their trading debut, a strong vote of confidence from investors in continued growth in the music industry.

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09-21-21 0622ET

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