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EUROPEAN MIDDAY BRIEFING - Stocks Rise as Investors Eye US Debt Ceiling

10/07/2021 | 06:20am EST

MARKET WRAPS

Stocks:

European stocks rose on Thursday, getting a boost after a leading Republican offered a way to temporarily get past a looming deadline for the U.S. debt ceiling to be raised.

Senate Minority Leader Mitch McConnell said his party would not filibuster a short-term debt-limit extension, an offer several Democrats said they would take.

The Republican proposal would extend the debt ceiling into December, provided that Democrats affix a dollar amount to the debt level. Treasury Secretary Janet Yellen has warned that her department is likely to exhaust its cash-conservation measures by Oct. 18 if Congress doesn't act.

"Bargain hunters have emerged after Wednesday's heavy selling, encouraged by strong trading in Asia overnight and apparent progress on an extension to the U.S. debt ceiling," says AJ Bell investment director Russ Mould.

"However, even if energy prices fall from here, they've gone up so much in recent weeks that they will still have a large impact on inflation numbers in coming months."

Shares on the move:

Gainers included Spanish utility Iberdrola, technology investor Prosus and luxury-goods producer Kering. Prosus was buoyed by the rally in Tencent, the Chinese tech giant in which holds a stake.

London-listed shares in Royal Dutch Shell fell after the oil major forecast a $400 million third-quarter earnings hit from Hurricane Ida in the Gulf of Mexico. "

BP also edged lower as Brent crude dropped.

Data in focus:

German industrial output dropped by 4.0% on the month in August, significantly more than the 0.2% decline that had been expected, in fresh evidence that supply shortage is hindering production. Read a selection of analysts' comments here .

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In September, UBS' eurozone business cycle clocks suggest manufacturing, services and retail were still booming, consistent with the expectation that eurozone third-quarter GDP growth was strong, UBS economists said.

However, the period ended on a weaker note, with a deceleration in output in September visible in manufacturing, services and retail, UBS said.

"Encouragingly, though, firms across sectors continue to report above-average expectations for future production, in particular in German manufacturing," UBS said.

This suggests that growth should slow heading into 4Q, but remain above its long-run potential growth rate over the next few quarters, helped by solid consumer demand, UBS economists forecast.

U.S. Markets:

Stock futures rose after Republicans offered a short-term debt-limit extension, helping stave off immediate concerns about a possible government default.

Concerns over whether the Treasury would be able to raise money to pay its bills have weighed on investors this week, alongside soaring energy prices and a general shift higher in government bond yields.

Fresh figures on the number of Americans who applied for first-time unemployment benefits in the week ended Oct. 2 are due out at 8:30 a.m. Jobless claims rose for three straight weeks in September, but economists surveyed by The Wall Street Journal expect weekly claims to have edged lower.

Forex:

The safe-haven dollar edged lower after news that Senate Democrats were poised to accept a Republican proposal to defer the showdown over the debt ceiling until later this year, which boosted risk appetite.

Moves are small, however, as markets await Friday's U.S. nonfarm payroll figures, which will be watched closely by the Federal Reserve as it looks to withdraw of monetary stimulus.

"Ranges have been very tight overnight, as is typically the case in the day ahead of the U.S. payrolls report," RBC analysts said.

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Sterling fell versus the euro but remains near its recent highs due to the market's view that the Bank of England will be more responsive to inflation than the European Central Bank, ING said.

The market is pricing in a 5 basis points U.K. interest rate rise in November followed by 25 basis points in February, ING analysts said. "We think that is too aggressive, but the BOE has yet to disavow the market of these expectations."

Meanwhile, the ECB is reportedly working on a new bond-buying program for when its pandemic scheme ends in March, which should serve as a reminder that the ECB won't be rushing into removing stimulus, the analysts said.

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Remarks from Polish central bank governor Adam Glapinski at a press conference later will determine whether the zloty can rally further after Wednesday's unexpected interest rate rise, Commerzbank said.

The bank raised its benchmark rate by 40 basis points to 0.5%. If Glapinski describes the rate rise as a one-off or part of a limited number of increases, pressure will return to the zloty immediately, Commerzbank currency analyst Tatha Ghose said.

If he said inflation risks are to the upside, the market will price in more rate rises to a level of 2.5% or 3.0% and boosting the zloty, he said. EUR/PLN fell 0.1% to a three-and-a-half low of 4.5411, according to FactSet.

Bonds:

Fixed-income investors are expected to hold off big moves ahead of Friday's U.S. labor data, said UniCredit. "Due to a rather light economic agenda today, fixed-income investors are likely to enter a wait-and-see mood ahead of tomorrow's U.S. payroll figures," analysts at the Italian bank said.

Fluctuations in commodity prices will probably remain in the spotlight, and they expect the joint ECB and Federal Reserve Bank of Cleveland online conference on Oct. 7 and 8 "will probably receive more attention than it would have done in other times."

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The ECB's minutes of its September policy meeting, due out Thursday, will be closely watched for how much risk to the official forecast was seen by Governing Council members, ING's rates strategists said.

"If this debate may seem dated as it precedes the spectacular jump in energy prices in late September/early October, it could still inform markets of how high the ECB's inflation pain threshold is," ING said.

The bank's strategists say that following the ECB's Sept. 9 meeting, some members highlighted upside risk relative to the official forecast.

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German Bund yields are out of sync with the improving economic outlook, according to Santander Asset Management, which has a "strong underweight" in EU fixed income. "Although German Bund yields have risen from their August lows, they do not sufficiently price in the improving economic outlook," the asset manager said.

Santander AM thus expects eurozone long-term yields to follow their U.S. counterparts higher, albeit not to the same extent. Eurozone periphery bonds may outperform core bonds, benefiting from wider spreads, nonetheless being vulnerable to a deterioration in the policy backdrop and investor sentiment.

Commodities:

Brent crude oil was down after President Putin said Russia could ease the gas supply crunch. Separately, Department of Energy figures were "bearish to mixed" said DNB Markets's Helge Andre Martinsen, with crude stocks up by even more than Tuesday's API figures suggested.

Elsewhere, the U.S. Energy Secretary said Wednesday that the U.S. has several tools to rein in energy prices, including a potential release of oil from strategic petroleum reserves and an export ban, although the latter is "unrealistic as it would create havoc for the US shale oil industry, lead to sharply increasing Brent oil prices" and increase gasoline prices, Mr. Martinsen said.

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Futures for gas to be delivered in the Netherlands-the European benchmark-fell 20% to 87.33 euros, equivalent to about $100.94, a megawatt-hour in volatile trading. This came after Russian President Vladimir Putin said Wednesday that Moscow was ready to work on stabilizing the global energy market, causing a sudden reversal in natural gas prices, which had earlier soared to their highest level on record.

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Gold prices were flat as the dollar and bond yields trade sideways ahead of U.S. jobless claims data. Investors are awaiting the jobs data for clues on the strength of the U.S. rebound.

Jobless claims had risen over three consecutive weeks in September but economists are expecting new jobless claims to drop for the week ended Oct. 2, holding close to a pandemic low. The weekly data comes ahead of--and could shine some light on--the monthly jobs report due Friday.

EMEA HEADLINES

German Industrial Production Fell More than Expected in August on Supply Shortages

German industrial production declined in August much more than expected, amid widespread supply shortages, statistics office Destatis said Thursday.

Total industrial output--comprising production in manufacturing, energy and construction--fell 4.0% in August from July in calendar-adjusted terms. Economists had forecast a 0.2% drop, according to a poll by The Wall Street Journal.

Royal Dutch Shell Warns of Hurricane Hit, Expects Cash Boost from Power Prices

Royal Dutch Shell PLC said Thursday that Hurricane Ida's impact in the Gulf of Mexico hit its operations but it expects a cash boost from high global energy prices in the third quarter.

The Anglo-Dutch energy giant said Hurricane Ida is expected to cause losses of around $400 million to its adjusted earnings and clash flow from operations in the third quarter.

Inflation Worries Hit U.K. Markets as Energy Prices Soar

Surging energy costs have spread fear among investors in recent weeks that inflation isn't going away. One place where the strains are being felt most acutely is the U.K., where bond markets have exhibited some wild moves.

The most dramatic swings took place with government bonds whose coupons are linked to inflation. Those bonds, and derivatives known as swaps, are seen as a measure of where investors believe inflation is headed. Yields on them surged to their highest levels in over a decade.

Natural Gas Prices Take Wild Ride After Putin Comments

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10-07-21 0619ET

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