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TAPER TANTRUM VULNERABILITY (0909 GMT)
While the future direction of equity markets hangs in
balance and the Fed's dovish rhetoric at best could fuel
incremental record highs, investors find it hard to see a clear
picture beyond that.
Here's Citi's attempt to summarise the state of play:
Financial markets, including the MSCI world equity index,
"have been riding high on a surprising second wave of global
liquidity." Still, all the components of it "are set to fade
during H2."
"The trouble for policymakers is that the more successful
they are in driving up valuations with global liquidity, the
more vulnerable markets are likely to be to a reduction in its
flow," they say in a Global Multi-Asset research report.
They add that leverage is starting to fall while earnings
are rebounding strongly. But this is "just not enough to justify
valuations" unless you get "a new paradigm."
Markets are vulnerable to tantrum, but central banks aren’t
exiting yet, they argue. So we can be pretty sure that stimulus
will not lead to persistent inflation, but it did lead to
"lasting asset prices inflation."
The chart below is reprinted with the permission of Citi
Research. Not to be reproduced.
(Stefano Rebaudo)
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OIL AND GAS STOCKS LEAD THE WAY (0758 GMT)
European stocks hit a fresh record high ahead of the Fed
meeting later this week, with oil and gas and tech stocks
leading gains.
While analysts are debating when and how the Fed will start
mentioning the t-word, namely the tapering of its bond
purchases, Treasury yields continue to stay well below 1.5%,
soothing fears of any policy tightening in the short term.
The Stoxx 600 index is up 0.3%, with oil and gas
stock index up 1% as oil prices rise underpinned by an
improved outlook for fuel demand. The rate-sensitive tech stocks
are up 0.7%.
Autos stocks are at the bottom, with a 0.2% fall,
still worried about a semiconductor shortage that has been
delaying production. Analysts see a peak in the second quarter
before normalising in the second half of this year. Basic
materials were down 0.3% after recent gains.
Shares in Philips, the worst Stoxx 600 performer,
was down 3.9% after the company recalled some breathing devices
and ventilators due to risks.
Serco stocks are up 5% after the company raised its
profit forecast for 2021.
(Stefano Rebaudo)
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WAITING ON THE FED (0709 GMT)
Market attention is firmly focused on this week's Federal
Reserve meeting, where investors expect to see policymakers
stick to a very dovish tone even as inflation over shoots
expectations.
Investors' confidence that the Fed will keep its foot firmly
pressed on the stimulus pedal for some time yet has helped
global stock markets claw their way back up to record-setting
territory.
The two-day Fed meeting begins on Tuesday and expect stocks
to hover near record highs until then. Asian shares were quiet
on Monday with several of the biggest markets closed for public
holidays, but European and U.S. shares pointed to small gains
following record closings last week.
U.S. Treasury yields are meanwhile flirting with three-month
lows, further shifting away from the selloff and panic in bond
markets over inflation earlier this year.
The mood was also buoyed by the optics of a G7 summit where
the world's wealthiest Western countries sought to project an
image of cooperation on key issues such as climate change,
recovery from the COVID-19 pandemic and the growth of China.
China, however, on Monday said a joint statement by the
Group of Seven leaders that had scolded Beijing over a range of
issues was a gross interference in its internal affairs.
There will be more opportunities for U.S. President Joe
Biden to show his cooperative credentials when he attends a NATO
summit on Monday, as leaders of the alliance hope to turn the
page on four tense years with Biden's predecessor Donald Trump.
Still, it's not all good news. Faced with a renewed surge in
COVID-19 cases, Britain appears set to postpone the ending of
all social distancing restrictions by four weeks.
However, investors globally have largely shrugged off signs
of rising cases in parts of the world as vaccination campaigns
in developed countries pick up pace and economic recoveries look
stronger than predicted.
Oil prices are higher, with Brent prices above $73 a barrel,
as the outlook for demand improved.
Key developments that should provide more direction to markets
on Monday:
- Bitcoin hits two-week high, Musk says Tesla could use it
again
- Japanese industrial output April
- Euro zone industrial output April
- NATO summit
- European Commissioner for Economy Paolo Gentiloni speaks
in Dublin on global corporate tax deal - 1500 GMT
- Auctions: 3-month/6month Treasury bills
- Emerging markets: Armenia central bank
- NY Fed manufacturing survey
(Tommy Wilkes)
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SLIGHTLY HIGHER AHEAD OF THE FED (0528 GMT)
European stock futures are slightly higher along with their
U.S. peers as investors expect the Fed to repeat its dovish
stance at its two-day meeting, which starts tomorrow.
Most of the debate is about if the central bank will start
discussing its bond-buying tapering this week or in August.
Still, whatever happens, markets will be flush with cash for the
foreseeable future as employment – one of the Fed’s targets –
will take time before getting back to pre-crisis levels.
Analysts have been betting on a so-called ‘dovish tapering,’
as they expect the Fed to do whatever it takes to ‘baby-sit’ the
market through that phase.
(Stefano Rebaudo)
*****
