North American Morning Briefing: S&P 500 on Track for Third-Quarter Gains Despite Recent Selloff

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MARKET WRAPS

Watch For:

U.S. third estimate GDP for 2Q; U.S. Weekly Jobless Claims; U.S. Chicago PMI for September.

Opening Call:

Stock futures rose Thursday, indicating that the broader equity market would eke out gains for the third quarter despite recent whipsawed trading.

Investors have had to navigate an uptick in Delta variant Covid-19 cases this quarter, alongside concerns that higher inflation-driven by surging energy prices-would stick around longer than expected. Also dogging markets were fears of contagion from debt-laden property developer China Evergrande Group.

Stocks have endured a particularly rocky stretch since the Federal Reserve signaled last week that it would start to reduce its bond-buying as soon as November-and possibly begin to raise interest rates next year.

“We’ve entered a slightly more difficult, more wonky stage of the recovery, and there’s a number of headwinds emerging against the upward march we’ve seen since last year,” said Sebastian Mackay, a multiasset fund manager at Invesco.

“People realize that the only asset with real expected returns are equities. The market kind of seems to grind higher on this there-is-no-alternative environment,” said Edward Park, chief investment officer at U.K. investment firm Brooks Macdonald. “That won’t last if central banks make it clear they are raising rates regardless of the growth backdrop.”

Investors have also sold off shares of large technology companies, which tend to do better in low-yielding environments because investors have more incentive to buy shares and await higher profits in the future. The technology heavy Nasdaq-100 has fallen 5.3% this month, though contracts tied to the index are up 0.8% ahead of Thursday’s market open.

Overseas, the pan-continental Stoxx Europe 600 climbed 0.9%, led higher by the basic resources and media sectors, while utility companies largely fell.

Indexes in Asia closed after a mixed performance Thursday. Investors will get fresh figures on the number of Americans who applied for first-time unemployment benefits in the week ended Sept. 25 at 8:30 a.m. ET. Economists surveyed by The Wall Street Journal expect that jobless claims eased to 335,000, from 351,000 the week prior.

Forex:

The dollar should strengthen over the remainder of this year as the Fed looks set to withdraw stimulus and as global growth concerns boost demand for safe havens, MUFG Bank said.

Fed Chair Jerome Powell has signalled that asset purchase tapering could start in November and end by mid-2022, meaning the first interest rate rise could come during the second half, MUFG currency analyst Lee Hardman said.

Worries over the global growth outlook, supply constraints and surging gas prices also support the dollar in the near-term, he said.

“In these circumstances, we expect the dollar index to head towards the 96.000-level.”

The U.K.’s current deficit leaves the pound vulnerable to any shifts in global risk appetite, Pantheon Macroeconomics said. “Sterling’s depreciation over the last week, despite the rise in expectations for U.K. interest rates, highlights how the persistent current account deficit leaves the pound sensitive to changes in global investor sentiment,” Pantheon economist Samuel Tombs said.

The deficit narrowed to GBP8.6 billion in the second quarter from GBP8.9 billion in the first quarter, versus the GBP15.4 billion expected by economists in a WSJ survey.

However, the deficit will widen gradually as imports of travel services rocket when Britons resume overseas holidays and as the U.K.’s reliance on natural gas imports increases this winter, Tombs said.

Bonds:

The expectation for interest rate increases and higher inflation-also reflected in rising oil and commodities prices-has led some investors to sell government bonds, whose yields have been near historically low levels. The selloff cooled Thursday, with the yield on the benchmark 10-year Treasury note ticking down to 1.534% from 1.540% Wednesday.

Inflation fears have caused shorter-dated U.S. government bond yields to rise recently, as well as longer-dated yields, although the rise hasn’t been as strong, said DZ Bank.

“What both yield trends have in common is the fear of permanently higher inflation,” the German bank’s analysts said. In their view, recent comments by central bankers also suggest that the period of pandemic-related emergency monetary policy assistance is slowly coming to an end, hence concerns about a less expansionary monetary policy seem to be impacting markets, they added.

Commodities:

Oil prices rose, OANDA’s Jeffrey Halley points out two developments “that suggest oil prices remain very well supported at these levels.” The first is a higher dollar, which would usually sting prices, and the second is that EIA inventory data echoed the API’s figures on Tuesday, showing a surprise increase in U.S. crude inventories.

Even though “the Northern hemisphere energy crisis isn’t going to disappear over the weekend,” Mr. Halley expects OPEC+ to support prices next week as he doesn’t believe the alliance won’t increase production beyond current plans. The Chinese public holiday that lasts a week from Friday “may take the heat out of the oil rally.”

Gold prices rally after two consecutive days of loss ahead of comments from Federal Reserve Chairman Jerome Powell. Still, the metal remains close to a six-month low. Gold’s losses have come despite central-bank chiefs increasingly flagging the risks from inflation.

“We are frankly astounded by the collapse in gold this month. While we appreciate that a firmer dollar and rising rates are key negatives, the precious metal seems to be ignoring both rising inflationary pressures and the lackadaisical attitude the central banks’ are bringing to bear on the issue,” said Ed Meir of ED&F Man.

Powell is set to testify before U.S. lawmakers Thursday at 10 a.m. E.T.

   
 
 

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September 30, 2021 06:07 ET (10:07 GMT)

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