European Morning Briefing: Markets to Absorb Catalonia Deadlock
Stocks to gain; EUR/USD 1.1701-04; bund yield 0.458%; Brent crude $56.93; gold $1269.11
-IMF, World Bank Leaders: Now Is the Time to Prepare for a Future Downturn
-Big Catalan Bank to Relocate From Region Amid Separatist Drive
-Fed's George: Delaying Rate Rises Poses Risks to Growth, Financial Stability
Watch For: Germany manufacturing orders; France balance of payments; Italy retail sales; U.S. employment report; speeches by several Fed officials
The U.S. government's non-farm payrolls report for September is due Friday and economists are expecting a big drop in growth from the recent trend -- most of that decline due to hurricanes Harvey and Irma.
Economists expect just 80,000 new jobs down from 156,000 in August. However, they expect average hourly earnings to bump back up to 0.3% from just 0.1% last month. The consensus is that the unemployment rate will stay the same at 4.4%.
Global policy makers are becoming complacent during a moment of calm, doing too little to prepare their economies for a future downturn, the leaders of the International Monetary Fund and World Bank said Thursday.
As finance ministers and central bankers prepare to descend on Washington for the annual meetings of the World Bank and IMF, the institutions' leaders, World Bank President Jim Yong Kim and IMF Managing Director Christine Lagarde previewed the message they will be delivering in coming days.
"We should not let a good recovery go to waste," Ms. Lagarde said. "We know what can happen if we let the moment pass. Growth will be too weak, and jobs too few."
Now is the time for advanced economies to really think about the reforms that they need to make to prepare themselves for potential downturns in the future," Mr. Kim said.
The remarks set the theme for debate and conversation for next week's meetings. Though most of the conclusions at the IMF and World Bank aren't binding, policy makers often feel pressure to respond.
"There are two ways to approach a moment like this," Ms. Lagarde said. "The first is to sit back, enjoy the progress, and wait for the next crisis before making big changes. As a former finance minister, I understand the appeal of this path."
But she added: "IMF research has shown that reforms are more potent and easier to implement when economies are healthier."
Banco de Sabadell, one of Catalonia's biggest banks, said on Thursday that it would move its headquarters out of the restive Spanish region, as bankers said another major Catalan lender, CaixaBank, also was considering a relocation.
Sabadell said its board decided to move its legal base to Alicante, Spain.
Surges of separatist sentiment in other countries have long spooked banks and pushed them to either relocate or consider it. In Catalonia, such moves could prove cosmetic in the end, with the legal headquarters leaving the region but staff and executives largely staying, analysts say.
Instead, the moves were likely a form of cheap legal insurance to protect banks against lawsuits if shareholders and clients lost money because of the region's secessionist drive, some of these people said.
In a regulatory filing Thursday, Banco Sabadell said it "has adopted this decision in order to protect the interests of our customers, shareholders and employees." The move won't entail the transfer of any employees, it said.
Bankers and investors said CaixaBank also could shift its legal headquarters away from Barcelona to another part of Spain. In a statement, a CaixaBank spokesman said the bank "reiterates that the necessary decisions will be made, in a timely manner."
European equities should gain at Friday's open, with DAX futures up 23 points and FTSE 100 futures 13 points higher.
Stock markets in Asia posted broad gains as Hong Kong's benchmark index briefly reached its best level in a decade and Japan's Nikkei moved closer to levels last seen in 1996.
The latest leg higher for stock markets, including new records in the U.S., has been helped by fresh comments from central bankers interpreted in support of a December interest-rate increase. Fed-fund futures now show a 87% probability of an increase then, versus 78% on Tuesday, according to CME Group data.
"It is difficult to say more about the raging optimism in U.S. equity markets," said Jingyi Pan, a market strategist at IG Group. That includes six consecutive record closing highs for the S&P 500, the longest such streak in 20 years, and Wall Street's fear gauge--the CBOE Volatility Index, or VIX--finishing at a record low Thursday.
For Asia, "mild gains remains in sight given the abundance of positive leads," said Ms. Pan.
Leading the way in Asia Pacific on Friday was Australia, which has been lagging both recent gains and the advances seen elsewhere for much of this year. The S&P/ASX 200 rose 0.7%, helped by gains in commodity prices.
The dollar held on to solid gains in Asia after strengthening Thursday as expectations for another U.S. interest-rate increase this year climbed.
Investors have been boosting bets on higher rates this week amid strong economic data and upbeat comments from Fed officials.
The September jobs report could prompt a bull run on the dollar, said Stephen Innes, head of Oanda's forex trading in Asia. With some hurricane impact expected, the market could sidestep any disappointment in the numbers but a better-than-expected wages reading could give traders the clearest signal of going long on the greenback, he said.
"There is too much lining up for a stronger dollar narrative by the end of the year." He expects the USD/JPY pair to touch Y113.20 and AUS/USD to test $0.75 levels as soon as after the jobs data is out.
Meanwhile, the euro edged slightly higher in Asia after falling 0.5% Thursday to $1.1704 amid continued political uncertainty in Spain.
Investors still think the European Central Bank will continue to gradually reduce its bond-buying program and that's what matters for the euro. The ECB September meeting minutes released on Thursday did little to change their sentiment. Jane Foley at Rabobank said: "I don't think that opinion is going to alter very much." She added: : "They [investors] know the quantitative easing tapering is coming."
At 0350 GMT, USD/JPY was 112.85-86, EUR/USD was 1.1701-04 and GBP/USD was 1.3094-96.
Judging by the fact that investors have turned into net protection sellers in the iTraxx Europe index for the first time since mid-August, the expected tapering of the ECB's QE program seems to be losing its "scare potential," according to Commerzbank.
The iTraxx Europe index, or Main, tracks credit default swaps of investment-grade companies. Analysts generally expect the ECB to announce tapering this year and implement it in 2018. The central bank currently buys EUR60 billion of assets per month, including corporate bonds, until December.
Government bonds weakened Thursday as investors looked ahead to the employment report.
The yield on the benchmark 10-year U.S. Treasury note ticked up to 2.352%, the highest closing level since July 11, from 2.332% on Wednesday.
The market tends to quiet down before key data releases like the employment figures, said Brian Brennan, a portfolio manager at T. Rowe Price based in Baltimore. Additionally, investors will be watching how strong foreign demand is for Treasury bonds next week, he said.
"Payroll and inflation continue to be the two most important numbers for the market," said Mr. Brennan. There are "not a lot of bets being placed at this point."
Oil futures were a few cents lower in Asia after rebounding almost 2% Thursday during U.S. trading.
Those gains gave WTI some breathing room from the psychologically important $50/barrel threshold. Still, the market remains range-bound with recent supply/demand dynamics unchanged.
At 0145 GMT, November Nymex futures were down 6 cents at $50.73 while December Brent was off 7 cents at $56.93.
London spot gold edged higher in Asia as investors await the U.S. jobs report but any gains are likely to be limited and further downside is seen with Fed officials indicating another U.S. rate increase is on the cards this year.
Safe haven demand has ebbed as tensions in the Korean Peninsula have eased, while Catalonia's move towards independence from Spain so far has had little impact on the precious metal.
At 0216 GMT, spot gold was up 0.1% at $1,269.11/troy ounce.
Copper prices ease slightly in Asia following a 3% jump Thursday, the biggest daily gain in more than 2 months.
That came amid concerns that an earthquake in Chile could disrupt supplies. But ANZ noted the impact to copper assets appeared minimal. Three-month copper prices were down $2 at $6,698/ton on the LME while other base metals were also little changed amid gains in the dollar, China's markets still closed and the U.S. jobs report. Aluminum was down 0.1%.
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