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European Morning Briefing: Stocks to Lack Momentum as Spain Troubles Persist

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10/05/2017 | 04:12 am


Snapshot:
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Stocks seen little changed; EUR/USD 1.1755-58; bund yield 0.456%; Brent crude $55.77; gold $1273.30



-Spain Tense as Catalonia Moves Toward Secession



-Siemens to Sell 17.34% Stake in Osram



-Tesco to Review Contracts and Centralize Orders, CFO Says



Watch For: Eurozone retail PMI; ECB accounts of its last monetary policy discussions; no major earnings scheduled




Headline News:
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Catalonia set a course toward declaring its secession from Spain as soon as Monday after separatist parties requested the regional parliament convene that day to review the results of this week's independence vote, injecting further tension in the standoff with the Spanish government.



The request came on Wednesday as Catalan President Carles Puigdemont made a televised address in which he took issue with a speech Spain's king made the previous evening admonishing Catalonia's leaders for "inadmissible disloyalty." Addressing the monarch, Mr. Puigdemont said his speech had "disappointed many in Catalonia, who appreciate you...[and] expected another tone from you, a plea for dialogue and harmony."



Two separatist parties that control Catalonia's parliament petitioned Mr. Puigdemont to discuss the official results of Sunday's referendum on independence, advancing the wealthy Spanish region toward declaring a split with Spain. Mr. Puigdemont, who has been at the head of Catalonia's secession push and is a member of one of the parties, said this week Catalan leaders "will act over the weekend or early next week."




Stocks:
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European stock markets are seen little moved at Thursday's open, with DAX futures down 15 points, with FTSE 100 futures 2 points higher.



Japanese equities struggled for direction despite a weaker yen, even as other markets in the region were broadly higher.



The Nikkei Stock Average was nearly unchanged in morning trade, with the market facing more resistance as the benchmark index nears its 2015 peak, which was the highest since 1996.



"In a few hours traders may move but for now they are struggling for new trading cues, good or bad," said Masashi Murata, currency strategist at Brown Brothers Harriman.



Trading in the region was muted as several key markets were shut for holidays. Markets in South Korea and China are closed for the entire week, while Hong Kong was shut on Thursday. Elsewhere, Australia's S&P/ASX 200 gained 0.2%.



U.S. stocks saw a modest rise Wednesday, with major benchmarks notching the latest in a series of record finishes after a round of strong economic data. The S&P 500 rose 0.1%, while the Nasdaq Composite eked out a gain of less than 0.1%. The Dow industrials rose by around 20 points, or 0.1%, to finish near 22,662.




Corporate News:
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Siemens said on Wednesday that is selling its 17.34% stake in lighting manufacturer Osram Licht.



Siemens said it would use the net proceeds from the sale of its Osram shareholding for general corporate purposes. The stake is equal to about 18.16 million ordinary Osram shares. The stake would be around $1.43 billion based on Wednesday's closing price.






U.K. supermarket giant Tesco aims to further reduce costs by centralizing orders and giving larger volumes to some of its suppliers, said its finance chief, Alan Stewart.



"We have been operating on a decentralized and more fragmented basis," said Mr. Stewart in an interview with CFO Journal. The grocer is now working with suppliers and potential suppliers to "get the most out of contracts" when they are up for renewal, he added.




Forex:
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The dollar steadied in Asia, with the WSJ Dollar Index up 0.1% at 86.64.



The U.S. currency had wavered Wednesday as investors consider the implications of a change in Federal Reserve leadership.



President Donald Trump is expected to announce his nomination for Federal Reserve chair in the coming weeks. Chairwoman Janet Yellen, Fed governor Jerome Powell and former Governor Kevin Warsh are all in the running for the job.



"Tuesday's pause in the U.S. dollar rally appears to be taking a more decisive turn...as market participants consider President Trump's short-list of Fed Chair candidates," said analysts at Scotiabank in a research note.



A change in U.S. central-bank leadership has the potential to reshape monetary policy, investors say. Tighter monetary policy typically supports the dollar by making U.S. assets more attractive to yield-seeking investors. Investors are also watching U.S. data this week.



The euro slipped against the buck in Asia. The currency has been buffeted in recent days by political turmoil in the Catalan region of Spain.



At 0350 GMT, USD/JPY was 112.74-75, EUR/USD was 1.1755-58 and GBP/USD was 1.3239-41.




Bonds:
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France's new May 2028 OAT, a government bond that will be launched at an auction Thursday, may get demand from investors searching for yield, said Marc-Henri Thoumin, rates strategist at Societe Generale.



"The low-volatility environment and the ensuing hunt for yield should offer some support" even if -- according to grey markets where bonds trade before their launch -- the May 2028 OAT offers a "slightly less generous" yield pick-up over the May 2027 OAT than what the May 2027 OAT had at the time of its launch over the May 2026 OAT, he said.



The French Treasury Agency launches the new long 10-year OAT and reopens its existing November 2025 OAT and May 2048 OAT, offering EUR7.5 billion to EUR8.5 billion in total.



Credit default swaps should outperform corporate bonds, especially as the European Central Bank gets set to taper its QE program, according to HSBC strategists.



HSBC has long thought CDS should outperform bonds given the size of the positive basis--CDS spreads minus cash bond spreads--since the ECB started buying corporate bonds in 2016. Analysts generally expect the ECB to announce tapering this year and implement it in 2018.



U.S. government bond prices held steady Wednesday, showing signs of stabilization after a recent selloff.



The yield on the benchmark 10-year U.S. Treasury note settled at 2.332%, unchanged from Tuesday. Yields drifted near the flat line in afternoon trading after jumping earlier in the session, when data showed service sector activity across the U.S. accelerated in September.




Energy:
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Crude oil futures were hovering near 2-week lows in Asian trade, after losses in the U.S. on continued concerns of fuel demand easing while U.S. fuel output edged higher.



The price weakness comes despite upbeat data on oil storage level, with the Energy Information Administration reporting that crude stockpiles shrank by 6 million barrels last week, exceeding the 300,000 barrel decline analysts were expecting. For Asia, trading for the rest of the week will stay muted as key oil consuming nations China and South Korea are shut for holidays.



At 0205 GMT, Nymex crude was down 0.2% at $49.89 a barrel, while Brent was down less than 0.1% at $55.77.




Metals:
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London spot gold prices were slightly weaker in Asia as caution dominated ahead of Friday's U.S. jobs report.



Gold has been pressured recently by positive U.S. economic data that has fuelled expectations of another rate increase this year and a strong jobs report could add to the negative sentiment. The absence of Chinese buyers due to holidays and an ongoing inauspicious period for Indian gold buyers has also weakened physical buying support.



At 0211 GMT, gold was down 0.1% at $1,273.30/troy ounce.



Base metals were mostly lower in thin Asia trading.



While snags in mine supplies and a fall in inventories of aluminum and zinc have provided some support to those metals, investors are likely to be circumspect until the transition in China's government later this month. Expectations are that fiscal stimulus measures could slow and metals demand moderate in coming weeks and months.



At 0327 GMT, three-month copper futures on the LME were up 0.1%, while aluminum and zinc were down 0.4% and 0.9% respectively.






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10-05-17 0012ET

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