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European Morning Briefing: Markets on Hold with U.S. Jobs in View

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09/01/2017 | 04:09 am


Snapshot:
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Stocks seen mixed; USD/JPY 110.00-01; bund yield 0.362%; Brent crude $52.31; gold $1319.50



-Volkswagen Aims to More Than Double U.S. Market Share With Push Into SUVs



-Rolls-Royce Newest Engine Gets Green Light



Watch For: Eurozone, Germany, France, U.K., Spain, Italy, U.S. manufacturing PMI; U.S. employment report; U.S. monthly car sales; no major earnings scheduled




Outlook:
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As inflation has fallen and market expectations for the Federal Reserve to raise rates have receded, the U.S. monthly jobs report has been less of a market focus.



To the extent investors will be paying attention at all to the August report, released at 1230 GMT Friday, it's wage growth that they will be watching.



Average hourly earnings growth, which has been slow all year, is expected to climb 0.2%, a low bar. Economists at Goldman Sachs expect only 0.1% growth (2.5% growth year-over year). It won't take much upside to illicit an upside surprise.



Likewise, many economists think payroll growth will be weak, partly due to seasonal factors. Goldman Sachs sees only 160,000 new jobs in August, while consensus is for 180,000. In July, 209,000 new jobs were added.



Most economists expect the unemployment rate to stay stable at 4.3%. Hurricane Harvey hit after the data for this report was collected so it won't be a factor.




Stocks:
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European stocks face a cautious open Friday, with DAX futures up just 3 points but FTSE 100 futures 14 points lower.



Asia-Pacific stocks pared initial gains Friday as the end of summer dried out trading volume and Southeast Asian markets were closed for a holiday.



A solid earnings season has also come to an end in the region, removing a potential market catalyst.



"There are a lot of moving parts in the news flow at the moment, but no one is really making the connection between these and the markets," said Chris Weston, a strategist at IG Markets. At the same time, markets aren't concerned about geopolitics, Tuesday's selloff notwithstanding, he added.



After gains on Wall Street to end August, moves were widely muted in Asia.



South Korea's Kospi was an exception. After trading little changed the first hour, it slid as much as 0.5% before quickly erasing much of that move. A weaker dollar capped stock gains in Japan. The Nikkei started up as much as 0.5% but was recently just 0.2% higher.



Australia's S&P/ASX 200 fully reversed its early advance to trade down 0.1% after notching a fourth-straight down month in August, its longest such streak in two years.



But Chinese stocks started modestly higher, adding to Thursday gains.



U.S. stock indexes on Thursday closed out August in the green, extending a recent uptrend and clawing back from a midmonth slump as previously dormant markets showed signs of volatility reemerging.



Relatively upbeat economic data and hope of tax reform has been part of the catalyst that has helped to offer a lift to equities and shake of geopolitical worries. The Dow Jones Industrial Average closed up 0.3% at 21,952, nearing the psychologically important level of 22,000, which it had hit mid August and marking its third straight gain. The S&P 500 index ended the session with a 0.6% gain, while Nasdaq finished about 1% higher at record 6,428.66.




Corporate News:
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Volkswagen is targeting a 5% market share in the U.S. by increasing the number of SUVs in its lineup, a top executive said Thursday.



Volkswagen wants to reposition itself globally as a bigger player in the sports utility segment and use that momentum to catch up with rivals in the competitive U.S. market, said Herbert Diess, chairman of the company's VW brand.



"We are committed to becoming a volume player" in the U.S. by more than doubling the company's current 1.9% market share, he told reporters in a briefing at Volkswagen's factory in Chattanooga.



Mr. Diess wouldn't provide a timeline for that growth goal in the U.S. but said Volkswagen plans to introduce two new models a year into the American market for the foreseeable future, including a pair of sedans in 2018.






The European Aviation Safety Agency has granted a type certificate to Rolls-Royce's newest aircraft engine, the TrentXWB, to power Airbus's A350-1000 long-range jet.



Qatar Airways is due to receive the first airplane of the type before year end.




Forex:
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If job growth in Friday's U.S. employment report underwhelms, the dollar is at risk of giving back the rest of its midweek rebound, said BK Asset Management forex-strategy chief Kathy Lien.



"If Friday's jobs report fails to impress, we could see" the euro back at $1.20 and the dollar at Y109.



Leading into Friday, the greenback was weighed by Treasury Secretary Steven Mnuchin saying, "A weaker dollar is somewhat better for us." But in early Asian trading the dollar remained largely flat at $1.1910/euro and Y110.05. The WSJ Dollar Index was down 0.03% at 85.70.



Brad Bechtel, a currency strategist at Jefferies Group, said the dollar could soon stage a rebound after its 8% slide so far this year.



"I do expect the dollar to rally as we head into the fall," said Mr. Bechtel. "On the employment side we're doing really well, and inflation is also improving."



At 0350 GMT, USD/JPY was 110.00-01, EUR/USD was 1.1900-03 and GBP/USD was 1.2940-42.




Bonds:
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Nomura, which has tweaked its view on European Central Bank policy and now expects nine months of tapering rather than six months next year, has downgraded its 10-year bund yield forecast.



Nomura now expects a year-end 10-year bund yield of 0.75%, down from 0.90% previously. Overall, Nomura continues to be short duration and maintains its near-term target of 0.65%. The yield currently trades at 0.362%.



U.S. government bonds rose Thursday, as the prospect of continued weak inflation lingered despite growth in Americans' spending and incomes.



Strong appetite for Treasurys spurred a second consecutive month of yield declines for benchmark 10-year Treasurys. The yield on the benchmark 10-year Treasury note fell to 2.122% from 2.145% on Wednesday, marking the lowest closing level since Nov. 10, 2016.



In August, 10-year Treasury notes recorded the largest one-month yield decline since June 2016.



"It's hard to see inflation taking off to the upside," said Julien Scholnick, a portfolio manager at Western Asset Management. Mr. Scholnick said other economic growth figures have been more encouraging than the continued weak inflation data, which tempers investors' expectations for higher interest rates.



Still, some say the recent lows in Treasury yields won't last.



"We expect that to change direction and drift higher as some of these one-off risks abate," said Charles Ripley, investment strategist at Allianz Investment Management, of the downward trajectory in bond yields.




Energy:
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Nymex oil futures gave back some of Thursday's near-3% gain in early Asian trading while Brent was little changed.



Crude followed another big pop in U.S. gasoline futures, with the now-expired September contract surging 14%--the biggest daily gain since New Year's Eve 2008. October gasoline futures were flat in Asia at $1.78/gallon.



Worries about supply, and the inability to make normal amounts near-term, have sent gasoline prices soaring this week and until Thursday pressured oil.



At 0240 GMT, October WTI was down 0.2% at $47.02/barrel, while Brent was off 0.1% at $52.31.




Metals:
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London spot gold eased in Asian trading after rallying Thursday on weak U.S. inflation data.



Investors are focusing on the U.S. jobs data, which could strengthen the dollar and again weigh on the precious metal. However, tensions in the Korean Peninsula will continue to simmer, ensuring that safe haven demand won't fade away soon.



At 0229 GMT gold was down 0.1% at $1,319.50/troy ounce.



China steel rebar and iron-ore futures gained sharply Friday, as a private gauge of the nation's factory activity rose for the third straight month.



The unexpected strength in the Chinese data reinforced optimism from the official manufacturing data released a day ago, helping the metals partly reverse some declines from earlier in the week. After a recent run up, a rally in both the commodities have shown signs of exhaustion and prices are still off their peaks touched about a week ago.



At 0249 GMT, Shanghai steel rebar was up 2.3% at CNY4,030/ton, while Dalian iron-ore futures rose 3.4% at CNY606/ton.



Base metals were generally higher but looming is the U.S. jobs report, which could aid the greenback and cap upside for the metals. Three-month copper and aluminum prices on the LME were up 0.3% each, but zinc eased 0.2% after Thursday's 1.8% jump.






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