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EMEA Morning Briefing: Stocks to Rise as China Covid Policy, Powell Speech in Focus

MARKET WRAPS

Watch For:

Euro area inflation flash estimate; Germany unemployment; France provisional CPI, PPI, detailed GDP figures, housing starts, consumer spending, Italy provisional CPI, GDP; trading updates from Fresenius Medical Care, Hapag-Lloyd, IAG, SAS, Renishaw, Evraz

Opening Call:

Shares may notch gains at Wednesday's open after China outlined plans to bolster Covid-19 vaccinations, boosting hopes for the end of lockdowns. In Asia, major stock benchmarks were mostly higher; Treasury yields fell; the dollar slipped; while oil and gold were firmer. In Asia, stock benchmarks were mostly higher; Treasury yields fell; the dollar slipped; while oil and gold were firmer.

Equities:

European shares appear set to open on a firm note on Wednesday after closing mixed overnight, as investors focus on an upcoming speech by Federal Reserve Chairman Jerome Powell, as well as progress in China's eventual reopening.

The market is overall skeptical about the more positive China developments, but the same can't be said of the FTSE 100, IG said.

"Solid gains from Asia-focused names HSBC and Standard Chartered show that at least some investors think the government in China will respond by loosening Covid restrictions, while the lower dollar has boosted commodity prices and thus given the raw materials and energy sector a boost," IG said.

China's government has said it will prioritize increasing vaccination rates among the elderly, which is seen as a sign that the country is slowly progressing towards reopening, SPI Asset Management noted.

Whatever Powell says at the Brookings Institution could be a preview of the next rate-setting meeting on Dec. 13-14, said UBS Global Wealth Management.

There is some concern that a hawkish tone from Powell could undo the gains that equities have made over the past two months. "There's a little bit of fear," UBS Global said.

Forex:

The dollar was weaker ahead of Powell's speech and key U.S. data later in the week.

"Optimism that China may be inching away from Covid-zero has lifted too, but the path is likely to be a gradual one, and U.S. stocks came off overnight despite China's strong showing yesterday," ANZ said.

Forex markets are seeing a lot of themes other than Fed rate increases, Silicon Valley Bank said. "It's not just dollar up or dollar down vs. everything."

China is dominating headlines, Silicon Valley Bank said, with some optimism on signs of the economy reopening. That's not only strengthening the renminbi but also commodity currencies "with the assumption that a fully functioning Chinese economy is good for commodities," it said.

Meanwhile Germany's CPI came in softer than expected, but inflation there is still in the double digits, it said, with "the euro catching some weakness on that."

Bonds:

Treasury yields weakened ahead of U.S. employment data, and with investors absorbing the latest hawkish comments from Fed officials, who indicated they will probably leave borrowing costs high for years to come.

The odds of a 75-basis-point rate increase in December rose to 32.5% in the CME's FedWatch tool, from 24.2% a week ago. The highest odds are for a 50-basis-point rate hike.

Investors have also recently been considering the prospects of slowing global economic growth, stemming from Covid-19 lockdowns in China and Russia's invasion of Ukraine. The Treasury curve remains at one of its most negative levels since 1981-1982.

The ADP November report is expected to show a slowdown in job creation.

Energy:

Oil prices rose in Asia, extending overnight gains amid hopes that China, the world's largest oil importer, might loosen its Covid-19 restrictions.

"The hope stems from the conciliatory tone taken by China's National Health Commission, particularly the concession that there was an excessive implementation of Covid controls," CBA said.

"The announcement follows unprecedented street protests against President Xi [Jinping], and is the first indication that Beijing may be considering a relaxation of its draconian Covid-control policies. The prospect of a return to normality, in an economy that is the world's largest oil importer, was enough to make oil prices jump, in the first significant price rebound of the last two weeks," ActivTrades said.

Market focus will also be on the OPEC+ meeting on Dec. 4, where members will decide on oil-production levels.

"We think the group will keep output levels unchanged, particularly given the group is set to meet virtually," CBA added.

Metals:

Gold was little changed, after rising overnight as the dollar stabilized.

The precious metal may be supported in the near term, if China's health authority offers some clear signals that the country is close to tweaking the zero-Covid policy, Oanda said.

"Gold needs a strong China as it drives risk appetite and could bolster demand for jewelry," Oanda added.

"A potential recovery in the dollar and still-rising interest rates around the world means investors might shy away from low- and zero-yielding assets like gold," said Fawad Razaqzada, market analyst at City Index and Forex.com.

The factor that "matters the most" is the Federal Reserve's stance towards its monetary policy, said AvaTrade.

A strong U.S. jobs number, due out Friday, could make the Fed think about its monetary policy, it said. The central bank "could adopt an ultra-hawkish monetary policy like before but so far, "the hope...is that the Fed will slow the roll in terms of increasing the interest rate."

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Base metals prices rose. Prices are stronger amid signs that China may be loosening some of its restrictive measures of their Covid-zero policies, ANZ said.

Following the weekend protests, the country is now pushing for greater vaccination of the elderly, driving speculation that Covid-related restrictions could be eased further, the bank added.

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Chinese iron-ore futures fell, taking a breather after a recent uptrend.

The steelmaking material could come under pressure from seasonality factors and Covid-19 outbreaks across China that are hampering demand for steel, Guotai Junan Futures said.

However, the supportive measures that regulators rolled out recently for the real-estate sector may help buoy sentiment toward the raw material in the near term, it added.

   
 
 

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China's Factory, Construction, Service Activities Contract Further in November

China's official gauges measuring factory, construction and service activities slipped further into contraction in November, weighed by the country's stringent Covid restrictions that have throttled production, along with a deepening property slump and slowing global demand.

The official manufacturing purchasing managers index fell to 48.0 in November, down from 49.2 in October, the National Bureau of Statistics said Wednesday. It was also lower than the 48.9 reading expected by economists polled by The Wall Street Journal and the lowest level since April, when Shanghai-China's financial and manufacturing hub-was locked down.

   
 
 

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November 30, 2022 00:28 ET (05:28 GMT)

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