European Morning Briefing: Euro Extends Gains but Stocks to Struggle

Snapshot:

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Stocks to extend losses; EUR/USD 1.1922-25; bund yield 0.379%; Brent crude $52.58; gold $1294.30

-China Industrial Profit Growth Slowed in July

Watch For: Eurozone M3; U.K. markets closed for national holiday; no major earnings scheduled

Outlook:

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Economists polled by The Wall Street Journal expect preliminary data to show Thursday that eurozone inflation nudged up to 1.4%--one step closer to, but still below the European Central Bank's target.

However, the increase in the pace of price growth will be sufficient to make the ECB "fairly confident about tapering its asset purchases from the start of next year," consultancy Capital Economics said in a note.

Also Thursday, Eurostat will publish data on unemployment in the common currency area, with analysts predicting no change to the previous month's reading of 9.1%.

Headline News:

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Profit growth in China's industrial companies slowed in July as heat waves in the country forced many factories to halt production.

China's industrial profit rose 16.5% in July, down from a 19.1% gain in June, according to official data released on Sunday. The deceleration of profit growth was also in line with the economic slowdown in July as Beijing's efforts to lower debt levels and to curb property speculation started to weigh on growth.

Stocks:

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European stocks face further losses Monday, with DAX futures down 25 points and CAC futures down 14 points.

Trading volumes may be lighter than usual with London markets closed for a national holiday.

Asia-Pacific equity markets struggled for direction after U.S. and European central bankers didn't provide fresh policy guidance at Jackson Hole, though Hong Kong stocks outperformed on strong corporate earnings.

Market participants were watching for implications from developments on U.S. tax policy, in addition to Hurricane Harvey's impact on the global energy market.

The Nikkei Stock Average was down 0.1% in early trade, dragged by a stronger yen. Australia's S&P/ASX 200 declined 0.7%, and Korea's Kospi was off 0.4%. Stocks in China opened up, however, with the Shanghai Composite Index rising 0.7%, driven by gains in financial stocks.

There were "no clear policy clues from the Jackson Hole central bakers' symposium," said Rob Carnell, head of Asia research at ING. And this "left investors pondering."

More broadly, positive comments on tax reform by the head of the U.S. National Economic Council, Gary Cohn, were good for markets. "But the political risk ahead of the debt ceiling deadline next month will continue to weigh on markets," said ING's Mr. Carnell.

Forex:

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The euro continued to build on Friday's gains in Asia, breaching weekly fresh highs against the dollar and the yen at $1.1963 and at Y130.69 respectively.

But AxiTrader's Greg McKenna said the market may be overreacting to Mario Draghi not jawboning the euro at Jackson Hole.

"That was all the bulls needed," Mr. McKenna said. Mr. Draghi avoided elaborating on the ECB's timing to unwind its stimulus programs even as he acknowledged the eurozone's economy was improving.

"The ECB is being pressured by a strong currency and low inflation," said Oanda's senior currency analyst Alfonso Esparza.

Meantime, the dollar continued its weakening trend in Asia with the WSJ Dollar Index down 0.1%. The index closed Friday at its lowest level since Aug. 19, 2016.

In particular, the dollar-yen pair was at 109.35, compared with 109.43 late Friday in New York.

The dollar's weakness is partly the result of U.S. companies refraining from sending money earned overseas home until the government lays out a tax-break plan on overseas profits, said Eiji Kinouchi, senior strategist at Daiwa Securities.

Market positioning for a weaker dollar may increase further this week, said ANZ's Khoon Goh.

Already, CFTC data for the week ended Tuesday showed dollar selling resumed as leveraged funds increased their overall net short dollar positions by $1.1 billion while going long on the euro by $1.9 billion.

Mario Draghi's speech at Jackson Hole steered clear of commenting on the euro, which was read by the market as a green light to push EUR/USD past the 1.19 level, said Mr. Goh.

Greg Gibbs, currency strategist at Amp GFX said the ongoing decline in the dollar appears to reflect heightened political uncertainty in the U.S.

At 0350 GMT, USD/JPY was 109.16-17, EUR/USD was 1.1922-25, GBP/USD was 1.2884-86 and EUR/JPY was 130.12-16.

Bonds:

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U.S. government bond prices rose Friday as Janet Yellen largely avoided discussion of monetary policy in a speech at Jackson Hole.

The yield on the benchmark 10-year Treasury note settled at 2.169%, compared with 2.194% Thursday and 2.196% last Friday.

If history is a guide, German Bund yields may drop after the Sept. 24 general elections, "regardless of the election result," with the magnitude of the fall depending on who wins, said DZ Bank.

"Empirical analysis reveals conspicuously frequent yield declines immediately after a federal election - but normalisation in the following weeks," said DZ Bank analyst Sebastian Fellechner. The reason for that is uncertainty on how the next government will be composed, he said.

Chancellor Angela Merkel's Christian Democratic Union, or CDU looks to secure a "clinching victory" but bund yields could initially see a more pronounced fall in case left-of-centre parties make a surprise victory, Mr. Fellechner said.

Government bond issuance in the eurozone is set to increase sharply in September compared with August, which is traditionally a very slow month for issuance due to the European summer holidays.

LBBW economists expect gross government bond supply at just under EUR80 billion in September, compared with an anticipated EUR45 billion in August. By the end of August, eurozone states will have completed 73% of their aggregate annual bond issuance target, compared with a 72% completion rate last year at the same time of the year, according to the LBBW analysis.

Energy:

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Crude oil prices are likely to remain under pressure with the impact of now-Tropical Storm Harvey likely to continue for the remainder of the week, hitting production of gasoline in U.S., said Barnabas Gan, an analyst at OCBC in Singapore.

He said that while Brent crude prices were slightly higher in early trading, they will likely see weakness over the next few days if Nymex oil continues to soften.

"It's bearish for crude oil and bullish for gasoline. The weather experts -- if you trust them -- say Hurricane Harvey will actually last days, which should mean gasoline will remain supported."

At 0301 GMT October WTI was down 0.4% at $47.71/barrel while October Brent rose 0.3% to $52.58/barrel.

U.S. gasoline futures traded around 6% higher in Asia after U.S. oil refineries were shut down.

Vivek Dhar, an analyst at Commonwealth Bank of Australia said the closure of these refineries, which process around 2.26 million barrels of crude oil per day, means markets expect subdued oil demand, preventing a sharp lift in oil prices. "Gasoline prices will likely remain elevated so long as rain continues to pour down and that is likely to be the case for the next few days at least," he said.

Metals:

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London spot gold prices were higher in Asia, underpinned by geopolitical uncertainties following fresh missile launches by North Korea over the weekend, increasing tensions with the U.S.

"While a further escalation of the war of words between U.S. and North Korean officials would temporarily boost gold prices, we expect the confrontation to remain verbal and see outright military action as unlikely," said BMI Research.

A weaker dollar also kept gold prices close to a psychological mark of $1,300/troy ounce.

At 0231 GMT, spot gold was up 0.2% at $1,294.30/troy ounce.

Write to paul.larkins@wsj.com

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August 28, 2017 00:13 ET (04:13 GMT)