European stocks drifted lower on uncertainty about the economic outlook and as investors fretted over Chinese property group Evergrande's potential debt default.

Miners were weaker on lower commodity prices, while a broad range of companies issued earnings and trading updates against a backdrop of doubts about the impact of the coronavirus delta variant and supply chain disruptions.

"Investors' appetite for riskier assets remains uncertain as a positive earnings season so far offsets concerns about slowing growth and uneven recoveries, caused by supply-chain disruption and the energy crisis," said ActivTrades analyst Pierre Veyret.

Stocks to Watch:

Deutsche Bank could become a cash return story, said UBS, upgrading its recommendation on the stock to buy from neutral.

Consensus is too conservative on the German bank's ability to return capital, said UBS. The bank's 2022 goal of returning EUR5 billion in capital looks realistic even when assuming below-target profits, and yet consensus views don't factor this in, said UBS.

"Our cash return assumptions 2022-25E are 80% above consensus [EUR5.5 billion versus consensus at EUR3 billion]."

UBS raised its price target on the stock to EUR13.50 from EUR12.50.

Economic Insight:

Central banks are explicitly or implicitly confronted with several conflicting objectives, said Erste Asset Management. These objectives include keeping inflation at a low level in the medium term and achieving full employment, not jeopardizing financial stability and public debt dynamics by raising interest rates sharply, and supporting the fight against climate change.

In a possible trade-off, key interest rates could be raised too little so as not to jeopardize financial stability and public debt dynamics, said Stephanie Clam Martinic, senior fund manager.

"Inflation could then get out of hand, and ultimately the central bank would react too late to inflation and stifle economic growth with the necessary rate hikes," she said, adding that this scenario could lead to a structural stagflationary environment.


Markets have to adjust to a world without emergency fiscal and monetary policy support, said Neuberger Berman.

More spending is still to come from the U.S. government and NextGeneration EU funds are starting to be disbursed in Europe, "but overall, the fiscal impulse is likely to turn negative over the course of 2022, after being strongly positive in 2020 and 2021," said Joseph Amato, president and chief investment officer for equities.

Central bank tapering is expected in the coming months and markets have pulled forward their estimate for the first interest rate rise by the Federal Reserve to the third quarter of 2022, although Amato is skeptical whether the Fed will move that fast, while the Bank of England looks set to raise rates before Christmas.


The European Central Bank's monetary policy meeting next Thursday will be an important signpost as markets look for a signal on the pre-announced policy decision at the December meeting, said Goldman Sachs, which doesn't expect any policy decisions.

The ECB is expected to acknowledge near-term headwinds to economic activity and reiterate that it will look through a transitory surge in inflation, but signal upside risks to the medium-term inflation outlook, said Goldman Sachs. "But we think the [Governing] Council will stop short of characterizing market pricing as inconsistent with the ECB's forward guidance."

U.S. Markets:

Stock indexes were poised for muted opening losses as investors awaited another batch of earnings reports and data on the labor market.

Stocks have risen in recent days, after solid earnings helping quell concerns that sent markets lower at the start of fall. Among those worries: A slowdown in China's economy, supply-chain blockages that have hampered sectors such as manufacturing and inflation pressures that could prompt central banks to withdraw stimulus.

Of the 80 companies on the S&P 500 to have reported through Wednesday, 81% had topped analysts' earnings forecasts, according to FactSet, better than three-quarters that did so each quarter in 2019.

"We've gone through a period of hesitation that's brought a bit of volatility but I think stocks will keep trending higher," said Paul Jackson, head of asset allocation research at Invesco. He expects households to keep spending savings accumulated during the pandemic.

A slew of earnings reports Thursday will offer clues about consumer spending habits. Southwest Airlines, American Airlines and AT&T will report financial results before the opening bell, while Chipotle Mexican Grill and Whirlpool will do so after markets close.

On the economic front, data due at 1230 GMT are expected to show jobless claims remained near pandemic lows for the week ended Oct. 16. Figures from earlier in the month show companies have been holding on tightly to existing employees while hiring is difficult.

Existing-home sales are expected to have rebounded in September after an August slowdown. The data are scheduled for 1400 GMT.


The dollar was slightly higher and Morgan Stanley said it stands to benefit from higher oil prices.

Forex strategist James Lord said the currency used to have a negative relationship with oil prices when the U.S. was a big energy importer but that is no longer the case, as the country has become self-sufficient. The prospect of the Federal Reserve taking action in response to energy-led price pressures will also support the dollar, Lord said.

"The Fed is quite sensitive to inflation and inflation expectations at the moment so I think as oil prices go up, it will put more pressure on the Fed to sound more hawkish compared to other central banks."

Recent weakness in havens such as the yen and the dollar may be limited by renewed concerns about Evergrande after the sale of its property-management unit was abandoned. This has increased pressure on Evergrande to raise cash elsewhere, as the 30-day grace period on some of its interest payments comes to an end this week, said IG.

The euro should be an ideal funding currency this autumn unless the European Central Bank unexpectedly changes its accommodative policy stance, said ING.

"EUR implied yields remain deeply negative and some of the commodity currencies are backed by very attractive yields these days-- particularly the [Russian] ruble," said ING analyst Chris Turner.

The ECB is likely to raise interest rates later than that priced in by markets, said Mohammed Kazmi, macro strategist at UBP.

The market has priced in an ECB interest rate rise by the end of next year but UBP sees this as a move that has gone in sympathy with the repricing of the BOE and the Fed, said Kazmi.

"Instead, ECB lift off will likely be much more delayed and as such, we could see European front end rates outperform U.K. and U.S. rates as markets stabilise," he said. UBP's short duration preference remains focused on the front end of the U.S. rates curve.


Eurozone government bond yields were little changed, showing tentative signs of stabilization after highly volatile trading earlier this week.

"The stabilization once again seems shallow, and soothing ECB comments still remain out of sight," said Commerzbank's rates strategists.

Government bond supply will be significant, as Spain will auction EUR4.5 billion-EUR5.5 billion, launching a new January 2027-dated bond and reopening a 2037-dated one, while France will offer EUR7.75 billion-EUR9.25 billion in conventional and inflation-linked bonds.

Treasury yields remained elevated, with the 10-year note yield holding at a five-month high following Wednesday's 20-year auction and the Beige Book report, which indicated the U.S. economy was growing at a "modest to moderate rate" amid a low supply of workers and elevated prices.

Bond investors are particularly attuned to the prospects of a potentially faster pace of Fed tapering, which would suggest that the central bank may be inclined to raise interest rates faster than expected to quell intensifying pricing pressures.

Pimco expects bonds to continue to provide diversification benefits in terms of overall asset allocation.

"While return expectations should be muted across asset classes, there are states of the world in which bonds could outperform equities--especially on the basis of return per unit of volatility."

A period of high inflation is not Pimco's baseline outlook, nonetheless. It remains of the view that Treasury inflation-protected securities, or TIPS, commodities and other real assets make sense to help hedge against inflation risks.

"Although we see upside risks to interest rates over the short term as economies continue to recover, over the secular horizon we expect rates to remain relatively range-bound, enabling lower but positive returns for core bond allocations."


Oil futures were lower in Europe, giving back the modest gains made Wednesday after the EIA released bullish weekly data, according to ING's Warren Patterson.

Crude stocks at the key distribution hub of Cushing, which was in danger of running out of storage space last spring, are now at their lowest since 2018.

"Continued strength in oil prices means that pressure on OPEC+ to pump more will only grow," Patterson said. He said that while the U.S., India and Japan have all called for more crude, "the reluctance of OPEC+ to pump more in the short term suggests that oil prices will remain well supported...this year."

Gold prices were flat, with the precious metal caught between a stronger dollar and investors' concerns about stagflation.

Concerns about rising inflation and flagging growth could keep the metal-supported in the coming months, said Giovanni Staunovo, a strategist at UBS. "Inflation expectations are rising and growth expectations softening for the short run." He added, however, that stagnation concerns will likely be short-lived as the Fed is likely to raise rates.

UBS expects gold prices to edge down to $1,700 an ounce by the end of the first quarter of next year, falling to $1,600 an ounce by the end of 2022.




Barclays Profit Rises on Investment Banking

Barclays PLC said its net profit more than doubled in the third quarter, driven by a continued strong performance at its investment bank.


ABB Cuts 2021 Guidance as Revenue Hit by Supply-Chain Constraints

ABB Ltd. cut its full-year guidance as a tight supply chain bit into its revenue, despite orders climbing, the company said at its third-quarter results.

The Swiss engineering company said Thursday that it anticipates comparable revenue growth in 2021 of 6%-8%, down from "just below" 10% previously, as supply chains continued to impact customer deliveries.


Unilever 3Q Underlying Sales Rose, Backs Margin Guidance Despite Cost Inflation

Unilever PLC said Thursday that third-quarter underlying sales rose on good growth in its priority markets of the U.S., China and India, development of online shopping channels and growth of portfolio brands.

The Anglo-Dutch retailer--which owns consumer brands such as Ben & Jerry's ice cream and Dove soap--said quarterly underlying sales rose 2.5% year-on-year, and that turnover increased to 13.5 billion euros ($15.7 billion). This compares with turnover of EUR12.9 billion in the year-earlier period.


Anglo American 3Q Production Rose 2% Driven by Iron Ore, Diamonds

Anglo American PLC said Thursday that its third-quarter production increased 2%, and narrowed guidance for diamonds, copper and iron ore to the lower end of the range.

The miner produced 16.9 million metric tons of iron ore in the three months through September, up 15% from a year earlier driven by the Minas-Rio operations in Brazil.


Hermes 3Q Revenue Surged on China Sales, Europe Tourism Rebound

Hermes International SCA's revenue rose strongly in the third quarter, driven by sales in Greater China and the return of tourists to European cities.

The French luxury-fashion company on Thursday posted revenue of 2.37 billion euros ($2.76 billion) in the quarter, an increase of 31% at constant currency from the EUR1.8 billion it booked in the same period last year, and 40% higher over two years.


Russia Orders People Not to Go to Work as Covid-19 Deaths Mount

MOSCOW-Russian President Vladimir Putin ordered people to stay off work for at least a week while Latvia has introduced a monthlong Covid-19 lockdown as deaths climb, driving renewed fears of another wave of infections as winter sets in.

Mr. Putin signed a decree Wednesday approving a period of nonworking days, as the government calls them, beginning Oct. 30 and stretching to Nov. 7 to encourage people to stay home and slow the spread of the virus. Regional governments where infection rates are especially virulent can speed up or prolong the measures, with employers continuing to pay their staffs as they stay home.



China Evergrande Calls Off Plans to Sell Key Unit for $2.6 Billion

SINGAPORE-China Evergrande Group called off plans to sell a majority stake in its property-management unit for the equivalent of $2.6 billion, a major setback in the real-estate giant's attempts to ease its liquidity crunch.

The cash-strapped developer said Wednesday that it had planned to sell 50.1% of the profitable subsidiary, Evergrande Property Services Group Ltd., to a unit of rival developer Hopson Development Holdings Ltd.


Chinese Developer Defaults Pile Up as Evergrande Contagion Spreads

HONG KONG-The pain is spreading in the market for Chinese junk bonds.

Dollar-bond defaults from Chinese property developers are rising quickly as the country's housing market slumps, and the problem could worsen as a wave of debt from the beleaguered industry comes due in the coming months.


Tight Labor Market Keeps Jobless Claims Near Pandemic Lows

Unemployment claims are trending near the lowest levels since the Covid-19 pandemic hit in the spring of 2020, as companies are reluctant to lay off workers amid labor shortages.

Economists surveyed by The Wall Street Journal estimate jobless claims ticked up to 300,000 last week from a pandemic low of 293,000 a week earlier. Claims, a proxy for layoffs, are holding well below a recent peak of 424,000 in mid-July but remain above 2019's weekly average of 218,000.


Crypto Miners Struggle to Cut Carbon Emissions

Bitcoin mining has earned a bad reputation for guzzling cheap electricity in the pursuit of profit. Now bitcoin miners are trying to go green, to a point.

Companies that mine bitcoin are aiming to power their computers with renewable energy or sign up for data centers that rely on the sun or wind. Falling prices for renewables and rising prices for bitcoin make it possible to still earn a profit.


Critics Blast Private Equity at Senate Hearing

At a Senate hearing Wednesday, private-equity critics denounced what they characterized as buyout managers' abusive practices, as some Democratic lawmakers seek to rein in the rapidly growing industry.

Sen. Elizabeth Warren (D., Mass.) led the hearing of the U.S. Senate Committee on Banking, Housing and Urban Affairs, at which workers, an academic and a state treasurer loosed volleys of criticism against private-equity managers and asked lawmakers to increase federal oversight of them.


Fed Official Says Lingering Inflation Could Change Interest-Rate Outlook

A top Federal Reserve official warned that extended high inflation through next spring could force the central bank to consider raising interest rates sooner than anticipated.

Fed governor Randal Quarles said Wednesday he still expects higher prices to ease next year as bottlenecks and supply-chain disruptions fade. If the Fed raised rates in response to recent price surges driven by the economic reopening, the central bank could constrict demand at the same moment that supply bottlenecks abate, Mr. Quarles said during a moderated discussion at a conference in Los Angeles. That could lead to undesirably low levels of inflation and employment.


U.S. Growth Slowed in Recent Months Amid Elevated Prices, Fed's Beige Book Says

U.S. economic growth slowed to a modest to moderate rate this fall as firms confronted supply-chain disruptions, elevated prices, a shortage of available workers and fears around the Delta variant of Covid-19, the Federal Reserve said Wednesday.

Many businesses said they expected higher prices and supply shortages to last another year or so. The report, known as the Beige Book, collects anecdotes from businesses in Fed districts around the country.


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(END) Dow Jones Newswires

October 21, 2021 05:54 ET (09:54 GMT)

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