MARKET WRAPS
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Eurozone Industrial Production; Germany WPI, Balance of Payments; U.S Inflation; updates from Vonovia, Bang & Olufsen, JD Sports, Sainsbury's, Just Eat, Whitbread, Vistry Group, Volkswagen
Opening Call:
Europe will likely follow Wall Street's lead and head higher on Wednesday but with gains for stocks capped ahead of the U.S. CPI reading. In Asia, shares rose, the dollar and Treasury yields dipped, while oil and gold were little changed.
Equities:
European stocks should extend gains on Wednesday after Wall Street finished higher, led by a tech rebound.
U.S. stocks opened lower and dipped further as senators peppered Jerome Powell with questions during his reconfirmation hearing for a second term as Fed chair. But indexes later recovered, while Asian markets tracked Wall Street's gains.
Analysts said Powell's comments gave investors their clearest indication yet of how the Fed plans to start normalizing monetary policy in the coming months, while cooling concerns around whether the central bank would aggressively raise rates.
For some investors, the comments signaled a buying opportunity for stocks that had been beaten down in recent sessions.
"We view the recent equity volatility as an adjustment to the Fed's incrementally more-hawkish stance, rather than a sign that the Fed is about to bring the recovery and the equity rally abruptly to an end," said Mark Haefele, chief investment officer of global wealth management at UBS Group, in a note to clients Tuesday.
Oanda said U.S. inflation data will be the next hurdle for the equity rally continuance. "Above 7% likely brings the inflation trade back, limiting gains, while a sub 6.5% headline should keep the party going as Fed hiking timetables get reset back to mid-year."
Stocks to Watch:
Glencore has completed the purchase of Cerrejón from BHP and Anglo American, giving it full ownership of the Colombian coal mine. Thanks to a rise in coal prices, the terms of the deal were sweeter than the commodities giant had anticipated.
Previously, the three miners each had a one-third interest in Cerrejón. Glencore agreed to buy out BHP and Anglo last June, paying $588 million in total. At the time, Glencore said cash generated by Cerrejón before the deal completed would reduce the effective price to $230 million.
But coal mines minted money last year when prices shot up and Cerrejón had cash in the bank. "We basically got it for free," a person familiar with Glencore's thinking said.
Forex:
The dollar continued to lose ground against most other major currencies except the yen as Powell's comments on Tuesday triggered a risk-on mood in Asian markets.
Powell indicated that Fed officials have afforded themselves maximum flexibility to deal with changing dynamics, while seeking to remove a belief that they are stuck on a set path, said Pepperstone. While the Fed chairman didn't really push back on market pricing around Fed rate increases, relief has certainly played out across markets, Pepperstone added.
"The Fed's tightening and reducing of stimulus is to a large extent baked into the market now, and I think that's why the dollar stalled in December even though there was this continuous market chatter about the Fed's hawkish pivot," said Scott Petruska, chief currency strategist at Silicon Valley Bank. Likewise, the most recent Fed minutes also didn't provide the fuel dollar bulls were looking for.
Petruska said markets are really long the dollar and have been since last September, a situation that makes it tough for the dollar to strengthen more. "It's going to be a challenging year for the dollar to continue to move higher" especially when other big central banks turn more hawkish.
TD Securities said the dollar could rise before the Fed delivers its first interest rate rise but may turn lower thereafter.
"We have now seen 24% of the world's major central banks raise rates recently, which may limit how much and how long the USD can rally," said TD analysts. "The global backdrop of central bank synchronization, above-trend global growth, USD overvaluation, and friendly financial conditions means the start of the Fed cycle could start the next USD top."
TD expects the DXY dollar index to rise to 97.8 in the second quarter as it sees the first rate increase in June. It sees the DXY starting to fall in the third quarter, hitting 95.2 by year-end.
December's CPI numbers are unlikely to bring a respite to the Fed, said Amherst Pierpont's Stephen Stanley.
"I would expect that the FOMC will remain in scramble mode until there is evidence of sustained moderation in inflation. That signal is unlikely to appear in the December CPI figures."
Stanley expects the headline figure to have risen 0.4%, pushing the 12-month figure to 7%, "though the [monthly] gain could easily be 0.5%."
Bonds:
Treasury yields continued to fall in Asia, after 10- and 30-year maturities posted their biggest declines in weeks on Tuesday following Powell's re-confirmation hearing.
The spread between 2- and 10-year yields, along with the gap between 5- and 30-year rates, flattened on signs of lingering economic worries and one part of the yield-curve was threatening to invert.
Powell said "the economy no longer needs or wants" the aggressive stimulus the central bank has been providing and "it is time" to start the process of normalization. But he added "it's a long road to normal." Powell doesn't believe providing less stimulus will hurt the job market, and when it comes to the Fed balance sheet, he said "at some point, perhaps later this year, we will allow the balance sheet to run off."
Cornerstone said the 10-year Treasury yield will stay around 1.5%-1.6% this year and won't reach the 2.5% many analysts foresee, arguing that the benchmark is driven primarily by Fed policy, German bund yields and U.S. real GDP growth.
"We expect 4% Real GDP y/y this year, with inflation slowing significantly in 2H," said Cornerstone. "That will keep the Fed from moving the 4 times markets now discount...Instead, we anticipate only 2 hikes in 2022, weighing on 10-Year yields."
Cornerstone said that even major deviations from its baseline scenario wouldn't take the 10-year close to 2.5%.
The Federal Reserve Bank of New York said its reverse-repo facility is working well. The tool takes in cash mostly from money-market firms and is designed to set a floor under short-term rates, and it's seen massive inflows, hitting nearly $2 trillion on the final day of 2021.
The New York Fed said the reverse-repo facility helps balance liquidity in the financial system, and is particularly valuable during times of stimulus via central-bank bond purchases, because the tool in part helps allow banks to hold lower levels of reserves. When reverse-repo usage grows, it reduces market pressures "by offering liabilities that can be held by a broader set of financial market participants, supporting the [FOMC's] efforts to stimulate the economy through asset purchases."
Euro corporate bond spreads are set to widen this year, offering a greater selection opportunities to investors, said Mizuho.
As government and the European Central Bank unwind stimulus measures brought in at the height of the pandemic, the narrowing of relative spreads between different types of bonds should ease. "Dispersion should increase," Mizuho said, adding that they see good value in decompression trades that exploit current mispricing of weaker credits.
Energy:
Oil futures were little changed in Asia after they rose Tuesday, with U.S. prices marking their highest finish in about two months, supported by tight supplies and growing expectations omicron won't derail global demand.
The market theme is "about demand recovery rather than supply concerns, although both are supportive of oil prices," Manish Raj, chief financial officer at Velandera Energy Partners, told MarketWatch. Despite omicron's spread, "global oil demand remains robust among all modes of transportation."
ANZ said production in Libya rose after it reopened its Sahara oil field, but exports from some of the country's shipping terminals could be shut due to bad weather. In addition, OPEC has been struggling to deliver a monthly production increase of 400,000 barrels a day as a few members have been unable to deliver targeted volumes, ANZ said.
WTI's gains on Tuesday came partly from expectations that [today's] weekly EIA report will show another bullish drop in U.S. inventories.
"Oil prices seem poised to trade between $80 and $100 a barrel as the global demand outlook still looks upbeat as most major economies are getting closer to the other side of the omicron fence," said Edward Moya at Oanda.
The EIA said in its Short Term Energy Outlook that it expects U.S. crude-oil production to ramp up to average 12.4 million barrels a day in 2023, just barely surpassing 2019's 12.3 million.
It also expects OPEC to increase its crude oil production to 28.9 million bpd in 2023, up from an average 26.3 million in 2021.
"We expect global demand for petroleum products to return to and surpass pre-pandemic levels this year," said the EIA's acting administrator, Steve Nalley. "We expect that as crude oil production increases, inventories will begin to replenish and help push prices lower for gasoline, jet fuel, and other products in the short term."
Metals:
Gold prices were flat after they posted their highest finish in nearly a week on Tuesday, with comments from Powell doing little to sway expectations for higher inflation and volatility in financial markets.
"As spooked as all the markets have been by the Fed's shift to more-hawkish rhetoric, I think Powell's testimony served as reassurance that the central bank won't move too drastically and will keep the health of the economy as its foremost priority," Brien Lundin, editor of Gold Newsletter, told MarketWatch.
Base metals were broadly higher as policy risks relating to the Chinese property sector fade, said Goldman Sachs.
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01-12-22 0042ET
