MARKET WRAPS

Stocks:

European stocks traded lower Thursday, and with little in the way to drive market direction, investors watched Omicron-related developments.

European governments have moved to tighten restrictions, spurring concerns about setbacks to the economic recovery. U.K. Prime Minister Johnson outlined a new work-from-home mandate and mask guidelines on Wednesday evening. A study released by a Japanese scientist said the variant was four times more transmissible than the Delta strain.

"The UK's move to new restrictions points towards the expected playbook for the weeks to come, and could well put some pressure on equity markets in what is normally a fairly positive time," said Chris Beauchamp at IG.

Shares on the Move: Rolls-Royce shares fell 3.2% after its trading update. CMC Markets said that while things are moving in the right direction, the engine-maker is still set to fall short of its 2021 target for large engine flying hours.

CMC's Michael Hewson said this isn't surprising given what has been happening with the Delta coronavirus variant in Europe and latterly Omicron, and international travel is likely to remain a headwind heading into next year.

Rolls-Royce returned to positive free cash flow in the third quarter, but the company still has some way to go to reach its 2022 free cash flow target of GBP750 million, and much of this will depend on when and if international travel returns to normal.

Market Outlook: JPMorgan said in its "2022 Year Ahead Outlook" that it expects the Covid pandemic to end next year, which will allow the global economy to go back to normal pre-Covid conditions.

"In 2021, economies around the globe made great progress towards recovery and re-opening. Our view is that 2022 will be the year of a full global recovery, an end of the global pandemic, and a return to normal conditions we had prior to the Covid-19 outbreak.

In our view, this is warranted by achieving broad population immunity and with the help of human ingenuity, such as new therapeutics expected to be broadly available in 2022."

Metzler said financial markets will have to live with the fact that the European Central Bank won't commit itself for as long as at all possible. This backdrop implies volatility near term.

"We think investors should be prepared for some volatility in the financial markets in the coming weeks, especially after corona [Covid-19] continues to make big waves and the price advances surprise on the upside." The ECB's next monetary policy meeting is scheduled for Dec. 16.

U.S. Markets:

Stock futures edged down as investors assessed the latest headlines on restrictions to limit the spread of the Omicron variant.

Stocks have swung in recent weeks, buffeted by conflicting headlines on the Omicron coronavirus variant and mixed signals on the health of the economy. Investors are still awaiting further data on the strain's severity and vaccine efficacy. Some pharmaceutical companies including Pfizer and GlaxoSmithKline have said this week that their shot and antibody treatment appear to work in early-stage studies.

Up ahead, cloud-computing firm Oracle, network company Broadcom and wholesaler Costco are set to report Thursday after market close. Popular meme stock GameStop declined 3.2% in off-hours trading after the company posted earnings that showed a widening loss last quarter.

"Earnings have been strong overall, it's a really positive underlying driver for equity markets," said Kiran Ganesh, a multiasset strategist at UBS Global Wealth Management.

Shares of Amazon.com declined 0.2% premarket after the Italian government fined it $1.3 billion for alleged abuse of market dominance. The European Union is also investigating the e-commerce giant in a similar antitrust case.

Fresh data on U.S. jobless claims, a proxy for layoffs, is set to go out at 8:30 a.m. ET. Economists are forecasting that the level will remain near pandemic lows. It has come close to the pre-pandemic average in recent weeks in a sign that the labor market is improving.

Forex:

The dollar was higher in Europe, with the USD Index back above 96.00, as investors looked ahead to data Friday that are expected to show inflation accelerated further in November, which would support bets the Federal Reserve will speed up the withdrawal of asset purchases.

On Wednesday the dollar "emerged as an underperformer" on reduced safe haven flows after the Pfizer/BioNTech announcement, said ING analysts. "Investors may be attracted by current levels [in particular against low-yielders] to build back some dollar longs ahead of the CPI report and the Fed meeting next week, so we would expect the dollar to start finding some support as early as today."

Sterling is likely to weaken versus the dollar if the Bank of England delays raising interest rates and the Fed accelerates the tapering of asset purchases, MUFG Bank said.

The BOE will likely keep rates unchanged until at least February after the U.K. government tightened coronavirus restrictions and following recently cautious comments from BOE officials, MUFG's Lee Hardman said.

Meanwhile, the Fed should speed up tapering at its December 14-15 meeting, he said. "The time gap between the first BOE and Fed rate hikes is likely to be much shorter now than initially expected which should keep downward pressure on cable heading into year end and moving it closer to the 1.3000-level."

Bitcoin reversed direction after four days of gains, slipping 2% from its level at 5 p.m. Wednesday. It traded below $50,000, a 28% drop from its record high set in November.

The Norwegian krone's fell after weaker-than-expected economic growth data but could resume its recent appreciation next week before the central bank's policy meeting, ING said.

"Markets may have started to position for a hawkish tone by the Norges Bank as it announces monetary policy (and most likely hike rates) next week," ING analysts said.

There is room for the krone to extend its recent gains into the Norges Bank's December 16 meeting, they said. EUR/NOK rose 0.3% to 10.1275 after earlier hitting a near two-week low of 10.0575, according to FactSet.

Data on showed Norway's economic growth was flat month-on-month in October, versus the 0.4% growth expected by economists in a WSJ survey.

Bonds:

Long-dated yields for government debt edged higher still in Europe, after they posted their biggest three-day rise in weeks following the Pfizer/BioNTech Omicron report. Meanwhile, the 2-year yield, which is most closely associated with the near-term path of Fed policy, declined on Wednesday.

Bank of America said the yield curve will keep flattening: "The hawkish Fed pivot suggests risks of further curve flattening and further pull forward of rate hikes."

Higher U.S. front-end rates "are a clear reflection of the recent shift in Fed policy due to elevated inflation concerns," while fears of policy errors help drive the long-end trend, as tightening begins when the economy still struggles, said BofA.

The European Central Bank's first interest rate rise could come at the beginning of 2024, with a 25 basis point increase, said Barclays. It sees some risks of a rate hike already a quarter earlier, or even in mid-2023, subject to inflationary developments.

"If inflation does not fall below 1.5% in 4Q 2022-1Q 2023, as per our and the ECB's current forecasts, but converges to 2% from above, the lift-off date would likely be brought forward to 1H 2023," Barclays said.

The new German government--a coalition of the Social Democrats, Greens and the Free Democrats--won't have a significant impact on the outlook for German Bunds, said Franziska Palmas, markets economist at Capital Economics.

"We think German politics will continue to have little bearing on moves in Bund yields in the coming year," Palmas said, adding that the policies proposed in the coalition agreement are unlikely to significantly alter the outlook for either the economy or the public finances.

Capital Economics expects 10-year Bund yields to rise gradually over the next year as the recovery continues and the ECB edges toward tightening policy.

Commodities:

Brent crude could climb even further after a recent rebound as structural deficits keep supporting prices, Goldman Sachs said. Brent has already recovered about half of the ground it lost as the emergence of the Omicron variant fueled concerns about oil demand.

"We therefore recommend investors re-engage some long positions, but caution that oil markets may see substantial increases in volatility and decreases in liquidity in coming weeks," it said.

Iron ore has become Morgan Stanley's top mined-commodities pick on a six-month horizon, citing an expected recovery in Chinese steel output following the Beijing Winter Olympics in February.

A recent slip in aluminum prices should give investors a good entry point to buy into that commodity as well in the coming months, supported by constrained Chinese supply, said Morgan Stanley.

"We also highlight nickel's strong demand story, supported by both stainless steel output and EVs, and supply risks in Indonesia." Coal and zinc are toward the bottom of its list of picks, given Beijing has intervened to boost coal supply and zinc is facing risks to demand.

Meantime, Citi expects a U-shaped swing in iron-ore prices in 2022 as an easing in Chinese credit will likely prompt a recovery in property starts and sales in the second half of 2022, following major declines in the first half. Citi said China already has plenty of iron ore sitting in stockpiles at its ports to meet upticks in demand.

"Steel mills' weak appetite for purchasing iron ore, owing to lower output and rising use of steel scrap, has resulted in 30-million-ton inventory builds at Chinese ports since July 2021."

Gold was flat in early European trade with investors focusing on upcoming U.S. inflation data due this week.

Geopolitical tensions between the U.S. and Russia may help support demand for safe-haven assets like gold in the near term, Commerzbank said.

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12-09-21 0634ET