MARKET WRAPS

Watch For:

Eurozone Trade Balance; Germany Annual GDP; France CPI; U.K. Index of Services, Monthly GDP Estimates, Trade, Index of Production, NIESR Monthly GDP Tracker; Christine Lagarde speaks; updates from Sberbank, Babcock, Experian, Currys

Opening Call:

Likely aggressive tightening in the U.S. following more hawkish comments from a batch of Fed officials will drag on European stocks. In Asia, shares were deep in the red, with the dollar weakening further but Treasury yields moving higher. In commodities, oil extended its losses but gold rebounded.

Equities:

European shares face steep losses on Friday after more hawkish remarks from Federal Reserve officials and as U.S. stocks ended lower following Big Tech's skid.

Federal Reserve Gov. Lael Brainard testified Thursday that "inflation is too high" as part of her nomination hearing to become the vice chair of the institution.

"Our monetary policy is focused on getting inflation back down to 2% while sustaining a recovery that includes everyone," Brainard also said in prepared testimony delivered before the Senate Banking Committee. "This is our most important task."

The Fed's rate-setting committee "has projected several hikes over the course of the year. We will be in a position to do that as soon as asset purchases are terminated," said Ms. Brainard. "And we will simply have to see what the data requires over the course of the year."

Hot inflation and a very robust labor market point to "a fair amount of tightening in 2022" when it comes to monetary policy, said Patrick Harker, the president of the Philadelphia Fed, on Thursday.

Equally hawkish comments from the Fed's Christopher Waller and Charles Evans firmed traders' expectations that U.S. interest rates could rise as many as four times this year, beginning as soon as March.

U.S. stocks closed down on Thursday, as a rebound in technology shares stalled out, snapping a three-day winning streak for Nasdaq.

Growth shares, which are more sensitive to interest rates, bounced back, but the tech-heavy Nasdaq ended lower, halting a recovery in the past three sessions.

"This is a reacceleration of last week's trade after the three day reprieve," said Tom Hearden, senior trader at Skylands Capital, citing an almost 20% move in value versus growth in 2022 so far. "That's a spectacular move in nine trading days."

Economic Insight:

New waves of Covid-19 infections, labor shortages and supply-chain challenges and inflation are driving a slowdown in global economic growth, according to the United Nations, which expects global output to increase by 4% in 2022 and 3.5% in 2023. That would be down from the 5.5% expansion in 2021, the highest rate of growth in more than four decades.

Africa and Latin America and the Caribbean are expected to see significantly lower growth, compared with pre-pandemic projections, while GDP per capita in developed economies is expected to almost fully recover by 2023, relative to pre-pandemic projections, according to the report.

Employment levels are expected to remain well below pre-pandemic levels during at least the next two years.

Forex:

The dollar slipped further in Asia, with the yen strengthening, as investors turned nervous after Fed officials' comments on the U.S. central bank's focus to fight inflation aggressively, said MUFG Bank.

Outgoing Fed second-in-command Richard Clarida is taking one last shot to weigh in on the economic outlook, at least in his official capacity.

In a paper that touts the ongoing value of the new Fed policy making framework in an economy with high inflation, he wrote: "I continue to believe that the underlying rate of inflation in the U.S. economy is hovering close to our 2% longer-run objective and, thus, that the unwelcome surge in inflation in 2021, once these relative price adjustments are complete and bottlenecks have unclogged, will in the end prove to be largely transitory under appropriate monetary policy."

The euro is likely to fall against the dollar this year as the Fed is set to raise interest rates ahead of the European Central Bank against the backdrop of U.S. economic growth and inflation outpacing that of the eurozone, Bank of America said. It has forecast EUR/USD to fall to 1.10 by year-end.

"We expect the ECB to be on hold this year and next, compared with market pricing 19bp [basis points] and 31bp hikes, respectively in 2022 and 2023," BofA analysts said. They expect the Fed to raise rates four times this year and four more times in 2023.

Sterling seems relatively unfazed by rising U.K. political uncertainty but the currency looks vulnerable to a string of bad news in coming weeks, TD Securities said.

The pound's lack of reaction to troubles facing Prime Minister Boris Johnson shouldn't come as a major surprise given politics is unlikely to affect expectations for higher U.K. interest rates, TD analysts said. Despite sterling's "perky price action," TD's MRSI framework allocates a "deep short" position to the currency, expecting it to fall, based on factors such as economic growth, inflation, risk, positioning, rates, and terms of trade.

Sterling is also the most overbought G10 currency. "That makes GBP vulnerable to a shift in both the broad USD narrative and the local risks in the weeks ahead."

Bonds:

Treasury yield rose slightly after they fell Thursday, with yields on 10- and 30-year notes hitting their lowest levels in more than a week, following a $22 billion bond auction and scant 0.2% rise in wholesale prices.

BMO Capital Markets strategist Ben Jeffery said the bond sale produced a "decent outcome."

AXS Investments chief executive Greg Bassuk said even though U.S. PPI rose by less than expected, "we believe investors have reason to remain hyper-focused on factors likely to keep inflation elevated in the months ahead."

Jefferies is neutral on Italian government bonds heading into Italy's presidential elections later this month, but would consider any widening in bond spreads due to political uncertainty as a buying opportunity.

This is because Jefferies considers there is a low probability of snap elections. It expects Italian government bond spreads to remain supported until the third week of January, "given positive seasonality and the fact that [Prime Minister Mario] Draghi is not likely to resign much before the Presidential elections due on 24th," Mohit Kumar, managing director for interest rate strategy said.

Jefferies would be more cautious in the second quarter, when the ECB's PEPP ends.

Energy:

Oil prices extended their losses in Asia as political pressure has been growing for the White House to lobby OPEC+ to ensure the group can hit its production targets amid supply disruptions, OANDA said.

The short-term outlook for travel demand is also likely to be crimped by the spread of Omicron, OANDA added, citing Delta CEO Ed Bastian who said he expects the rebound in travel to be delayed by 60 days.

Oil futures ended lower Thursday, with a significant rise in U.S. gasoline stockpiles last week raising concern over omicron's impact on demand for fuel, even as domestic crude supplies stand at their lowest since 2018.

Prices fell despite continued weakness in the dollar, "signaling that the move higher in oil futures over the past month may have once again gotten too far ahead of the physical market reality," said Troy Vincent, senior market analyst at DTN.

Several constraints will likely limit renewable sources to a roughly 20% to 40% share of the total power supply in most markets over the next decades, according to SailingStone, an investment-advisory firm that focuses on natural resources.

Those constraints include the volatility of solar and wind sources and their inability to stabilize power grids, as well as the cost of renewable-energy projects and the significant amount of land they use, SailingStone said.

However, the firm said it's still possible to decarbonize the global economy through a mix of renewables, energy storage, zero-carbon conventional power, natural gas and carbon-removal projects.

Metals:

Gold futures rebounded in Asia, helped by sustained weakness in the dollar as high inflation provokes investor concern about more hawkish action from the Fed, ANZ said.

Gold futures posted their first loss in five sessions Thursday, after a rise in the U.S. producer price index reading for December came in below market expectations.

"It could be argued that the bullish case for gold is its reputation as an inflation hedge, especially given central banks' recent record for recognizing how severe the situation is," said Craig Erlam, senior market analyst at OANDA. "But with inflation likely nearing its peak, that may not last."

"That said, fear around Fed tightening may also be peaking which could support gold in the short-term and a break through $1,833 could signal further upside to come," said Erlam.

Aluminum prices were also slightly higher, as "falling inventories and renewed supplies issues remain supportive across metals," ANZ said, noting that robust Asian demand for aluminum has pushed stock levels to a 16-year low. Demand for base metals is also likely to be helped by a recovery in auto demand.

Electric vehicle companies are facing much higher costs for the lithium metal used in the batteries that give the cars power, Rystad Energy said.

"Battery-grade lithium are poised to skyrocket. Prices for the metal are already trading at a record high of $35 per kilogram in Asia, and are likely to keep climbing to $50 per kilogram in the second half of 2022."

Rystad said interest in lithium iron phosphate batteries has taken off since early 2021, and it expects the supply of lithium salts "to remain tight through the first half of 2022 at least, due to lagging production in China and South America."


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01-14-22 0053ET