MARKET WRAPS
Watch For:
Eurozone, Italy Unemployment; UK Narrow Money; updates from Carnival, Smith & Nephew, Brunello Cucinelli
Opening Call:
Europe looks set for a positive open at the start of a week that will be dominated by U.S. earnings and the latest CPI reading. In Asia, stocks were mostly higher, along with the dollar and oil, while gold was lower with Treasury yields little changed following Friday's advance.
Equities:
European stocks were poised for modest gains Monday, with investors' focus shifting from the threat of Omicron to inflation, with this week's U.S. CPI print likely to force an early rate rise from the Federal Reserve.
The U.S. consumer-price index is forecast to top 7% for the first time since 1982, underscoring the broad inflation pressures affecting the economy during the pandemic. The Fed appears poised to lift interest rates as soon as March amid increasing concern over tight labor markets and rising inflation.
"It's been quite the start to the year, with omicron fears subsiding only to be replaced by interest rate anxiety once more. This could be the theme for the coming months, as policymakers are forced to take inflationary pressures more seriously in the hope that a little now will prevent the need for a lot more later," wrote Craig Erlam, Senior Market Analyst, UK & EMEA at OANDA.
The start of the U.S. earnings season this week could stir up market volatility, although Erlam said it "may bring a welcome distraction at a time when fear has again become a dominant driver of the markets."
Economic Insight:
Omicron is clearly having an impact on the global growth outlook, but the worst may be over in just a few months, said Goldman Sachs.
Both confirmed cases and hospital admissions are now on a downward trend not only in South Africa but also in London, the first place in the northern hemisphere to see a major outbreak. If this pattern holds up elsewhere, the economic impact should be "largely behind us" by the end of the first quarter, at least in the advanced economies, said Goldman Sachs.
Forex:
The dollar edged higher in Asia after it weakened Friday following the disappointing jobs report.
OCBC's base-case scenario remains that the U.S. will raise rates more quickly than the rest of the world, which is positive for the dollar.
However, it noted that the implied probability of a Fed rate increase in March is nearly 0.90, suggesting that such arguments could be reaching their limits. Although OCBC maintains a dollar-positive view, it said it needs to be more circumspect about the pace and extent of additional gains given that any further increase in Fed hike expectations looks limited.
TD Securities ha entered a short position in sterling versus the Canadian dollar that bets on the exchange rate falling, targeting a drop in GBP/CAD to 1.68 and a stop loss at 1.7480.
"Following the Canadian jobs report, we think markets will move to price in a non-trivial risk of a [interest rate] hike by the Bank of Canada this month," said TD forex strategist Mazen Issa. Sterling is the "richest currency" in the G10 on a positioning and valuation basis while the Canadian dollar offers modest cheapness, Issa said.
Bonds:
Treasury yields were little changed in Asia after they posted their biggest weekly gains in years on Friday, helped by further advances in most rates as traders focused on positive elements of the December jobs report.
After the jobs report was released, the odds of a 25-basis-point rate hike at the Fed's meeting in March hovered around 70%, close to where it was a day ago, according to the CME FedWatch tool.
Meanwhile, San Francisco Fed President Mary Daly said she could imagine starting to shrink the balance sheet after "one or two hikes."
"A longstanding view held within the Fed is that monetary policy should be pre-emptive to avoid a wage-price spiral," said Ben Emons, managing director of global macro strategy for Medley Global Advisors.
Real earnings are holding up in a healthy sign that a tightening labor market is not derailed by rising wage costs, and "yields are higher because the report is not accounting for omicron likely tightening labor markets even further.".
Energy:
Oil prices were slightly firmer in Asia, paring some of Friday's modest losses.
While oil ended lower on Friday, it tallied a weekly gain of roughly 5% as investors continued to monitor unrest in Kazakhstan that threatens to add to supply outages that have helped boost crude prices.
Kazakhstan is worrisome because it exports about 1.5 million barrels of oil per day and "the violence is near the oil producing center," Michael Lynch, president at Strategic Energy & Economic Research, told MarketWatch.
Should any significant amount of production from the country be lost, "the bull market in oil will be extended," said Lynch. "OPEC+ is unlikely to react to such a loss unless it is clear that it will be lengthy and global inventories would thus continue to decline," he said.
The big rebound in energy prices may be enough to prompt a substantial increase in oil drilling, a quarterly survey by the Federal Reserve Bank of Kansas City found.
Energy firms surveyed by the bank, on average, said they need to see oil at $73 a barrel before they significantly ramp up drilling, and they expect prices to exceed that mark over the next five years. On the flip side, the average natural gas price needed was $4.27 per million British thermal units, which those surveyed don't expect to see until five years out.
Metals:
Gold futures dropped in Asia and seem likely to stay below the $1,800 level with Treasury yields on the rise, said OANDA.
Gold settled higher Friday after the jobs report, but logged its sharpest weekly loss since Thanksgiving.
For now, gold appears to be trading in a range of $1,750 to $1,825 "until direction and leadership is established; predominantly from policy makers," Jeff Wright, chief investment officer at Wolfpack Capital, told MarketWatch. "Their lack of leadership is rather glaring and gold isn't sure where to go next."
Aluminum prices were firmer too as elevated European natural gas and power prices added to the cost of producing the energy-intensive metal, said ING. The recent coal-export ban by Indonesia also crimped fuel supply in Asia, further adding to cost pressures, ING said.
Declines in European gas prices on Friday may ease aluminum prices, but falls may be limited as aluminum inventories remain tight, ING said, noting that LME inventories fell more than 22,000 tons from a week ago.
TODAY'S TOP HEADLINES
Fed's Daly Sees Quick Shift to Balance-Sheet Cuts After Rate Rises Start
Federal Reserve Bank of San Francisco leader Mary Daly said she is on board with a faster drawdown in central bank asset-buying stimulus and supports a relatively quick shift toward shrinking the size of Fed holdings once interest-rate rises start.
Ms. Daly said she was "quite supportive" of the Fed's decision last month to speed the so-called taper of asset buying. If the Fed maintains the new pace of the drawdown, it would bring the purchases that expand Fed holdings to a close by March.
U.K. Manufacturers Expect Positive New Year
U.K. manufacturers are positive on the outlook for the market in 2022, though the optimism is tempered by difficulties in accessing labor and increasing input costs, according to a new survey.
Around three quarters of U.K. manufacturing companies expect conditions to improve in the new year, with 73% now believing the opportunities ahead for their business outweigh the risks, according to data from Make U.K. and PricewaterhouseCoopers.
Omicron Comes to China, Prompting Mass Testing and Quarantines
HONG KONG-Chinese health authorities confirmed the country's first cases of domestic transmission of the Omicron variant of the coronavirus in the northern coastal city of Tianjin on Sunday, ordering up testing of millions of residents weeks before neighboring Beijing is set to host the Winter Olympics.
Two Covid-19 infections were confirmed as Omicron cases by the Chinese Center for Disease Control and Prevention and its Tianjin branch after genome sequencing, according to state broadcaster China Central Television. Officials said it wasn't confirmed if the cases were linked to imported cases found in Tianjin late last year, CCTV reported.
Bond Selloff Rattles Markets
A year-opening bond rout has pushed longer-term interest rates to new pandemic-era highs, sending shock waves across financial markets.
U.S. traders had barely switched on their computers last Monday for the first trading session of the year when bond prices started tumbling. The yield on the benchmark 10-year Treasury note, which rises when bond prices fall, jumped in just one day from its year-end close of 1.496% to 1.628%. By Friday, it had settled at 1.769%, smashing through its 2021 closing high of 1.749% to reach its highest level since January 2020, before officials reported the first Covid-19 case in the U.S.
Can Energy Stocks Stay Hot in 2022?
By most measures, 2021 was a good year to be an energy investor. According to research firm Morningstar Inc., energy outperformed every other funds sector, and asset flows into these funds grew a net $11.4 billion. As economies around the world started to reopen, energy demand surged, fueling a rebound by energy stocks.
Those same stocks could be poised to perform well this year, as energy demand remains elevated. Limited oil and gas supply is also likely to keep prices high. A recent research note from UBS suggested that oil could stay above $80 a barrel in 2022; it's around $80 now.
Stock Funds Rose 22.5% in 2021
Stocks aren't quite immune to the virus, but they continue to overcome it.
For a third straight year, stock-fund investors pocketed big gains. The average diversified U.S.-stock fund rose 22.5% for the year, according to Refinitiv Lipper data-following gains of 19.1% in 2020 and 28.3% in the pre-pandemic year before that.
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01-10-22 0047ET
