MARKET WRAPS

Watch For:

Eurozone M3, Business & Consumer Surveys; Germany GDP, Foreign trade price indices; France GDP, Consumer Spending, PPI, Housing starts, Italy Consumer/Business Confidence Surveys, PPI; UK Capital issuance, Insolvency statistics; updates from Caixabank, Siemens Gamesa, Givaudan, UniCredit, Autoliv, Signify, H&M, Telia, SSAB, Volvo, Babcock, Steinhoff

Opening Call:

A third day of losses on Wall Street will likely drag on European stocks in opening trade. In Asia, most benchmarks were in positive territory as risk sentiment improved; the dollar dipped slightly and the 10-year Treasury yield climbed. Elsewhere, oil, gold and base metals delivered modest gains.

Equities:

European shares face a slightly weaker open Friday after another red day on Wall Street.

U.S. stocks fell Thursday in another frenzied session as investors try to gauge how monetary policy and the prospects for the economy will affect corporate profits and stock valuations.

The range between Thursday's highs and lows wasn't as wide as in other sessions this week, but it did continue a run of erratic trading. Markets have been buffeted by concerns about central-bank policy around interest rates and inflation, and geopolitical tensions over Russia.

The volatility is a reflection of the difficulties investors are having in not only responding to the Federal Reserve's plans for monetary policy, but in preparing to live with what will be a long-term change in that policy, said Yung-Yu Ma, the chief investment strategist at BMO Wealth Management.

"What gets priced in and when is difficult at this point," he said. If inflation comes down quickly on its own, that will release some pressure. If it doesn't, and the Fed has to be aggressive in fighting it, "that's going to take its toll on the market."

Asian markets were mostly flat to higher Friday, with gains of around 2% in Japan, Australia and South Korea. Data on U.S. employment costs were in focus, with traders weighing how they might influence Fed decisions on interest rate policy.

Forex:

The dollar edged lower early Friday but the USD Index remained close to its highest level since July 2020. The yen also weakened as risk appetite recovered in Asian markets, with sentiment helped by growing confidence the Fed will get on top of the inflation problem, ANZ said.

This will support a durable business expansion while allaying the more extreme market concerns over a 50 bps rate increase in March and immediate end to quantitative easing, ANZ added.

Other Currency News:

The Bank of England is widely expected to raise interest rates at its Feb. 3 meeting so will need to be "super hawkish" about the outlook for further policy tightening to lift sterling, Nomura said.

If the BOE lifts rates while also suggesting inflation risks are to the upside of its forecasts and hints at the possibility of another rate rise in March then GBP/USD could rally towards 1.38 from 1.3402 currently, said Nomura forex strategist Jordan Rochester.

"But if as we expect the BOE takes a more middle ground, then the pricing for a March hike may wane and with it GBP/USD is likely to head lower."

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The Czech koruna, Hungarian forint and Polish zloty are likely to weaken against the euro this year even though the central banks of all three countries should continue to raise interest rates, Capital Economics said.

"This is primarily because we expect the euro itself to weaken against the dollar; typically, in this environment, CEE [Central and Eastern European] currencies have performed even worse than the euro," Capital Economics economist Joseph Marlow said.

The forint will be the region's worst-performing currency as Hungary's central bank probably won't raise rates as much as markets expect, Marlow said. In contrast, the koruna will fare better than its peers as the Czech central bank should deliver more rates hikes than expected.

Bonds:

The benchmark Treasury yield rose in Asia after it dropped by the most in almost a week on Thursday. That shrunk the gaps between yields of various maturities to the narrowest levels in years, a possible sign of continued worry about the economic outlook by investors.

Tradeweb said the 10/30-year and 5/30-year spreads were 28.6 basis point and 42.7 bps, respectively, their flattest since early January 2019. Tradeweb also said the 5/10-year spread, now 14.3 bps, was at its flattest since early March 2020, while other spreads were also flattening or close to inversion.

Capital Economics said the yield curve was flattening in large part because of the newly aggressive outlook for Fed interest rate rises.

The narrowing spread between short and long-dated securities "reflects a belief that more aggressive tightening in the near term to combat inflation implies less need for hikes further out in time," the firm said.

Over the last year difference between the two year and 10 year Treasury notes has been volatile, but it's been moving more closely since around October of last year, and was at a 72 basis point difference, the narrowest since Dec. 27 and then early December 2020. Some have viewed the current state of the yield curve as showing concern about Fed policy, or heralding future economic weakness.

Other Bond News:

Columbia Threadneedle's Ed Al-Hussainy said the key transmission of the Fed's policy to the real economy will be through wider credit spreads.

"The risk scenario for us is that the combination of markets pricing a faster Fed hiking cycle and the drag from contractionary fiscal policy do not tighten financial conditions...while inflation momentum remains above 4% into the summer."

He said this mix "will reflexively feed back into higher front end pricing, flattening the curve and bringing forward the risk of a recession."

Energy:

Oil prices bounced back in Asian trade after they ended lower Thursday for the first time in three sessions.

ANZ said market fears of another Covid-induced hit to demand have failed to materialize. "Supply-side constraints then sustained the rally. With spare capacity falling sharply, the market will struggle to handle any more unplanned disruptions."

ANZ said traffic numbers in Europe were rebounding as Omicron case numbers decline. Higher demand for vehicle fuels should provide upward price-pressure for oil. "We see the market remaining in deficit in the first quarter of 2022."

Other Energy News:

A group of Democratic lawmakers including sent letters to six cryptocurrency mining companies raising concerns about their energy consumption. Recipients were Riot Blockchain, Marathon Digital Holdings, Stronghold Digital Mining, Bitdeer, Bitfury Group and Bit Digital.

"The extraordinarily high energy usage and carbon emissions associated with Bitcoin mining could undermine our hard work to tackle the climate crisis - not to mention the harmful impacts crypto-mining has on local environments and electricity prices," Sen. Elizabeth Warren said.

Lawmakers asked each company to provide, by Feb. 10, information on its electricity consumption, scaling plans, agreements with electricity providers, and effect on energy costs for consumers and small businesses.

Metals:

Gold futures rose in Asia but remained below the $1,800 level, after they ended with a 2% loss Thursday, as the dollar popped higher.

OANDA said that while gold was vulnerable to further technical selling now that the $1,800 level has been breached, risk aversion should provide price support for the safe-haven asset. It has put support at $1,760 an ounce.

Read: Gold Investment Demand Down Over 40% in 2021, New Report Finds

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Base metals were also higher as supply-side issues persist, ANZ said.

It thinks that resource nationalism in Russia is gathering steam, which could affect nickel supply, while tight supplies of aluminum could continue as Chinese smelters are under pressure to cut back on power usage.

UBS warned the risk of disruption to iron ore and lithium supplies is growing after an Omicron outbreak in Western Australia. Authorities have reported several Omicron cases at the Kemerton lithium hydroxide refinery near Bunbury.

Almost 60% of global iron ore and lithium supply comes from Western Australia, while significant volumes of zircon, manganese, alumina, titanium feedstock and nickel also come from the state.

"If Covid disruptions emerge and remain site- and company-specific, industry peers can capitalize to the extent their operations may be less impacted and they can make the most of higher commodity prices," UBS said. But if Covid disruptions impact miners and the industry to a similar extent, then the benefits of higher prices may only go toward compensating for lower volumes, it added.


TODAY'S TOP HEADLINES

Natural-Gas Futures Spike in Latest Market Turmoil

A wild spike in expiring natural-gas futures contracts on Thursday afternoon was the latest bout of extraordinary volatility that has whipsawed financial markets to start the year.

Natural-gas futures for February delivery settled 46% higher, at $6.256 per million British thermal units, the largest one-day gain on record. More heavily traded futures for March delivery ended the day up 8.1% at $4.363.


Behind the Stock Market Turmoil: A High-Speed Investor U-Turn

The Federal Reserve is about to end America's era of easy money. That is prompting investors to reverse course on two years of investing strategies, kicking off this month's broad market rout, the worst selloff since the early days of the pandemic.

Major U.S. stock indexes have dropped between 6% and 15% in January, through Thursday, with some investor favorites during the pandemic-including Covid-19 vaccine maker Moderna Inc., Peloton Interactive Inc. and Netflix Inc.-falling around two or three times as much. Wall Street's fear gauge, the Cboe Volatility Index of expected market swings, has almost doubled this year. Some well-known hedge funds are down 10% or more, said people familiar with the results.


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01-28-22 0039ET