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EMEA Morning Briefing: Shares Seen Weighed by Jump in Treasury Yields With Fed Still in Focus

01/18/2022 | 12:37am EDT

MARKET WRAPS

Watch For:

Germany ZEW Indicator; U.K. Unemployment; Italy Foreign Trade EU; EU New Passenger Car Registrations; OECD Harmonised Unemployment Rates; ECOFIN meeting of EU finance ministers; updates from OMV, Rio Tinto

Opening Call:

A spike in Treasury yields will likely drag on European shares early Tuesday. In Asia, most major benchmarks were weaker, while the dollar and oil gained but gold struggled.

Equities:

European and U.S. stock index futures were in the red early Tuesday following a jump in Treasury yields, as investors remained focused on the likelihood of higher U.S interest rates in the next few months.

Traders are also gearing up for another big week of U.S. earnings, with Goldman Sachs set to report Tuesday and Bank of America and Morgan Stanley scheduled for Wednesday, with several other household names following through the week.

"One of our major calls for 2022 is that banks will surprise to the upside," said Lale Akoner, a market strategist at BNY Mellon Investment Management.

More broadly, "wages are going higher, energy costs are still very elevated so inflation overall is going to pressure margins. This will definitely show in earnings in 2022," Ms. Akoner said. "Large-caps usually weather this better than small-caps."

In Asia, the Bank of Japan raised its price forecast slightly amid pandemic-related supply shortages, although it still expects its 2% inflation target won't be reached for at least the next two years.

Stocks to Watch:

Rio Tinto's fourth-quarter production was somewhat lower than Jefferies had been expecting and, based on the miner's 2022 guidance, the bank expects little volume growth for the company overall this year.

"This means that Rio's earnings trajectory for 2022 will depend entirely on prices and unit costs," Jefferies said, adding that a weaker iron-ore price could be a headwind after the first quarter.

Economic Insight:

This year's biggest risk is inflation, Capital Economics said, forecasting it will fall this year but at a slower pace than most currently expect.

"If supply constraints in both product and labour markets were to ease more quickly than we anticipate, then it's possible that inflation will fall more quickly too," Capital Economics group chief economist Neil Shearing said.

But markets should be more concerned with the risk that inflation proves more sticky than even Capital Economics expects. Strong demand, tight labor markets, squeezed margins and stretched supply chains all suggest that the risks to inflation lie on the upside, Shearing added.

Forex:

The dollar was little changed overall in Asia, although USD/JPY rose after the Bank of Japan maintained its easing policy, saying risks to prices were generally balanced. That has raised expectations the Japanese central bank will likely be well behind its peers, such as the Fed, in tightening monetary policy.

U.S. economic data will be in focus in the coming days, as investors assess the Fed's pace of potential rate increases.

The Swedish krona is likely to remain under pressure in 2022 after last year's poor performance as the Riksbank maintains its ultra-loose policy stance, Bank of America said.

"The dovish Riksbank stance remains the main reason for our persistent bearishness on SEK: the market expects the Riksbank to hike rates as soon as this year and twice more next year, but we do not see hikes on the horizon," BofA analysts said.

The Riksbank sees current price pressures as transitory, arguing higher energy prices and supply disruptions explain most of the rise in inflation. BofA sees EUR/SEK rising to 10.20 and USD/SEK increasing to 9.27 this year.

The Polish zloty is likely to weaken over the next 12 months even as the country's central bank raises interest rates to rein in inflation, Danske Bank said.

National Bank of Poland Governor Adam Glapinski has sounded more "hawkish" lately as the government is putting pressure on the central bank to do more to combat high inflation, Danske Bank analyst Jakob Christensen said.

"However, we still think that the central bank will not deliver as much as the market thinks, due to NBP's concern about the negative impact on economic activity." That means high inflation will keep upward pressure on EUR/PLN. Danske Bank expects EUR/PLN to rise to 4.64 in 12 months.

Turkey's central bank may leave interest rates unchanged at Thursday meeting after delivering a series of rate cuts but that's unlikely to offer the lira lasting support, Unicredit said.

Further rate cuts this year still remain "on the cards" given pressure from Turkey President Recep Tayyip Erdogan to take such action and the lira's recent recovery after the government announced measures to shore up the currency, Unicredit said.

USD/TRY and EUR/TRY have already absorbed most of their initial sell-off on the government measures and failed to benefit much from the dollar's decline this past week, suggesting "buying on dips" strategies--or buying an asset price at cheaper levels--remain favored for these pairs.

Bonds:

Treasury yields jumped in Asia, with the yield on the benchmark 10-year note above 1.84%. Bond markets in the U.S. were closed Monday, in observance of Martin Luther King, Jr. Day.

Energy:

Oil futures were higher in Asian trade, boosted by signs of tightness in the market.

Reports suggest that Iran-backed Yemeni fighters have launched drone attacks on the international airport and storage facilities of state-run oil group Adnoc, ANZ said. "This comes as Iran is negotiating with world leaders to try and restore Tehran's 2015 nuclear deal."

Meanwhile, the market doesn't appear to be too worried about the impact of China's coronavirus outbreak on oil demand, ANZ added.

Goldman Sachs said "robust fundamentals have reversed last year's oil price melt-down, with the market remaining in a surprisingly large deficit as the Omicron demand hit is so far smaller" than expected.

A lack of progress on the Iran nuclear talks may mean a ramp-up of oil production in the country would be slower than expected, the bank added, which may "bring OECD inventories to their lowest level since 2000."

The outcome of an EU consultation due on Jan. 21 is unlikely to include gas-powered electricity firms such as Enel, Naturgy Energy Group and E.ON, the three largest producers in Europe, in the region's taxonomy for what classes as green activities, ABN Amro said.

A draft of the proposal sparked criticism as it would allow gas and nuclear to be labelled as green investments subject to certain conditions. ABN Amro's fixed-income strategists said that none of the current 439 operational natural gas power plants in Europe would comply with the proposed EU Taxonomy thresholds regarding permitted carbon emissions, so they won't qualify.

Additional investments will be necessary to curb emissions and "this might not come across any time soon."

Metals:

Gold futures were little changed in Asia and OANDA said they may struggle to breach key technical resistance around the $1,833/oz level.

However, it is impossible to ignore gold as it continues to rally despite more and more rate increases being priced in around the world and yields rising in tandem, OANDA added. There could be an argument that there are safe-haven or inflation-hedge moves owing to the current environment, which could become clearer in coming weeks.

Chinese iron ore fell, around 0.7% on reduced restocking activity among the country's steel mills, ING said. On the supply side, improving weather in key producer Brazil should allow for some mines to come back online after heavy rains caused mining giant Vale to suspend some operations in the south of the country.


TODAY'S TOP HEADLINES

BOJ Raises Inflation Expectations Amid Pandemic-Related Supply Shortages

TOKYO-The Bank of Japan raised its price forecast slightly amid pandemic-related supply shortages, although it still expects its 2% inflation target won't be reached for at least the next two years.

In its quarterly outlook released Tuesday, the bank's policy board projected inflation would increase 1.1% in the year ending March 2023 and 1.1% in the following year, up from previous projections for 0.9% and 1.0%, respectively.


BlackRock's Climate Stance Is About Profits, Not Politics, Larry Fink Says

Larry Fink's efforts to get companies to adopt climate-friendly policies have led some to call him an activist. The BlackRock Inc. chairman and chief executive prefers a different label: capitalist.

In his annual letter to the CEOs of the companies in which BlackRock invests, Mr. Fink said businesses that don't plan for a carbon-free future risk being left behind. The quest for long-term returns, and not politics, is what animates the money manager's efforts, he wrote.


Full Recovery in Global Labor Market Could Take Years

It will take at least two years before global unemployment falls back to pre-pandemic levels, according to fresh projections, with joblessness in poor countries remaining high even as labor markets in rich countries become increasingly tight.

The pandemic has upended the global labor market, initially sending unemployment soaring around the world. A surge in demand following the reopening of rich economies such as the U.S. created huge disruptions in labor markets, with companies in need of workers. But at the same time, a lack of vaccines in many poor countries is keeping unemployment high.


Rio Tinto Full-Year Australian Iron-Ore Shipments Fall; 2022 Exports Likely Higher

Rio Tinto PLC said annual iron-ore shipments from its Australian mining operations fell by 3% in 2021 as projects were disrupted by a worker shortage and supply chain issues, but said shipments will likely increase this year.

The world's No. 2 mining company by market value said 321.6 million metric tons of iron ore were shipped from its operations in remote northwest Australia last year. Fourth-quarter shipments were down 5% year-over-year at 84.1 million tons, the miner said.


(MORE TO FOLLOW) Dow Jones Newswires

01-18-22 0036ET

Stocks mentioned in the article
ChangeLast1st jan.
AUSTRALIAN DOLLAR / JAPANESE YEN (AUD/JPY) -0.05% 89.978 Delayed Quote.7.72%
AUSTRALIAN DOLLAR / US DOLLAR (AUD/USD) -0.13% 0.7032 Delayed Quote.-3.01%
BANK OF AMERICA CORPORATION -1.71% 33.86 Delayed Quote.-23.89%
BLACKROCK, INC. 1.24% 600.44 Delayed Quote.-34.42%
BRITISH POUND / JAPANESE YEN (GBP/JPY) 0.25% 159.718 Delayed Quote.2.31%
BRITISH POUND / US DOLLAR (GBP/USD) 0.19% 1.24866 Delayed Quote.-7.89%
CANADIAN DOLLAR / JAPANESE YEN (CAD/JPY) -0.16% 99.562 Delayed Quote.9.51%
CANADIAN DOLLAR / US DOLLAR (CAD/USD) -0.17% 0.7783 Delayed Quote.-1.43%
DANSKE BANK A/S 1.37% 107.55 Delayed Quote.-4.78%
ENEL S.P.A. 3.15% 6.123 Delayed Quote.-13.10%
EURO / BRAZILIAN REAL (EUR/BRL) -0.43% 5.1528 Delayed Quote.-18.41%
EURO / JAPANESE YEN (EUR/JPY) -0.11% 134.9 Delayed Quote.3.36%
EURO / US DOLLAR (EUR/USD) -0.11% 1.0548 Delayed Quote.-6.97%
GOLD 0.00% 1845.6 Delayed Quote.0.70%
INDIAN RUPEE / JAPANESE YEN (INR/JPY) -0.55% 1.642495 Delayed Quote.6.88%
INDIAN RUPEE / US DOLLAR (INR/USD) -0.59% 0.012844 Delayed Quote.-3.79%
LONDON BRENT OIL 0.94% 112.54 Delayed Quote.42.93%
MORGAN STANLEY -0.74% 79.37 Delayed Quote.-19.14%
NATURGY ENERGY GROUP, S.A. 0.58% 27.68 Delayed Quote.-3.32%
NEW ZEALAND DOLLAR / JAPANESE YEN (NZD/JPY) 0.44% 81.932 Delayed Quote.3.61%
NEW ZEALAND DOLLAR / US DOLLAR (NZD/USD) 0.38% 0.64048 Delayed Quote.-6.67%
OMV AG 2.04% 49.99 Delayed Quote.0.08%
ON SEMICONDUCTOR CORPORATION 0.70% 56.46 Delayed Quote.-16.87%
RIO TINTO PLC 1.91% 5449 Delayed Quote.11.39%
S&P GSCI GOLD INDEX 0.03% 1076.15 Real-time Quote.1.05%
S&P GSCI NATURAL GAS INDEX -2.64% 382.901 Real-time Quote.119.25%
SILVER 0.00% 21.73 Delayed Quote.-6.01%
US DOLLAR / JAPANESE YEN (USD/JPY) 0.00% 127.85 Delayed Quote.11.11%
US DOLLAR / TURKISH LIRA (USD/TRY) -0.05% 15.8951 Delayed Quote.19.43%
WTI 1.22% 110.515 Delayed Quote.44.84%
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