MARKET WRAPS

Watch For:

UK producer prices; UK monthly inflation figures; UK House Price Index; U.S. interest rate decision; updates from Inditex, H&M sales.

Opening Call:

European stock futures were pointing higher, while futures indicate that London shares could struggle at the open. U.S. stock futures were pointing higher ahead of the Federal Reserve interest rate decision. The dollar was steady in early Asia. Oil declined as the IEA warned that Omicron could dent demand. Gold rose slightly.

Equities:

European stocks could open cautiously higher as investors await the Federal Reserve interest rate announcement.

Investors are watching to see if the uptick in Covid-19 cases and the new Omicron variant change how quickly the Fed will end easy-money policies that have helped fuel this year's stock rally. The central bank, which concludes its meeting Wednesday, could also signal that it will raise interest rates sooner than expected next year to try to curb inflation.

"It's a fairly challenging backdrop for the market," said Hani Redha, a portfolio manager at PineBridge Investments. "Things have been fairly directionless in the lead-up to this. The market wants to see confirmation of what they're going to do."

Investors seem to be selling off assets that have been experiencing higher valuations, such as technology and consumer-discretionary stocks, and could be hurt more by higher interest rates, said Sam Stovall, chief investment strategist at CFRA Research.

"Investors were under the impression that Fed [Chairman Jerome] Powell has been sounding increasingly hawkish," Mr. Stovall said. "Investors are trying to lock in the profits now before the end of the year."

Forex:

The U.S. dollar was steady in early Asian trade, while Asian currencies consolidated but may weaken against the dollar on prospects of further tapering that might be unveiled at FOMC meeting's outcome later.

Investors have been spooked by data showing a sharp rise in U.S. producer prices, suggesting price pressures are broad-based and persistent, Commerzbank said.

They will scrutinize the FOMC's updated economic forecasts and the "dot plot" for clues on the pace of Fed rate increases next year, Commerzbank said. The key question is the extent of the Fed's expected hawkish pivot, it added.

"In sharp contrast, the BoE later in the week is expected to hold fire, but given how the market has piled into short positions against sterling in recent weeks it is proving hard to push GBP/USD much lower ahead of Thursday's meeting.," said Chris Beauchamp at IG.

The Norges Bank is the only major developed central bank of those announcing policy decisions this week that may raise interest rates and this should support the Norwegian krone, Rabobank said.

"Although there is the risk for some volatility around this week's policy meeting, we continue to see the Norges Bank as remaining more hawkish than most of its peers," Rabobank forex strategist Jane Foley said.

That should allow EUR/NOK to fall over the medium-term, she said. In the next three months, EUR/NOK could fall to 10.10, from 10.2541 currently, she said. The Norges Bank's decision is on Thursday, the same day the European Central Bank and Bank of England hold their meetings.

Read why investors increasingly see the dollar as overvalued and the euro as undervalued in December here .

Bonds:

If the Fed does what's expected and accelerates the pace of asset buying, it will face even sooner the question of what to do with its $8.7 trillion balance sheet once it completes the bond buying that had led central-bank holdings to rise sharply. Goldman Sachs economists said they believe the central bank will wait a while before allowing holdings to contract.

"We forecast that the fourth rate hike will come in [the first half of 2023,] and our best guess for now is therefore that runoff will begin around that time," the bank said.

"Research on balance sheet policy implies that the impact of runoff on interest rates, broader financial conditions, growth, and inflation should be modest, much less than that of the rate hikes we expect," the analysts said.

Energy:

Oil declined in early Asian trade after the International Energy Agency warned that the Omicron will dent demand, cutting its forecast for 2022. Though it also lowered its forecast for non-OPEC supply, ANZ said the agency said the market is returning to surplus, with the U.S., Canada and Brazil possibly producing record annual output next year.

The IEA's bearish outlook stood in contrast to OPEC's more positive view in its monthly outlook earlier this week, ANZ noted. "The divide suggests volatility is likely to remain high in the short term."

Going into 2022, Jefferies remains positive about the prospects for major oil companies, read the analysts' comments here .

Metals:

Gold was slightly higher in early Asia trade. The precious metal was ticking up after declining as USD and 10-year U.S. treasury bond yields rose after data showed U.S. producer prices rose by more than expected last month, CBA said.

The data adds to views that the Fed will end its bond buying program quickly and begin raising interest rates, CBA said. "A hawkish Fed is negative for gold prices, which we forecast will fall to $1,700/oz in 1Q 2022," CBA says.Base metals were lower amid signs of generally improving supplies, ANZ said. Aluminum declined after its LME inventories rose 7.5% to 977,400 tons, the most since March, ANZ said.

However, the bank expects copper to remain supported by signs of strong demand, noting that Codelco buyers in the U.S. have agreed to a hike in the premium they pay for copper cathode next year.

TODAY'S TOP HEADLINES

China Economic Data Signal Slowing Consumption, Investment, But Improved Factory Output

BEIJING--China's factory production rose at a faster pace in November as the country's power crunch eased, while consumption and investment decelerated, official data showed Wednesday.

Value-added industrial output grew 3.8% from a year earlier in November, up from the 3.5% expansion marked in October, the National Bureau of Statistics said. The result was slightly higher than the 3.7% expected by economists polled by The Wall Street Journal.

Omicron Variant Accounts for 3% of U.S. Covid-19 Infections

The Omicron variant accounts for an estimated 3% of Covid-19 cases in the U.S. and more than one in eight cases in the New York and New Jersey area, federal data show.

Cases caused by the Omicron variant started cropping up in the U.S. after Thanksgiving, and as of Dec. 11 account for an estimated 2.9% of infections, according to data the Centers for Disease Control and Prevention released on Tuesday. The estimates range regionally from less than 1% of cases in some areas to more than 13% of cases in the region including New York and New Jersey.

Fed Meets for First Time Since Powell Signaled Policy Shift

Federal Reserve officials meet Tuesday and Wednesday for the first time since Chairman Jerome Powell said last month that the central bank needed to shift its focus toward preventing higher inflation from becoming entrenched and away from fostering a rapid rebound in hiring from the pandemic.

The pivot raises the prospect that the Fed's postmeeting statement-a document parsed by markets as a signal of likely future policy-could be overhauled at the conclusion of their meeting Wednesday.

U.S. Producer Prices Climbed Sharply in November

Prices that suppliers are charging businesses and other customers leapt in November, signaling that broad-based price pressures are still building throughout the U.S. supply chain.

The Labor Department said Tuesday that its producer-price index rose 9.6% in November from a year earlier, the most since records began in 2010. The so-called core PPI, which excludes often volatile food and energy components, climbed 7.7% from a year ago, also the highest on record.

Omicron Will Slow Oil Demand Recovery but Not Destroy It, IEA Says

The Omicron variant's emergence will allow the supply of oil to overtake the rate at which the world is consuming it, easing the supply tightness of recent months, the International Energy Agency said Tuesday.

The IEA trimmed its 2022 supply forecast from non-OPEC producers by 100,000 barrels a day and cut its demand forecast by the same amount, saying it expects the surge in coronavirus cases to stymie the recovery in global demand.

Millennials Are Supercharging the Housing Market

Alex and Michelle Angert lived the last years of their 20s without a permanent address. They moved out of a small Manhattan apartment in 2018 to stay in short-term rentals around the U.S. before embarking on a yearlong honeymoon to travel the world, starting in the Philippines.

When the pandemic cut their travels short last year, Mr. Angert, 31, decided to take a job in public relations in Richmond, Va. He and Mrs. Angert, who is also 31 and works at a healthcare tech company, started house hunting this spring. After losing out on multiple offers, they raised their $400,000 budget. In July, they plunked down $635,000 on a three-bedroom ranch in a tree-filled lot near a Richmond country club.

As Omicron Spreads, Vaccine Rules Stir Political Resistance for U.K.'s Johnson

LONDON-British Prime Minister Boris Johnson faced resistance over plans to require vaccinations in certain venues to stem the fast spread of the Covid-19 Omicron variant, as dozens of lawmakers from his own Conservative Party voted against the measure Tuesday.

Despite the rebellion of around 100 Conservative lawmakers, so-called vaccine passports will come into force Wednesday in England after the opposition Labour Party backed the measure. Voting in favor were 369 lawmakers, with 126 voting against.

United Arab Emirates Threatens to Pull Out of $23 Billion F-35, Drone Deal With U.S.

(MORE TO FOLLOW) Dow Jones Newswires

12-15-21 0034ET