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Europe will likely follow Wall Street lower on Wednesday, as investors continue to scrutinize the U.S. inflation data with an eye to future Fed interest-rate policy. In Asia, most major benchmarks were lower; the dollar and Treasury yields held solid gains; while oil and gold moved higher.
European shares look likely to fall early Wednesday, tracking losses on Wall Street, as investors react to the growing risk of Federal Reserve rate rises to combat surging inflation.
Shares of U.S. technology and other fast-growing companies lagged behind the broader market Tuesday as rising bond yields threatened the value of far-off earnings.
"If inflation doesn't subside, the Fed may need to taper at a more substantial rate and hike interest rates, which could hurt stocks and bonds," said Nancy Davis, founder of Quadratic Capital Management.
Stocks have charted a rapid course higher in recent weeks, boosted by a strong batch of corporate earnings. Markets are showing "stubborn resilience" despite inflation concerns and the prospect of tightening monetary policy, said Aoifinn Devitt, chief investment officer at Moneta Group.
"Inflation is very much here, and arguably not transitory, but markets don't seem to be too concerned about that," she said.
The dollar continued its surge higher as investors expect the surprisingly strong U.S. inflation print will put pressure on the Fed to tighten monetary policy.
Pricing for the Fed Funds rate at the FOMC's December 2022 meeting has risen to 0.64% from 0.58%, said CBA. High inflation is likely to be persistent rather than transitory because consumers' long--run inflation expectations have risen materially and wage growth has picked up substantially.
Expectations for Fed rate increases could move higher over time and support further dollar gains, CBA added.
Commerzbank said the dollar could weaken if President Joe Biden decides against reappointing Jerome Powell for a second term as Fed chief as it could raise concerns about the central bank's independence from political influence.
Powell has "principally proven to be an able Fed chair" so there's no reason to replace him other than politicians expecting his successor to implement "more convenient" monetary policy, said Commerzbank currency analyst Ulrich Leuchtmann. "That would not be good news for the dollar."
Treasury yields remained elevated in Asia after they advanced across the board on Wednesday, with the 10-year rate seeing its biggest daily rise in a year.
The rise in yields was substantial, with the two-year rate posting its biggest one-day gain since March of 2020 and the 30-year rate notching its biggest daily gain in almost eight months.
"The biggest concern for the Fed should be signs that longer-lasting cyclical inflation pressures are continuing to build rapidly," said Andrew Hunter, senior U.S. economist at Capital Economics. "The bottom line is that, while it remains difficult to predict how far or for how long the various `transitory' factors will boost inflation, there is increasing evidence that inflationary pressures are broadening out."
U.S. fixed-income markets are closed Wednesday in observance of Veterans Day.
Banco Carregosa said bond yields are expected to rise in the eurozone in 2022, but how much will depend on the European Central Bank's actions as well as on the performance of economies. It added that inflation has created extra pressure on central banks as it is more prolonged than initially expected.
Oil prices edged higher in Asia after the U.S. government withdrew plans to release its strategic oil reserves into the market, according to Commerzbank.
However, gains may be capped after the Energy Information Administration released its short-term energy outlook forecasting an easing market next year, said Commerzbank, adding that U.S. crude production is expected to continue recovering in 2022, which may also weigh on prices.
Oil futures fell on Wednesday, posting their first loss in four sessions, pressured by a weekly rise in U.S. crude inventories, as well as strength in the dollar.
"It seems unlikely crude prices can break above recent [price] highs until energy traders see whatever action will come from the Biden administration," said Edward Moya, senior market analyst at Oanda.
Gold extended its climb after it logged its highest finish since June on Wednesday as the rate of U.S. inflation climbs to a nearly 31-year high, a fifth-consecutive session gain.
Gold is a "perfect inflation hedge" and prices for the metal have made "massive upward moves" in the wake of the [U.S.] data, said Naeem Aslam, chief market analyst at AvaTrade. "This is despite the fact that the dollar index is up, as traders believe that the [Fed] is behind the curve and they need to do something to control the pace of inflation."
Aluminum's rebound continued on lingering concerns over supply disruptions. Although rising coal supply and lower prices have eased worries of power shortages and supply disruptions in the aluminum market, the risks haven't been fully erased, said ANZ.
TODAY'S TOP HEADLINES
Broad Selloff Signals Inflation Fears Are Warming
For months, there has been relatively little investor angst about rising prices. On Wednesday, there were signs that might be changing.
The Dow Jones Industrial Average fell 240 points, or 0.7% while the technology-fueled Nasdaq Composite Index dropped 264 points, or 1.7%. In the government bond market, longer-term Treasury securities, which generally are most sensitive to inflation expectations, fell in price, as did short-term Treasurys, which tend to anticipate interest-rate moves by the Federal Reserve. The 10-year Treasury yield posted its largest rise in a year. When bond prices fall, yields rise.
China Borrows Again at Negative Rates in Euros
China sold about $4.6 billion of bonds denominated in euros, taking advantage of superlow yields in the eurozone to raise shorter-term funds at negative rates for the second year running.
China Weighs Moderating Property Curbs to Help Troubled Developers Unload Assets
Chinese regulators, wary of financial risks spreading as a result of their crackdown on property lending, are considering easing the rules to let struggling developers sell off assets to avoid defaults and hits to the broader economy.
Currently, rules put in place late last year to restrict how much property firms can borrow, dubbed the "three red lines" on leverage ratios, are so strict that they have hurt the ability of developers like China Evergrande Group to sell assets to repay debts.
Inflation Pickup Makes Fed More Likely to Raise Rates Next Year
The latest rise in inflation helps to explain why investors are increasingly asking not whether the Federal Reserve will raise interest rates next year but rather how much and how quickly it may do so.
The Labor Department reported Wednesday that consumer prices rose strongly in October, up 0.9% on a seasonally adjusted basis from the prior month. Over the last 12 months, inflation is up 6.2%. So-called core prices, which exclude food and energy items, rose 4.6% over the past year. Both are the largest annual increases in more than 30 years.
Twitter Launches Cryptocurrency Team to Explore Bitcoin, Blockchain Uses
Twitter Inc. is launching a dedicated crypto team.
The social-media company said Wednesday it is assembling a team called "Twitter Crypto" to look into ways to help creators on the app to earn money or accept cryptocurrencies such as bitcoin for payment, and other ways to use blockchain technology.
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Expected Major Events for Thursday
00:01/UK: Oct RICS Residential Market Survey
07:00/TUR: Sep Balance of Payments
07:00/UK: Sep Index of production
07:00/UK: Sep UK trade
07:00/UK: Sep Index of services
07:00/UK: 3Q First quarterly estimate of GDP
07:00/UK: Sep Monthly GDP estimates
08:00/SVK: Sep Employment and average monthly wage in selected branches
08:00/SVK: Sep Turnover in selected branches of economy, incl Industry & Construction
09:00/EU: Oct Long term interest rates statistics
09:30/UK: 3Q Business investment in the UK: provisional results
09:30/UK: 3Q Mortgage and landlord possession statistics
09:30/UK: 3Q Mortgage Arrears and Possessions data
11:00/POR: Oct CPI
11:00/IRL: Oct CPI
12:30/UK: Oct NIESR Monthly GDP Tracker
16:59/AUT: Nov OPEC Monthly Oil Market Report
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