MARKET WRAPS
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Opening Call:
European stocks are likely to open muted Wednesday, with U.S. stock futures also pointing lower. The dollar was slightly stronger and Treasury yields higher. Oil remains volatile and gold rose in early trade.
Equities:
European stocks could open slightly lower Wednesday, as investors continue to monitor Europe's worsening Covid-19 situation.
In the U.S., the S&P 500 rose Tuesday as gains by cyclical stocks helped overcome losses in technology shares.
Rising bond yields and expectations for economic growth powered shares of energy and financial companies while weighing on the growth stocks that have lifted the market in recent months.
"With good economic growth and without a policy mistake, I believe the more cyclical areas of the market could continue to do well, versus what has done well, which is more those technology stocks" said John Bailer, deputy head of equity income at Newton Investment Management.
With most of the reporting season in the books, investors are in a quieter period for new information about companies. David Bahnsen, chief investment officer at wealth management firm The Bahnsen Group, is looking ahead to the fourth-quarter earnings season that will kick off early next year.
"Fundamentals are going to drive the next leg of the market, either because earnings outperform expectations yet again, or because they don't," he said.
Meanwhile, the eurozone economy could stagnate in the last three months of the year in a scenario in which Germany and Austria are in lockdown and consumers elsewhere become more cautious, said Jessica Hinds, Europe economist at Capital Economics.
Germany's worsening Covid-19 situation means much of the country could be subject to much tighter restrictions soon, potentially reducing eurozone 4Q GDP growth by 0.25%, she said.
The economic impact of any restrictions will depend on their severity and duration, but if lockdowns are enforced in additional countries across the region, the economic outlook could worsen significantly, Hinds said.
Forex:
The US dollar weakened 0.1% against the euro and strengthens slightly against the yen. "The US dollar is now at a 16-month high relative to emerging market currencies," Louis Navellier of Navellier & Associates said. "A strong dollar will help suppress inflation somewhat, because most commodities are priced in dollars.
However, a stronger dollar makes goods even more expensive for emerging markets, so worldwide GDP growth may stall, especially due to China's domestic problems." He said, "gold is weaker, crude oil is lower, and just announced PMI is lower than expected," and added "concerns about inflation should fade somewhat today for these reasons."
But he noted consumer sentiment is at a 10-year low as "both inflation and product shortages are making folks angry."
Asian currencies consolidate against the US dollar in Asia trade, but may weaken on U.S. economic data due later today. Both the headline and core PCE deflator for October could post a strong reading as signaled by the recent sharp rise in the CPI, CBA said.
Another set of strong inflation figures may spur higher market pricing for FOMC interest-rate increases and help the USD Index reach a fresh 2021 high today, CBA reckoned.
Turkish annual inflation could rise to 25% or 30%, from close to 20% in October, as the lira slides in response to the central bank and President Recep Tayyip Erdogan remaining "defiant" in their determination not to raise interest rates, Jason Tuvey, senior emerging markets economist at Capital Economics said in a webinar.
The central bank recently cut interest rates as Erdogan reiterated his unconventional view that lower interest rates are needed to bring down inflation.
Other emerging-market currencies such as the South African rand and the Mexican peso might be hurt by the lira's slide, although the impact for now is limited, CE economist Shilan Shah added.
Bonds:
Treasury yields were mostly higher, especially the back end, with the 10-year adding 0.031 percentage point to 1.656%, as Fed Chair Powell gets the renomination bid from President Biden and markets see the Fed behind the curve.
Nordea's Sebastien Galy said global liquidity will be slushing around until rates begin to rise. He sees the Fed getting more hawkish in the next couple of weeks. "Till then we are riven by data...It is likely too early for durable goods orders hurt by production issues and personal spending to disappoint as savings remain elevated."
Energy:
Oil edged lower in the morning Asian session on likely concerns over demand. With Austria imposing lockdown measures and Covid-19 cases increasing in the U.S. and Europe, prospects of weaker-than-expected demand loom on the horizon, CBA said.
However, with several countries including the U.S. confirming plans to release some of their strategic oil stockpiles, there is a case to be made for OPEC+ to defer boosting supply, CBA added.
A possible U.S. oil-export ban could be counterproductive at lowering crude prices, Goldman Sachs said. The U.S. exports three million barrels a day of crude and domestic refiners don't have enough capacity to process this much crude, the investment bank noted.
An export ban will lead to U.S. refinery inventories quickly filling up, and force curbs to domestic oil production, it said. At the same time, the global crude market would be short of U.S. oil so the price of Brent, which is of a similar grade, could spike if demand rises.
The release of government crude reserves may not lead to lower oil prices, partly because the total amount was smaller than expected, Goldman Sachs said. The investment bank said the extent of the releases is only worth a $2/bbl selloff, versus the "overshooting" $8/bbl decline since late October.
Furthermore, "while the coordinated government stock releases would warrant a $2/bbl downgrade to our year-end Brent price forecast, we see offsetting risks from the lack of progress on negotiations with Iran," Goldman said. "In addition, OPEC could consider halting its production hikes to offset the detrimental SPR impact of lower oil prices."
Metals:
Gold rose in early Asian trade, after declining overnight on higher U.S. treasury yields that was driven by Fed Chairman Powell's renomination.
Gold may be vulnerable to further losses, should U.S. yields remain resilient this week, Oanda said. "Even if U.S. yields retreat over the next few sessions before the Thanksgiving holiday, investors are likely to be much more cautious at re-entering long positions," Oanda said, and expects momentum for gold to remain muted.
Base metals were broadly higher, tracking rises in energy-commodity prices, ANZ said. Energy-intensive aluminum is among the top gainers, with copper also trading higher.
The metal is getting support from a tightening Chinese market amid signs that some buyers are paying premiums over international benchmark prices, the bank said.
TODAY'S TOP HEADLINES
Federal Agencies Crafting Rules Around Banks and Cryptocurrencies
A group of U.S. federal agencies on Tuesday said they plan next year to begin delineating how banks can legally get involved in the growing field of cryptocurrencies.
The agencies will focus on what activities banks can legally participate in, and outline rules to ensure safety, consumer protection and compliance with existing laws, said the joint statement from the Federal Reserve, Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency.
RBNZ Raises Cash Rate, Forecasts Greater Monetary Tightening
WELLINGTON, New Zealand-New Zealand's central bank raised its policy interest rate for the second time in two months as it withdraws pandemic stimulus that has driven consumer price inflation to its highest point since 2010.
The Reserve Bank of New Zealand on Wednesday raised its cash rate by 25 basis points to 0.75%. Seven of eight forecasters in a Wall Street Journal survey had expected that outcome. The central bank had raised the cash rate to 0.5% from a record low 0.25% in October.
Thanksgiving Travelers Will Face High Gas Prices, Long Lines
Gas prices remain high as millions of Americans take to the roads and sky this week to meet family and friends for Thanksgiving celebrations, according to AAA.
The national average price for a gallon of regular unleaded gas is $3.40, according to AAA's weekly gas report.
Bank of Canada Raises Concerns Over High Household Debt
OTTAWA-Canadians' high household debt levels are re-emerging as a concern despite the massive fiscal support offered by the federal government during the pandemic, a senior Bank of Canada official said Tuesday.
Deputy Governor Paul Beaudry said the prevalence of highly indebted households -- which are defined as those with a debt-to-income ratio above 350% -- likely improved during the first year of the pandemic as many Canadians accumulated savings and paid down debt. But that trend appears to be reversing, he said, in part because of the worsening quality of Canadians' mortgage borrowing in recent quarters.
Strong Demand, Continued Shortages Push Up Prices in U.S. and Europe
Firms on both sides of the Atlantic reported robust demand in November that, combined with persistent shortages of parts and labor, has led to record price increases.
In the U.S. the lifting of Covid-19 restrictions has boosted business output, particularly in the services sector. Businesses in Europe also reported a pickup in production despite a fresh surge of Covid-19 cases that has prompted fears of new pandemic restrictions.
Apple Sues Israeli Firm NSO Over Spyware, Claiming iPhone Hacks
Apple Inc. has sued NSO Group, an Israeli maker of surveillance software, alleging the company misused its products and services, escalating a battle over surveillance and user privacy.
(MORE TO FOLLOW) Dow Jones Newswires
11-24-21 0034ET
