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EMEA Morning Briefing: Stocks to Rise, Investors Eye Fed Decision This Week

12/14/2021 | 12:31am EDT

MARKET WRAPS

Watch For:

UK monthly unemployment figures; Germany Ifo Economic Forecast; EU Industrial Production; OECD Quarterly National Accounts G20 GDP growth; U.S. Federal Open Market Committee meeting. Updates from Ceconomy.

Opening Call:

European stock futures were pointing to gains after Monday's retreat, while U.S. stock futures were also higher. The U.S. dollar firmed ahead of the meeting of the U.S. Federal Reserve Tuesday and Wednesday. The yield on the 10-year Treasury was steady at 1.42%. Oil and gold remained in a wait-and-see mode ahead of central bank meetings this week.

Equities:

European stocks could open higher as investors await the outcome of a major decision by the Federal Reserve expected later this week on how aggressively to combat inflation.

The Fed is set to release its decision on Wednesday following the conclusion of a two-day policy meeting. The U.S. central bank is expected to move more quickly to wind down its bond-buying program and signal that it will raise interest rates next year to curb inflation.

Low rates and easy-money policies from the Fed have helped fuel this year's extraordinary stock-market rally. Removing that support could send markets tumbling, some investors say.

"We are in the midst of a transition from a euphoric economic environment funded by the Federal Reserve to an environment that is much more uncertain," said Phil Blancato, president and chief executive of Ladenburg Thalmann Asset Management.

Wall Street will get an inflation update on Tuesday when the Labor Department releases its producer-price index for November, which shows how inflation is impacting costs for businesses. That report will be especially important with the Fed meeting.

Stocks were mostly lower in Asia on early Tuesday, Hong Kong's benchmark slipped on persisting worries over property developers.

Stocks to watch: Investors are likely to applaud Rio Tinto and Turquoise Hill's offer to cancel $2.3B of debt and terminate the current underground development plan at the Oyu Tolgoi copper mine in Mongolia, Morgan Stanley said.

That's because it would remove a key hurdle in progressing the project. Rio Tinto has a 51% interest in Turquoise Hill and a 34% economic interest in Oyu Tolgoi.

"This stake accounts for 3% of our group attributable net present value and is expected to contribute 3% to group underlying Ebitda for 2021 and 31% of copper division Ebitda," Morgan Stanley said.

Forex:

The US dollar remained firm in early Asia trading. The dollar could climb if the Fed is more hawkish than expected, possibly dissuading investors from moving out on the risk-taking spectrum, Cambridge Global Payments' Karl Schamotta said.

But then again, it might not. "A widely-perceived shift in rhetoric after Jerome Powell's renomination may have overstated the degree to which the institution itself has pivoted," he said.

"If Wednesday's dot plot shows policymakers still see inflation rates coming down by mid-2022, a more gradual tightening trajectory could be priced in, and terminal rate expectations could fall. A more dovish Fed could touch off a Santa Claus rally across the currency markets, tilting momentum against the dollar into the new year."

Most Asia-Pacific currencies weaken against U.S. dollar amid risk-off sentiment spurred by losses in the majority of regional equity markets following declines in U.S. and European bourses. The near-term focus for financial market participants remains the economic impact of the Covid-19 Omicron variant and meetings from the Fed, BOE and ECB this week, Commerzbank said.

Bonds:

The bond market has taken the pullback in Fed asset buying with relative calm so far and yields haven't shown a huge reaction. But next year could be a different and more challenging situation for the central bank.

"Declining Treasury demand from investment funds raises the risk of higher rates and volatility in 2022, particularly as the Fed winds down [quantitative easing] purchases," writes John Canavan, bond analyst at Oxford Economics.

"While foreign Treasury demand has been offsetting a portion of the shrinking investment fund purchases, we don't expect it will be strong enough to compensate for the decline in both investment fund and Fed purchases next year," Canavan wrote, adding "we anticipate a gradual increase in the 10-year Treasury yield through 2022 to around 2.25% at year-end."

All eyes are on the Fed's decision on Wednesday, when the central bank is expected to accelerate the pace at which it's paring its bond-buying program. Some analysts said they are expecting a faster tapering to stoke volatility in the stock market.

"If they execute on that path, it will leave a mark on asset prices in our view," wrote Morgan Stanley analysts. "Our guess is that growth will take a hit at a time when it's already decelerating and increase the odds of our bear case playing out."

The Fed would be tapering its bond-buying program twice as fast as it did in 2014, when it took the central bank 10 months to wind down its program, according to Morgan Stanley. Additionally, economic growth was accelerating last time the Fed tapered, while it's currently poised to slow.

BlackRock prefers equities over fixed income, though it favors inflation-linked bonds in light of the inflationary environment, Wei Li, global chief investment strategist at BlackRock Investment Institute said in a webinar.

BlackRock is undwerweight nominal U.S. Treasurys, and developed-market government bonds in general, expecting yields to gradually head higher, but remains overweight on inflation-linked bonds.

BlackRock expects 2022 to be another year of negative nominal bond returns, due to slightly higher real yields, another rise in breakeven inflation rates and a return of investors demanding a term premium for the risk of holding long-term bonds.

BlackRock's base case is that central banks will respond to inflation in a relatively muted manner, supporting its preference for risk assets such as equities over fixed income, Wei Li, global chief investment strategist at BlackRock Investment Institute said in a webinar.

BlackRock still sees a "combination of still very robust growth dynamics and still low rates" which she says should be supportive for risk assets. BlackRock has a mild overweight in developed-market and Chinese equities.

Energy:

Oil was little changed in early Asian trade. Traders will likely focus on the moves of the OPEC+ group. Saudi Arabia's oil Minister reminded the market that he and his OPEC+ members can change their plans at any moment, with regards to easing production cuts, CBA said.

And that such an abrupt change of plans would leave oils market shorts "ouching like hell," CBA added.

Metals:

Gold was little changed in early Asia trade. "It appears gold prices will remain stuck in a trading range until investors get a better idea of how high the Fed expects interest rates to go over the next few years, " Oanda said. Traders should be prepared for any dovish surprises, it said.

Copper was lower in early Asian trade as the metal builds up in LME inventories, ANZ said. Monday marked the fourth consecutive day of stockpile gains, the bank noted.

However, the base metals complex can find support amid expectations of further stimulus measures in China, after Beijing signaled that it would focus on economic stability at the recently concluded Central Economic Work Conference, ANZ said.

TODAY'S TOP HEADLINES

GameStop, AMC Share Prices Fall in Blow to Meme-Stock Investors

Shares of GameStop Corp. and AMC Entertainment Holdings Inc. tumbled Monday, dealing a blow to the legions of individual investors who have banded around the two stocks and frequently tout them on social media.

GameStop dropped 14% to $136.88 per share, its lowest closing price since March. AMC shares fell 15% to $23.24, their lowest close since May. The broader market was down, with the S&P 500 retreating 0.9% after closing at a record on Friday.

Global Central Banks Diverge as Omicron Clouds Growth, Inflation Outlook

FRANKFURT-The policy paths of the world's major central banks are diverging sharply, creating crosswinds for investors, as the Omicron variant of Covid-19 clouds an already uneven global recovery and risks aggravating red-hot inflation.

Policy makers at three influential central banks-the Federal Reserve, the European Central Bank and the Bank of England-meet this week to provide guidance on future interest rates. They are expected to move at different speeds, reflecting varying responses to the pandemic and divergent outlooks for growth and inflation.

Omicron Oil Demand Impact Will Be 'Mild and Short-Lived,' OPEC Says

The Omicron variant's impact on global oil markets won't be as seismic as initially feared, because governments and businesses are now better adapted to dealing with the coronavirus, the Organization of the Petroleum Exporting Countries said Monday.

In its closely watched monthly report, OPEC left unchanged its global oil demand and supply forecasts for 2021 and 2022. However, the cartel said that some of the recovery in consumption that it had expected to take place in the final months of this year would shift into early 2022, due to the emergence of the highly-transmissible Omicron variant.

U.K. Sees First Death of a Person With Omicron as Government Warns of Wave of Cases

LONDON-The U.K. reported its first death of a patient with Omicron on Monday, Prime Minister Boris Johnson said, as the country faces what he called a tidal wave of cases of the new variant.

It couldn't be determined where the person contracted the variant or whether it was the cause of death. The U.K. Health Security Agency said the individual had been diagnosed in a hospital but gave no indication of his or her vaccination status.

Fedspeak Cheat Sheet: What Fed Officials Said Before Their December Meeting

(MORE TO FOLLOW) Dow Jones Newswires

12-14-21 0030ET

Stocks mentioned in the article
ChangeLast1st jan.
BLACKROCK, INC. -1.01% 622.755 Delayed Quote.-31.29%
COMMERZBANK AG -2.26% 7.008 Delayed Quote.7.19%
S&P 500 -0.09% 3816.04 Real-time Quote.-19.82%
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