MARKET WRAPS
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Eurozone Flash Estimate Inflation, Retail Trade, Business & Consumer Surveys; Germany Industrial Production, Foreign Trade; France Industrial Production, Consumer Spending, Foreign Trade, Balance of Payments; UK Construction PMI; Italy General Govt Quarterly Accounts; U.S. Employment Report; updates from Getlink, Sodexo
Opening Call:
Europe faces a cautious opening session following more losses on Wall Street and after a warning on rates by the Fed's Bullard. However, Asian stocks were mostly higher early Friday, with oil continuing to rally and the dollar and Treasury yields remaining elevated.
Equities:
European shares should steady at the open following Thursday's steep losses, with investors continuing to digest the prospect of interest-rate rises and the recent tech rout.
On Wall Street, stocks finished lower across the board, with Nasdaq giving up a modest bounce in the final minutes of trade as rising Treasury yields and tech-led losses continued to hit sentiment.
Comments from St. Louis Federal Reserve President James Bullard may have further rattled investors, with the central banker saying publicly that the Fed could raise as early as March.
Bullard said although omicron variant cases are expected to subside in the weeks ahead, the first rate hike could come as soon as March, and a balance sheet runoff is one of possible next steps for monetary policy. Bullard is a 2022 voting member of the rate-setting Federal Open Market Committee.
"We're going to have to show everyone that we will take action to keep inflation low and stable and try to hit our 2% inflation target," Bullard said in prepared remarks.
Stocks to Watch:
While unrest in Kazakhstan has put a spotlight on the uranium market--as it accounts for two in every five pounds produced globally--the country is also an important supplier of some other commodities, such as ferrochrome, that risks disruptions, too.
"Kazakhstan is also a significant player in the global ferrochrome market [12% share] via Kazchrome, which is owned by Eurasian Resources Group," said Morgan Stanley.
Should its supplies be disrupted, Finland's Outokumpu could find its ferrochrome--which account for roughly 27% of that company's Ebitda--in high demand, said MS.
Forex:
The dollar was stable in Asia having gained slightly Thursday but Capital Economics said it wouldn't be surprised if the rally in the dollar paused in the short term, but it still expects the relative strength of the economic recovery in the U.S. and monetary tightening there to push the greenback higher against most currencies in 2022.
"At the moment, economic data in the U.S. have come in stronger relative to expectations than those elsewhere, the Fed is continuing to strike a hawkish tone, and net speculative positioning in the DXY index is at its highest level in more than two years."
Sterling's recent rally, driven by U.K. interest rate rise expectations encouraging short sellers to close earlier bets against the currency, appears to have run out of gas, said Societe Generale.
GBP/USD could fall to 1.32 in the "next week or two," said SocGen forex strategist Kit Juckes. "The approach of the [Bank of England's] Monetary Policy Committee meeting on Feb. 3 can provide some support in due course, but a 25 basis points [rate] hike is priced in by March and a move next month isn't a foregone conclusion after the December hike."
The Japanese yen was the worst performing 2021 currency and should continue falling versus the dollar as Treasury yields rise, said SocGen forex analyst Olivier Korber.
"If optimism and a solid U.S. employment report continue to support [Fed] rate hikes, the bond selloff is unlikely to abate and FX markets should look towards USD/JPY at 120."
SocGen has advised buying a USD/JPY three-month reverse knock-out call option with a 117 strike price and a 121 knockout. These options bet on an asset price rising with a cap on the level it can reach in the holder's favor. Taking this option saves 60% of the cost of a vanilla call option, Korber said.
Meantime, TD Securities said USD/JPY's bias is likely to the upside given that the Fed may embark on an earlier start and faster pace of quantitative tightening this year.
This should support higher yields, in particular, higher 10-year real rates as well as more duration supply, TD said, adding this backdrop should be "toxic" for funding currencies such as the yen.
TD Securities sees 118/119 as key upside targets and recommends buying USD/JPY on dips into the 114.80-115.50 area.
Bonds:
The two-year Treasury yield remained elevated at an almost 2-year high in Asia after it led an advance in rates on Thursday as the Fed's Bullard heightened the prospect of a March interest-rate increase. The move extended the rise in yields that followed the release of the Fed's December minutes.
The Fed's more hawkish approach also drove the benchmark 10-year Treasury to 1.733%, its highest level since March and just 0.016 shy of its 52-week high. The yield was a touch lower early Friday.
Nonfarm payrolls data coming out Friday are expected to corroborate the notion that employment levels are getting closer to the Fed's goals, leaving above-target inflation as the bank's main concern.
Capital Economics said the Fed is likely to start selling assets later this year, as it rushes to tighten monetary conditions.
"They would start by allowing maturing assets to run off, but if longer-term bond yields were to remain unusually low, we expect officials would go further and begin actively selling some holdings particularly at the long end."
The research firm believes the Fed has reasons to be more aggressive than in the 2017-19 tightening cycle, as financial conditions are unusually loose. It suspects that "a more hawkish balance sheet policy would be used to supplement, rather than replace, rate hikes."
Energy:
Oil's rally continued, building on a strong start to 2022, as traders worried about unrest in Kazakhstan and production outages in Libya.
The situation in Kazakhstan "is becoming increasingly tense. And this is a country that is currently producing 1.6 million barrels of oil per day, " said Barbara Lambrecht, commodity analyst at Commerzbank, in a note.
The protests in Kazakhstan, which have spread to the oil city hubs in the western part of the country, haven't yet affected production at the 650,000 barrel-a-day Tengiz field, noted Louise Dickson, senior oil markets analyst at Rystad Energy. But Chevron previously announced a temporary adjustment to output due to logistics, she said. The involvement of Russian troops could also further stoke unrest.
"The upward jump in oil prices mostly reflects the market jitters as unrest escalates in Kazakhstan and the political situation in Libya continues to deteriorate and sideline oil output," she said in a note.
In addition, production in Alberta, Canada, has reportedly slowed due to extreme cold, while freezing conditions in the U.S. are reportedly beginning to affect output in the Bakken region of North Dakota, said ING.
Metals:
Gold futures steadied in Asia after they booked their sharpest daily drop in over 6 weeks as the Fed's tightening talk rattled bullion buyers.
OANDA cautioned that if the U.S. nonfarm payrolls report due later significantly exceeds market expectations, gold could be in for more "pain."
Copper prices were also are slightly higher, recovering from a recent downturn on expectations for higher interest rates this year, and seasonal demand weakness ahead of China's Lunar New Year holidays.
Huatai Futures reckons copper's downside may be limited, as spot market transactions have been active with buyers willing to offer high prices due to global supply tightness.
Iron ore prices extended their multiday rally, with Galaxy Futures seeing good demand support from recovering steel-production activities in China, as producers accelerate inventory buying to catch up with output after strict production curbs in late 2021.
But the brokerage advises some caution in the near term, as demand seasonality may slow ahead of the Lunar New Year holidays.
Fitch Solutions said industrial metals prices appear set to decline this year on concerns over global economic growth due to Omicron and continued weakness in China's property sector.
"We forecast the 2022 annual average for all metals under our coverage to be below current levels," adding that it believes base-metal prices peaked in 2021. While manufacturing-linked metals like aluminum and tin may find some support from industrial demand, copper, often seen as a barometer of wider macroeconomic health, may underperform due to a poor macro outlook, Fitch said.
Bank of America said the physical aluminum market is poised to get tighter still as sharply higher power prices put a cloud over more European smelters.
In Europe, around 650,000 tons of capacity has already been cut, and another 900,000 tons are at risk of closing down fully or partially over high energy prices. BofA said those issues "exacerbate concerns over aluminium shortfalls globally."
Stockpiles have already been dwindling, with LME warehouses now holding around 900,000 tons of aluminum, almost 1 million tons less than a year ago.
TODAY'S TOP HEADLINES
Fed's Bullard Eyes Three Rate Rises This Year, Says Fed Must Defend Inflation Credibility
Federal Reserve Bank of St. Louis President James Bullard said the U.S. central bank may need to raise its short-term interest rate target as soon as its March meeting, and follow that action in fairly short order by allowing its massive balance sheet to shrink.
Mr. Bullard, who spoke with reporters after a speech Thursday, said such actions are likely needed to help restrain the surge in inflation. With price pressures at current levels, Mr. Bullard said the Federal Reserve's credibility as an institution that keeps inflation under control "is more at risk today than it's been at any point since I've been at the Fed over the last three decades."
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01-07-22 0044ET
