MARKET WRAPS
Watch For:
Eurozone Flash Estimate, Car Registrations; U.K. Narrow Money; Italy Provisional CPI; OPEC and non-OPEC Ministerial Meeting; updates from Ferrari, Novartis, Julius Baer, Santander, Publicis, Naturgy Energy, JCDecaux, Swedbank, Novo Nordisk, Orsted, Telenor, Ryanair, Vodafone, Glencore, Imperial Brands, Severn Trent
Opening Call:
A late-session rally in the U.S. and solid gains in a holiday-thinned Asia should help buoy European stocks early Wednesday. Elsewhere, the dollar, Treasury yields and gold were a touch weaker, while oil prices rose.
Equities:
European shares are likely to extend their rally Wednesday, tracking solid gains in other global markets.
U.S. stocks advanced Tuesday after a late-afternoon rally helped indexes notch a three-day winning streak.
All three major indexes finished the day higher, shaking off the choppiness that largely defined the session. For most of the day, U.S. stocks swung between tiny gains and losses before turning solidly higher toward the final hour of trading.
Some investors say they are hopeful that last month's volatility is-at least temporarily-behind them. Many still expect 2022 to be a choppy year of trading, as investors continually re-evaluate their portfolios to account for higher interest rates ahead.
There is also deep skepticism among many investors that the Federal Reserve will raise short-term interest rates as high as they did in the last economic expansion-a level that was itself the lowest peak for rates over the past seven decades.
"We have relatively good economic conditions, in terms of much-higher-than-normal GDP growth, a strong labor market and consumers and companies with strong balance sheets," said Chris Zaccarelli, chief investment officer for Independent Advisor Alliance.
"But you have those big headwinds of the Fed raising rates and reducing [its] balance sheet. I think investors are trying to decide what's a good level...for buying some dips but also making sure they are prepared for potential volatility down the road."
Read: As Fed Sets Stage For March Rate Hike, Investors Face 'Perilous' Backdrop Of Higher Volatility.
Stocks to Watch:
BHP is forecast by Macquarie to declare an interim dividend of $1.30 per share, up 29% year-over-year, when it reports interim earnings on Feb. 15. The miner's payout will likely comprise a minimum dividend of $0.89/share and an additional amount of $0.41/share, Macquarie said.
"We also expect BHP to announce its new net debt target range," said Macquarie, which rates BHP at outperform. "However, we argue that this metric could carry less weight going forward, as the unified company is now more flexible in undertaking non-cash M&A activities."
Forex:
The dollar was little changed against a basket of currencies after it softened Tuesday.
"Seems like we've been talking about King Dollar for a year or so, but now that trade is showing some signs of exhaustion as rate hikes are priced in," said Edward Moya of Oanda.
He believes traders are unsure about how the dollar will react to the end of the stimulus trade because the removal of support may be "difficult for the economy to handle." He also points to signals from oversees: "Inflation pressures are a lot more significant abroad and the pressure on central banks will grow, meaning the ECB is going to have to pivot from cruise control to address inflation."
Westpac said the impetus toward pricing in a more abrupt Fed tightening cycle seems to have its run its course for now, with five rate increases priced in this year. This could prompt the USD Index to give back more of its recent gains although the medium-term bullish trend is very much intact.
Other analysts said a changing monetary environment is expected to keep weighing on forex rates for the time being. Investors expect Friday's January jobs report to help them fine-tune forecasts for the Fed rate increases, which economists see as supportive to the greenback.
Other Currencies:
The euro could extend its gains if eurozone inflation data on Wednesday exceed expectations, Commerzbank said.
The market might bet on the European Central Bank being more "hawkish" in signalling policy tightening at Thursday's meeting if the January inflation data beat forecasts, said Commerzbank currency analyst You-Na Park-Heger. "That means EUR might find further support in the run-up to the meeting on Thursday."
The ECB assumes price pressures will be temporary but the higher inflation is now, the more concerned policymakers will be about it.
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Sterling probably won't appreciate much further versus the euro as the bar is high for markets to raise U.K. interest rate rise expectations, said Danske Bank analyst Mikael Olai Milhoj.
Unless U.K. inflation exceeds expectations over the course of 2022, it will be difficult for markets to price in more rate rises than the current five expected for the year, he said. That means sterling will see less support from relative rates going forward.
"If anything, relative rates may become a drag if markets start to price in more aggressive actions from the ECB/less aggressive actions from the Bank of England."
Danske sees 0.83 as the bottom for EUR/GBP.
Bonds:
The 10-year Treasury note yield edged lower in Asia, but only slightly, after it posted its biggest gains in nearly a week on Tuesday, as investors continued to assess how fast and far the Fed will raise interest rates.
Treasurys are showing some signs of stability after a volatile January that saw the 10-year yield surge to a two-year high around 1.9% before pulling back. Investors are preparing for the launch of a cycle of rate increases by the Fed and a potentially quicker start to the wind-down of the central bank's balance sheet compared with the last tightening cycle once rate increases begin.
"The Treasury market continues to settle into a new trading range as the global central banking community reinforces the hawkish pivot that has defined the beginning of a hiking cycle that is expected to continue well into 2023," said BMO Capital Markets strategists Ian Lyngen and Ben Jeffery.
"It's notable that despite the bounce in domestic equities and a general easing of the initial risk-off sentiment seen throughout much of January, the Treasury market's grand bearish repricing has stalled out-for now."
Fed Officials:
St. Louis Fed President James Bullard on Tuesday said Fed policy isn't as far away from a stance where it would not be boosting the economy as many believe, once the central bank's plans to shrink its balance sheet at a fast pace is factored into the equation.
The Fed's latest estimate of a "neutral" policy rate is 2.5%. At the moment, the Fed has rates close to zero--so on the surface it is 250 basis points away from neutral.
But in an interview with Reuters that was broadcast on its Twitter page, Bullard said actually policy "is not that far from breaching neutral."
Bullard said that he thinks the Fed will launch "some pretty significant balance sheet reduction" pretty soon--at a faster pace than in 2017-19 and the runoff of its portfolio was removing accommodation in another form. Read more here.
Also read: Fed's Harker Leans Against 50 Basis-Point Rate Hike
Energy:
Oil made more modest gains in Asia ahead of an OPEC+ meeting that's expected to boost output and as investors continued to track tensions over Ukraine.
Expectations are for the group to deliver 400,000 barrels a day increase next month, but many in the group are already struggling to hit their quotas, which should support oil prices, Oanda said.
"Fears of disruption to supplies will remain elevated given the winter blast hitting the north and the geopolitical risks abroad."
Late Tuesday, the API reported inventories of crude in the U.S. surprisingly fell by 1.6 million barrels in the latest week, a source citing the data said, but gasoline supplies climbed by a huge 5.8 million barrels. The results, bullish for crude but bearish for gasoline, were released ahead of official inventories data from the Department of Energy due later Wednesday.
Average forecasts in a WSJ survey indicate the DOE report will show crude supplies rose by 1.1 million barrels and that gasoline supplies increased by 1.7 million barrels.
Other Energy News:
Rising corporate demand for voluntary carbon-offset credits is aiding the world's path to net-zero greenhouse-gas emissions, said Dickson Pinner, head of McKinsey's sustainability practice, speaking at a virtual event hosted by the consultancy.
"We have got a bit of a chicken-and-egg situation in terms of what it takes to scale up supply, but if we could unlock things like voluntary carbon markets, that would move investment dollars from high carbon emitters to carbon removal. That also helps with investment flows going from the global north to the global south."
Metals:
Gold futures edged back below the $1,800 level despite some dollar weakness.
A potential driver of gold this week is Friday's U.S. nonfarm payrolls, DailyFX.com said. "A weaker-than-expected print could entice some gold buying, as it could be seen weakening the Fed's resolve to lift in March, even if just a little."
A potential Russian incursion against Ukraine would also boost prices of the safe-haven asset, DailyFX.com added.
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Copper prices were higher, extending a rangebound trading pattern this week with a host of market closures for the Lunar New Year holidays in Asia curbing volumes. A multiday rally last week also has held back substantial buying interest, said ANZ Research.
It reckons the metal will find some support from recent Fed officials' comments that they wouldn't tighten monetary policies too fast, which has likely eased some fears over potential rapid increases in interest rates. But concerns remain over a slowdown in Chinese manufacturing demand this year, which could pressure overall copper prices.
TODAY'S TOP HEADLINES
Fed's Harker Leans Against 50 Basis-Point Rate Hike
(MORE TO FOLLOW) Dow Jones Newswires
02-02-22 0044ET
