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EMEA Morning Briefing: Stocks to Tumble as Fed Minutes Surprise on Tightening

01/06/2022 | 12:38am EDT


Watch For:

Eurozone PPI; Germany Provisional CPI, Manufacturing orders/turnover; UK Official Reserves, Services PMI, Narrow money, car registrations; updates from Getlink, Ryanair, Morrisons Supermarkets, Next, Norwegian Air Shuttle

Opening Call:

Steep losses on Wall Street after surprisingly-hawkish FOMC minutes will likely drag European shares deep into negative territory. In Asia, most stock markets retreated, the dollar steadied while the yen gained and there were losses of more than 1% for oil and gold. Elsewhere, the yield on the 2-year Treasury note eased back from a near 2-year high.


European shares are expected to slide Thursday after U.S. interest-rate worries battered global stock markets.

Major U.S. stock indexes fell sharply Wednesday as investors worried that the Federal Reserve might respond more aggressively to rising inflation than previously anticipated. The minutes of the Fed's December policy meeting indicated that officials might lift short-term interest rates as soon as March.

Some officials also thought the Fed should start shrinking its $8.76 trillion portfolio of bonds and other assets relatively soon after beginning to raise rates, the minutes said. Investors would see the move as another way for the Fed to tighten financial conditions to cool the economy.

"If the Fed is looking to move that much faster, then that headwind is a little bit stronger than what the market was originally thinking about at the end of 2021," said Principal Global Investors Chief Strategist Seema Shah.

"Many of our clients are looking at the gains they've had and starting to wonder, 'Hey, should I take a little bit of the cream off the top and put the money aside?,'" said Emerson Ham III, a senior partner with Sound View Wealth Advisors.

Stocks to Watch:

Pfizer and BioNTech will have new data about its vaccine for children under 5 in late March or early April. The companies are testing adding a third dose for everyone under 5 at least eight weeks after their second shot.

Pfizer-BioNTech added the third dose after initial studies of the shots generated a weaker-than-expected immune response among 2- to 5-year-olds. Those aged 6 months to 2 years did meet the immune response criteria. Pfizer and BioNTech pushed back plans to seek FDA clearance for the vaccine in younger children in December.

Read Barron's: Chip Stocks Tumbled on Fed Minutes. Intel Was an Exception


The dollar remained steady in Asia after the Fed minutes and upbeat ADP jobs data, while the yen strengthened, as a generally risk-off sentiment dominated in regional markets.

IG said investors have been caught by surprise by a much more hawkish tone from the FOMC minutes that what many had expected. A shrinking balance sheet and aggressive rate increases indicated by the minutes may have driven concerns over some capping of economic momentum ahead, IG added.

USD/JPY rose to a five-year high earlier this week and could advance further to 119 if the 10-year Treasury yield rises to 2% and the current correlation is maintained, said JPMorgan. It expects the yield to rise to 2% by end-June.

Among risks to the bearish yen scenario are comments from Japanese officials that the yen is weakening too much, said JPMorgan.

Speculation that the Czech National Bank could use the exchange rate as a means of tightening policy by selling foreign currency in order to strengthen the krona is likely to persist even though the central bank has said it won't take such action, said ING.

"There has been some suggestion that the CNB could start selling its foreign exchange reserves to drive EUR/CZK lower and tighten monetary conditions without policy rate increases having to do all the heavy lifting," said ING.

The CNB will start to sell part of the annual income from its forex reserves this month and the topic of the exchange rate playing a role in tightening policy is unlikely to go away soon.

There is concern that mass protests in Kazakhstan over an increase in fuel prices--which led to the government resigning and the president imposing a state of emergency--could affect Bitcoin production.

Last year, China began cracking down on Bitcoin miners, and several moved operations to its western neighbor, making it the second-largest Bitcoin mining country after the U.S.

Canaan, The9 and TAOP all entered Kazakhstan in some form in the last year, hoping to take advantage of a friendlier atmosphere in the energy-rich nation, but a recent power shortage has crimped Bitcoin production. Producing Bitcoin requires computers that use great amounts of electricity.

Earlier this week, Canaan entered into strategic deals with multiple crypto mining firms for a joint-mining business in Kazakhstan.


The two-year Treasury yield eased back Thursday after it jumped to the highest in almost two years on Wednesday, following the Fed minutes. They also helped to push the 10-year yield to its highest level since last April and those gains extended in Asian trading.

The FOMC discussed a range of topics associated with the eventual normalization of monetary policy, with almost all participants agreeing that it would likely be appropriate to initiate balance-sheet runoff at some point after the first rate hike.

Some said that relying more on balance-sheet reduction, and less on rate hikes, could help to limit the flattening of the Treasury yield curve as the Fed attempts to move away from an easy policy stance.

Yields were already higher across the board just before the minutes were released. After their release, the gain in the two-year rate outpaced that of the 10-year yield, leaving the curve flatter on the day at 87 basis points, while the spread between 5- and 30-year rates shrank to around 65 basis points, according to Tradeweb.

JPMorgan economists said the Fed will likely allow its balance sheet to start contracting in September and will probably allow $100 billion of Treasurys and mortgages to run off each month.

That pace is more than double the last balance-sheet contraction, but notably, that's smaller than the $120 billion-a-month purchase pace that dominated most of the balance-sheet expansion.


Oil prices fell more than 1% in Asia, giving back all of Wednesday's gains.

The U.S. benchmark posted its highest finish since late November after government data revealed a sixth consecutive weekly decline in domestic crude supplies, along with a more than 10 million-barrel climb in gasoline inventories.

"The draw in crude was a little less than expected, [but] we saw an eye-opening build in gasoline and a very large build" at the Cushing delivery hub, Tariq Zahir, managing member at Tyche Capital Advisors, told MarketWatch.

Oil largely shrugged off the larger-than-expected builds in petroleum product supplies amid a "growing market consensus that the latest wave of Covid and accompanying decline in demand will be short-lived" and growing concerns over OPEC's ability to delivery on their production goals, said Troy Vincent, senior market analyst at DTN.

OANDA said energy traders are growing optimistic that once the Omicron wave passes, a massive pick-up in air travel will keep supporting the outlook for crude demand.


Gold futures fell 1% in Asia, extending their post-Fed minutes retreat. OCBC said it expects more gold selling pressure ahead, as the Fed embarks on its rate normalization path.

Copper prices were also lower. However, Huatai Futures said that while expectations for higher U.S. rates and rising Treasury yields may pressure buying interest for commodities, copper prices are likely to remain firm with limited downside, given tight supply and low inventories around the world.

Iron ore prices rose 3%, extending the new year gains on growing hopes for better demand in 2022 as steel production recovers in China.

While Beijing imposed substantial output curbs in late-2021, industry data show that the country's major steel producers are resuming production, said Huatai Futures. The rise in steel-producing activity is a major positive for iron ore buying sentiment.

Nickel ore production should rise solidly in 2022 and 2023 as there are fewer disruptions to mining in Indonesia and the Philippines and high metal prices encourage producers to dig up more, said Fitch Solutions. However, production increases will later taper off to result in average 4% annual growth for 2021-2030, down from 6.6% a year during 2010-2019.

"The most fragile part of the global nickel mine supply pipeline is in Indonesia, where any delays to development of downstream nickel processing facilities could result strand nickel ore in the country and reduce the incentive for miners to boost output," Fitch said.


Fed Minutes Point to Possible Rate Increase in March

Federal Reserve officials at their meeting last month eyed a faster timetable for raising interest rates this year, potentially as soon as in March, amid greater discomfort with high inflation.

Minutes of their Dec. 14-15 meeting, released Wednesday, showed officials believed that rising inflation and a very tight labor market could call for lifting short-term rates "sooner or at a faster pace than participants had earlier anticipated."

China Services Activity Improved in December

A private gauge of China's services sector rebounded at the end of 2021 after falling in November, as both supply and demand improved.

The Caixin China services purchasing managers index increased to 53.1 in December from 52.1 in November, Caixin Media Co. and research company IHS Markit said Thursday.

U.S. Businesses Add 807,000 Jobs in December, Surpassing Expectations

Private-sector employment boomed in December as concerns over the Delta variant of Covid-19 abated and Omicron's impact had yet to be felt on the economy, according to data from payroll provider ADP released Wednesday.

(MORE TO FOLLOW) Dow Jones Newswires

01-06-22 0037ET

Stocks mentioned in the article
ChangeLast1st jan.
AUSTRALIAN DOLLAR / JAPANESE YEN (AUD/JPY) 0.65% 90.9 Delayed Quote.7.67%
AUSTRALIAN DOLLAR / US DOLLAR (AUD/USD) 0.63% 0.71052 Delayed Quote.-3.14%
BIONTECH SE 0.13% 163.22 Delayed Quote.-36.77%
BITCOIN (BTC/EUR) 2.83% 28640.1 End-of-day quote.-31.86%
BITCOIN (BTC/USD) 3.13% 30331.7 End-of-day quote.-36.46%
BRITISH POUND / JAPANESE YEN (GBP/JPY) 0.63% 160.908 Delayed Quote.2.55%
BRITISH POUND / US DOLLAR (GBP/USD) 0.64% 1.25818 Delayed Quote.-7.70%
CANAAN INC. 3.23% 3.2 Delayed Quote.-39.81%
CANADIAN DOLLAR / JAPANESE YEN (CAD/JPY) 0.35% 100.136 Delayed Quote.9.33%
CANADIAN DOLLAR / US DOLLAR (CAD/USD) 0.39% 0.78284 Delayed Quote.-1.59%
EURO / JAPANESE YEN (EUR/JPY) 1.13% 136.715 Delayed Quote.3.09%
EURO / US DOLLAR (EUR/USD) 1.14% 1.069 Delayed Quote.-7.23%
GETLINK SE 1.04% 18.45 Real-time Quote.25.41%
GOLD 0.35% 1852.6 Delayed Quote.0.89%
INDIAN RUPEE / JAPANESE YEN (INR/JPY) 0.31% 1.648995 Delayed Quote.6.30%
INDIAN RUPEE / US DOLLAR (INR/USD) 0.43% 0.012899 Delayed Quote.-4.36%
INTEL CORPORATION 0.84% 42 Delayed Quote.-19.13%
JAPANESE YEN / SWISS FRANC (JPY/CHF) -0.96% 0.7546 Delayed Quote.-3.90%
JPMORGAN CHASE & CO. 6.19% 124.6 Delayed Quote.-25.90%
LONDON BRENT OIL 0.68% 113.33 Delayed Quote.44.68%
NEW ZEALAND DOLLAR / JAPANESE YEN (NZD/JPY) 0.69% 82.669 Delayed Quote.4.07%
NEW ZEALAND DOLLAR / US DOLLAR (NZD/USD) 0.70% 0.64644 Delayed Quote.-6.31%
NORWEGIAN AIR SHUTTLE ASA -0.74% 10.025 Real-time Quote.-6.05%
PFIZER, INC. 0.78% 52.88 Delayed Quote.-11.14%
RYANAIR HOLDINGS PLC 0.38% 14.355 Real-time Quote.-6.23%
S&P 500 1.86% 3973.75 Real-time Quote.-18.14%
THE9 LIMITED -2.67% 1.46 Delayed Quote.-77.61%
US DOLLAR / JAPANESE YEN (USD/JPY) -0.01% 127.891 Delayed Quote.11.11%
WTI 0.36% 110.563 Delayed Quote.44.84%
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