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North American Morning Briefing : Stock Futures Steady After Wall Street Records

11/02/2021 | 05:02am EST

MARKET WRAPS

Watch For:

Pfizer Inc. 3Q results; Mondelez International Inc. 3Q results; U.S. Federal Open Market Committee meeting; U.S. general elections.

Opening Call:

Stock futures paused after all three major indexes closed at record highs, as the Federal Reserve was set to begin its two-day policy meeting against a backdrop of sharpening inflation concerns.

The Fed's two-day policy meeting will be a key focus of investors this week who have grown increasingly concerned that a period of rising prices could last longer and weigh more on the economy than central bank officials have suggested. Major central banks elsewhere in the world, concerned about stubbornly high inflation, have been moving forward plans to raise rates.

On Tuesday, the Reserve Bank of Australia signaled it would raise interest rates sooner than expected. The Bank of England is expected to increase rates when it meets on Thursday, while Canada's central bank suggested last week that it could do so as soon as April.

"Virtually every policy taken has been inflationary in nature and the market has been very blasé about it all," said Tim Courtney, chief investment officer at Exencial Wealth Advisors. "The market will disagree, but I think the biggest risk is that the Fed doesn't move fast enough" in raising rates, he said.

Economists expected the Fed on Wednesday to begin winding down its asset-buying program but leave interest rates unchanged. Officials are unlikely to suggest any major changes to their pathway for interest-rate increases, said Mr. Courtney.

While inflation concerns have dragged on investor sentiment, strong earnings for the third quarter have had the opposite effect and helped lift indexes to their record levels. Strong earnings were particularly important to justify a run-up in company valuations, said Mr. Courtney.

"The market had run up so much from the bottom but we had no earnings to show for it. The earnings had to come in to back fill those price moves, " he said.

Pfizer, KKR and Apollo Global Management are among the companies set to report earnings ahead of the opening bell. T-Mobile US, Mondelez International and Lyft will release earnings after markets close.

Forex:

The dollar is expected to stay stuck in a tight range ahead of a Fed policy announcement, said UniCredit. "The return of interest in the USD that emerged abruptly on Friday--with investors looking at the Fed meeting for more information about the first rate hike, while the kick-off of the tapering program is taken for granted at this point--was partially reversed yesterday," it said.

With the Fed's meeting starting on Tuesday, major currencies are likely to be "stuck within tight trading ranges and in 'wait-and-see' mode" after the recent heavy swings, with the DXY dollar index struggling close to 94, the Italian bank said.

Bonds:

The yield on the benchmark 10-year U.S. Treasury note fell to 1.551% from 1.573% on Monday.

The U.S. bond market is pricing in too much pessimism given that the gap between real yields and terminal rates is the widest in more than 10 years, while the five-year/30-year yield curve is back at a point last seen in March 2020, the onset of the pandemic, said Morgan Stanley Wealth Management.

Its global investment committee believes the bond market may have overreacted and will ultimately see TIPS--Treasury Inflation-Protected Security--sell off, real yields rebound and curves steepen, said chief investment officer Lisa Shalett. Morgan Stanley WM recommends investors consider reducing positions in TIPS and expensive long-duration secular growth stocks that are sensitive to rising real rates, she said.

NatWest Markets expects the FOMC to announce tapering of its asset purchases at this week's meeting, with tapering beginning later this month, it said.

NatWest Markets looks for a reduction of $15 billion of the monthly asset purchases, including $10 billion in Treasurys and $5 billion in agency mortgage-backed securities, with the taper concluding in the middle of 2022, it says ahead of the coming Fed meeting.

Fed Chair Jerome Powell is likely to emphasize how tapering allows the Fed flexibility in responding if the economy evolves in a way that deviates from the committee's outlook, NatWest Markets said, which expects the market to take the reduction in asset purchases in stride.

Climbing two-year U.S. Treasury yields in the past month reflect investors' worry that the pace of interest rate rises necessary to mitigate inflation might have to come at a swifter pace than the Fed's current guidance, Morgan Stanley Wealth Management said.

The two-year UST yield almost doubled to over 0.50% in the past month, the highest level since March 2020, it says. Another sign of the market's weakening faith in the Fed's inflation stance is the flattening of the two-year/10-year yield curve, which indicates skepticism about economic growth prospects, it said.

"This is where we think bond investor pessimism is excessive," Morgan Stanley Wealth Management said.

Commodities:

Oil prices rose with it seeming increasingly likely that OPEC+ will stick to its output policy at Thursday's OPEC+ meeting--raising production by 400,000 barrels a day--"despite mounting pressure from the world's biggest oil consumers," DNB Markets' Helge Andre Martinsen said.

However, according to a Bloomberg survey, OPEC+'s production continues to undershoot the amount by which the cartel is easing cuts, with production for Nigeria and Angola declining on a monthly basis, Martinsen said. "OPEC cut compliance is now at 121%, a clear indication that several OPEC countries struggle with its production capacity," he said.

Gold was flat and could consolidate ahead of the FOMC decision. The precious metal looks set to consolidate around the $1,800/oz level until financial markets get through the expected Fed taper announcement and pushback in signaling when a rate increase might happen, Oanda said.

However, rapid monetary tightening cycles and unbalanced economic recoveries globally could trigger demand for gold in the coming quarters, Oanda added.

Base metals weakened amid concerns about slowing demand from China's property sector. The default of a string of Chinese property developers was causing concerns about waning demand from the sector for the metals, said Anna Stablum, at brokerage Marex.

Volumes are light, however, as investors await the conclusion of the Fed's meeting on Wednesday, she noted. The central bank is expected to start tapering its bond-buying but keep rates unchanged.

TODAY'S TOP HEADLINES

DuPont Plans Moves That Would Remake Chemicals Company

DuPont de Nemours Inc. is planning deals that would remake the famed chemicals company, according to people familiar with the matter, following years of subpar performance in its shares.

DuPont is nearing a deal to buy Rogers Corp., an electronics-materials specialist with a market value of nearly $4 billion, the people said. It also plans to review alternatives for its unit specializing in materials used in the automotive industry, they said.

Amazon Says Fully Vaccinated Workers Can Skip Face Masks

Amazon.com Inc. is relaxing its mask-wearing rules for U.S. employees, letting those who are fully vaccinated against Covid-19 work in its warehouses without a face covering.

The online shopping giant, which has about one million employees in the U.S., had let vaccinated employees go maskless in the spring, but changed course in August as the highly transmissible Delta variant spread.

Ford Taps Non-IT Professionals to Broaden Its AI Expertise

Ford Motor Co. is putting artificial-intelligence development tools in the hands of engineers, designers and other non-IT professionals in an effort aimed at helping the auto maker harness the technology for a range of pressing issues, including supply-chain challenges.

The auto company has trained more than 1,000 employees over the last year on a platform housing home-grown and purchased AI development tools, said Gil Gur Arie, Ford's chief data and analytics officer.

Coke to Pay $5.6 Billion for Full Control of BodyArmor

Coca-Cola Co. is buying full control of BodyArmor for $5.6 billion in a cash deal that values the sports-drink brand at about $8 billion, amping up a rivalry with Gatorade.

Coke, which already owns a stake in BodyArmor, announced the deal Monday, confirming a report Sunday by The Wall Street Journal and recent reporting from other outlets. Earlier this year, Coke disclosed it was in talks to take a controlling stake in BodyArmor.

BP Reports Rise in 3Q Profit; $1.25 Bln Buyback

BP PLC on Tuesday reported a rise in third-quarter profit, beating forecasts, and said that it continues to expect a decline in reported full-year upstream production.

The FTSE 100 energy group also said that it is planning an additional $1.25 billion share buyback before it announces its fourth-quarter results and that it expects upstream underlying production to be slightly higher than in 2020.

Mallinckrodt Kicks Off Defense of $1.7 Billion Opioid Settlement

Mallinckrodt PLC has begun defending its chapter 11 exit plan, a proposal that would reduce its debt and settle litigation the company faces over its production of opioids for roughly $1.72 billion.

A trial addressing the drugmaker's chapter 11 reorganization plan opened Monday in the U.S. Bankruptcy Court in Wilmington, Del. Mallinckrodt sought court protection early last year with the framework of a deal already in hand to resolve its opioid liabilities. The trial could last several weeks.

Rivian Automotive Targets IPO Valuation Just Above $60 Billion

Rivian Automotive Inc. is seeking a valuation in a range just above $60 billion in its initial public offering next week, one of the biggest and most-anticipated deals yet in a blockbuster year for new issues.

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