MARKET WRAPS
Watch For:
S&P CoreLogic Case-Shiller Home Price Index for November; Conference Board - Consumer Confidence for January; results from American Express, General Electric, Johnson & Johnson, Raytheon Technologies, Canadian National Railway, Microsoft, Verizon Communications
Opening Call:
Stock futures fell Tuesday suggesting Wall Street could come under fresh pressure after starting the week with a roller-coaster session.
Market volatility has picked up in recent sessions, as investors have grown anxious about how rapidly the Federal Reserve will act to combat inflation by raising interest rates and shrinking its balance sheet.
The turbulent trading "showed that investors are facing a dilemma," said Tai Hui, Asia chief market strategist at J.P. Morgan Asset Management.
Investors are anxious about U.S. monetary policy and how that could affect pricier stocks, he said, having moved quickly to price in four or more interest rate increases this year. On the other hand, the economic growth outlook for 2022 is still decent and investors are aware that few assets offer the same long-term return prospects as equities, Mr. Hui said.
U.S. markets are likely to remain volatile at least until the Fed's first rate increase, which is widely expected to be in March, said Jason Liu, the Asia head of the chief investment office at Deutsche Bank's international private bank.
His team cut their stance on U.S. stocks, reflecting both their own holdings and their investment recommendation to clients, to neutral from overweight last week, after maintaining an overweight position for more than a year.
Fed policy makers are meeting on Tuesday and Wednesday this week and are set to resume discussions about how fast they will shrink their nearly $9 trillion bond portfolio.
"Everyone will be watching the Fed's guidance this week," Mr. Liu said.
In Europe, the pan-continental Stoxx Europe 600 rose 1%, recovering some of Monday's steep losses, but stocks in Asia closed deep in the red.
Market Insight:
The Omicron wave, soaring food and energy prices, the sudden drop in stock prices, and the jump in mortgage rates in recent weeks are rattling U.S. consumers and reducing their ability and willingness to spend in January, Pantheon Macroeconomics' chief economist Ian Shepherdson said.
There are signs that Covid-19 cases could have peaked, so the Omicron hit should fade soon, but the other factors dragging sentiment and spending aren't likely to reverse as quickly, he said.
Still, U.S. households are likely to ride out pressures imposed by higher inflation, though that will happen only when people are confident that the danger from Covid-19 has passed, Shepherdson added.
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The profitability of the global container-shipping segment looks set to keep growing, helped by rising charter rates over the past 12 months, according to HSBC Research. It said an increasing number of shippers are entering into contract negotiations earlier, which should help lock in earnings for ship owners.
Earnings tailwinds include China opting to continue its "zero-Covid" policy and any disruption to U.S. West Coast ports. HSBC said that investor concern about longer-term stock valuations are overblown and despite a likely decline in earnings in 2023, the sector should still generate double-digit returns on equity. Near-term dividends or buybacks offer additional cushion to valuations, HSBC said.
Stocks to Watch:
The second union vote happening over mail in February and March at an Amazon warehouse in Alabama would feature many new voters. The Retail, Wholesale and Department Store Union estimated on Monday that about half of the roughly 6,000 eligible voters weren't employees at the facility during the first vote in 2021, when workers overwhelmingly rejected joining the union.
One of the toughest challenges the RWDSU faces in organizing is Amazon's reputation for high turnover. During the first vote, the union estimates about 1,000 workers left around the time voting took place. The second election is taking place after the National Labor Relations Board found Amazon violated labor law during the first vote, a charge Amazon has denied.
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CSX named Sean Pelkey as its chief financial officer, elevating its interim finance chief to the permanent role. The promotion takes effect immediately, CSX said in a press release Monday.
Mr. Pelkey joined the company in 2005, and served as vice president of finance for about four years before he was named interim CFO in June. In his new role, succeeds Kevin Boone, who currently serves as the company's executive vice president of sales and marketing.
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Delta Air Lines was upgraded to buy from hold by Berenberg analysts, who see "a better value proposition than the European flag carriers.
The U.S. airlines' demand recovery is more advanced [partly due to their domestic bias], valuations are more compelling relative to history and balance sheets are generally in a better position; the European carriers have been far more hampered by travel restrictions over the past two years," said analysts Conor Dwyer and William Fitzalan Howard, in a note to clients on Tuesday.
They like buy-rated Southwest Airlines for its revenue visibility and balance sheet, the best within in their airlines coverage, while Southwest's recently renegotiated credit card deal with Chase has "the potential to offer a material profit contribution," they said.
The analysts kept a hold rating on American Airlines and United Airlines.
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Walmart is looking for strategic alternatives for its businesses in Honduras, El Salvador and Nicaragua, the most recent move by the retailer to offload an international business.
"These alternatives could include, among others, possible joint ventures, strategic partnerships or alliances, a sale or other possible transactions," the company said in a release.
Company executives have said Walmart is focused on growing its businesses in the U.S., Canada, Mexico, China and India.
Forex:
The dollar could appreciate further in the near term as the Fed is likely to confirm its monetary policy tightening plans at Wednesday's meeting, said MUFG Bank.
"We would be surprised if the Fed provides any signal that it will slow Fed tightening plans as early as this week in response to recent equity market weakness," said MUFG Bank currency analyst Lee Hardman.
"In these circumstances, we continue to favor further dollar strength at the start of this year."
With inflation still well above target and the unemployment rate now under estimates for the long-run level of maximum, Pimco expects the Fed to use the upcoming meeting to reiterate its recent guidance.
"Officials now expect a March lift-off, three to four rate hikes this year and an earlier and faster start to quantitative tightening," said Tiffany Wilding, U.S. economist at Pimco.
Pimco expects QT to begin in June or September. Whether the Fed announces the end of asset purchases in mid-February, one month earlier than the widely expected mid-March date, is a close call, she said.
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The euro looks unappealing amid a stand-off between Russia and the West over fears of a Russia attack against Ukraine, said ING.
"Until events in Ukraine become clearer, we would presume the much greater exposure of European economies to the crisis and the fact that one is still charged for holding euros, does not make the euro a particularly attractive vehicle to ride out the current storm," said ING.
EUR/USD could fall to 1.1265 heading into the Federal Reserve's policy meeting on Wednesday, unless there is a substantial de-escalation of tensions over Ukraine, ING said.
Read Barrons.com: Bitcoin, Ether, Other Cryptos Claw Back Losses but Remain Beaten Down
Bonds:
Yields for government bonds edged higher as investors awaited the outcome of the first Fed meeting of the year.
"I think after ending [quantitative easing] and getting 50-75 bps of rate increases under their belt, the Fed will then see the economic and market reactions, and where the yield curve lies," wrote Peter Boockvar, chief investment officer at Bleakley Advisory Group.
"Then, if the curve has flattened, they'll start [quantitative tightening] in an attempt to steepen it. If the curve still steepens because the market doesn't think they are tightening enough, they'll do more hikes."
BlackRock has slightly reduced its underweight of Treasuries after the surprising yield surge this month, but it continues to see the direction of travel for yields as higher.
"We see the sharp rise in government bond yields this year as consistent with a fundamental asset reallocation driven by investors wanting greater compensation for the risk of holding government bonds."
BlackRock sees the swiftness of these moves as an example of that the market is primed to overshoot amid confusion over the macro backdrop. The reduction of the tactical underweight is a result of that, but BlackRock keeps its strategic underweight unchanged.
Read: 'No Signs of Panic' by Corporate America's Debt Investors
Commodities:
Oil prices rallied in European trading on tensions in Eastern Europe and the Middle East that pose a risk to supply in a tight market.
"The potential sources of geopolitical crisis such as the Russia-Ukraine conflict and the tense security situation in the Middle East, and the associated risks to supply, are likely to preclude any more pronounced price slide," said Carsten Fritsch, an analyst at Commerzbank.
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European gas prices were steady as the continued tensions in Ukraine balanced a moderate increase in gas supplies from Russia.
While the threat of conflict between Ukraine and Russia lingers, flows of gas through the Velke Kapusany gas station on the Ukrainian-Slovak border were expected at 454,175.179 MWh/day Tuesday, the highest amount since Jan. 1, according to data from operator Eustream.
(MORE TO FOLLOW) Dow Jones Newswires
01-25-22 0556ET
