MARKET WRAPS
Watch For:
Eurozone Quarterly Sectoral Accounts, Balance of Payments; Italy Retail Sales; OECD CPI; World Bank's Global Economic Prospects; ECB's Lagarde speaks at virtual change of office ceremony at Deutsche Bundesbank; U.S. Senate Banking Committee holds nomination hearing for Fed's Powell; updates from BMW, Volkswagen, Sika, SAS
Opening Call:
Europe should open on a firmer footing after a tech rebound on Wall Street. In Asia, stocks were mixed, while the dollar and Treasury yields eased lower. Oil and gold made modest gains.
Equities:
European shares should post modest opening gains on Tuesday, despite a pullback in Asia following a rocky session on Wall Street.
The S&P 500 and Dow fell on Monday as government bond yields continued to rise, signaling that investors expect the Federal Reserve to move quickly in raising interest rates. But in a bright spot for investors, an afternoon rebound erased more steep losses in technology stocks and pushed Nasdaq to a small closing gain.
Some analysts are adopting a much more sanguine view of the market's outlook, despite the imminent tightening of financial conditions.
On Monday, BlackRock Investment Institute's global chief investment strategist, Wei Li, and others said that although central banks will move away from emergency stimulus, they won't necessarily "hit the brakes by raising rates to restrictive levels."
In addition, the three rate hikes being penciled in by Fed policy makers for this year is "more than we expected." "We prefer equities and would use Covid-related selloffs to add to risk," they wrote.
Stocks to Watch:
Volkswagen sold around 3.3 million vehicles in China in 2021, down about 14% from a year earlier, after it was hit by the global semiconductor shortage, its China chief executive said Tuesday.
The auto maker aims to raise sales in the world's biggest auto market by around 15% in 2022 if component supply conditions improve, said Stephan Wöllenstein, CEO of Volkswagen Group China.
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The luxury sector should expect a more polarized year after 2021's recovery lifted all boats, with those players with more pricing leverage likely to win out at the expense of those with less, said UBS.
The "virtuous circle" of pricing power leading to greater brand desirability, amid a higher inflationary environment, means polarization and increasing margin gaps, UBS added, pointing to Prada and Moncler, Richemont and EssilorLuxottica among likely winners.
A potential slowdown in the U.S. market remains the greatest threat to the sector, while the biggest upside lies in a speedy return of Asian tourism, UBS said.
Economic Insight:
Deutsche Bank expects inflation to peak in January, "indicating an inflation market view well aligned to the hawkish messaging from the Fed."
Deutsche said the "less virulent nature of Omicron...somewhat alleviates concerns over further deterioration in supply chain," with smoother global logistics potentially weakening prices.
It also noted that U.S. inflation data on Wednesday will be "the last print to benefit from a 'base effect' as December 2020 marks the final months with stagnant inflation rate before CPI embarked on the current trajectory of rapid growth."
All that means "limited scope for further widening of U.S. breakevens in the short run."
Forex:
The dollar eased back slightly against a basket of currencies, with the US Dollar Index remaining below the 96.00 level. The main focus for forex markets is Jerome Powell's confirmation hearing later Tuesday.
In prepared testimony for the hearing, released Monday, Powell said the Fed would use its tools "to prevent higher inflation from becoming entrenched." Powell's remarks come ahead of what may be the highest U.S. CPI reading since the early 1980s on Wednesday, said DBS.
Overall, the USD Index and the euro are still consolidating in same ranges seen over past month, DBS added.
JPMorgan said: "While the current surge in Omicron cases will have real near-term effects on economic outcomes, the principal driver of the macro backdrop and our FX views remains the increasingly hawkish Fed."
The FOMC minutes "underscored Fed hawkishness as a durable macro theme by bringing quantitative tightening into the policy mix and in doing so defied suggestions that U.S. monetary tightening might have been fully or over-priced in the dollar."
In the medium term, early and swift unwinding of Fed quantitative easing could imply up to around 4% further upside on the broad dollar, JPMorgan said.
JPMorgan CEO Jamie Dimon thinks the Fed is likely to increase interest rates by more than 100 basis points next year. Fed officials have signaled they expect three 25 basis-point increases in 2022.
Dimon, speaking on CNBC, suggested there would be more because he believes consumers and businesses are healthy enough to handle it and inflation would be higher than estimates.
"I'd personally be surprised if it's just four increases next year. It's a very, very little amount and very easy for the economy to absorb." Dimon hopes Omicron may help end the crisis stage of the Covid-19 pandemic: "If that's true, we may have a very, very good spring."
Forex interventions by the Swiss National Bank are probably weighing on the safe-haven Swiss franc despite geopolitical risks, said BMO Capital Markets, after EUR/CHF hit a six-week high of 1.0474 on Monday.
Tensions between Russia and Western nations over a possible Russian invasion of Ukraine, combined with investor positioning in EUR/CHF, likely prompted the SNB to intervene, said BMO forex strategists. With the SNB's assistance, EUR/CHF could rise above 1.05, they said.
"But a climb down by Russia from its current position looks very unlikely, and we don't expect the currency pair to reverse the entirety of its November/December decline."
Bonds:
Treasury yields edged down in Asia after they mostly added to their recent gains on Monday, with the 2-year and 10-year maturities establishing fresh 52-week highs.
"Look for another upward ratchet if December core CPI arrives higher than 5% on Wednesday," wrote Jim Vogel, executive vice president at FHN Financial, in a Monday research note.
" Two things to consider before revising economic and market thinking for the entire year: First, 2022 headlines are incremental and not pivotal. The pivot was six weeks ago. Second, last week's flows pushed yields 20-25bp higher without the volume that accompanies a major turn."
Scarred by events in late 2019 and into the start of the coronavirus pandemic in early 2020, the Fed has since taken action to help shore up bond markets and ensure access to liquidity. But there could still be problems, said Lorie Logan, who leads implementation of monetary policy at the New York Fed.
"These repo facilities alone won't prevent all types of pressures on the Treasury market to the extent that limits on intermediation capacity or sales of Treasury securities are happening for factors other than the need for temporary liquidity," she said on the Macro Musings podcast, adding "repo won't fully substitute for outright sales of securities, but they can meaningfully I think limit the potential for disruptions."
Logan also said Fed asset purchases are an effective tool to help the central bank achieve its policy goals. These purchases work by lowering yields throughout credit markets, and they send a signal about the central bank's commitment to easy policy.
"Our assessment is that [asset purchases] been very effective at easing financial conditions and generally supporting the recovery." And on the tapering of the purchases, Logan said "I think this has gone well, and we haven't observed any challenges associated with the decline and purchase amounts."
Energy:
Crude oil prices rose in Asia, recovering some of Monday's losses. Concerns over disruptions to output in key producers Libya and Kazakhstan remain in focus, while investors will also likely watch for news on the spread of Omicron in China, said ANZ.
There are concerns that the rising number of cases there could trigger more travel restrictions, crimping demand in one of the world's top consumers of oil.
Chinese authorities in the northern coastal city of Tianjin, after the detection of two cases of Covid-19 caused by omicron, ordered the testing of millions of people weeks ahead of the start of the Winter Olympics in nearby Beijing. China has been sticking to a "zero-Covid policy" entailing strict lockdowns and mass testing in response to outbreaks.
Read Barrons.com: Bets Are Rolling In Again for $100 Oil
Metals:
Gold added to Monday's gains, with futures above the key $1,800 level. However, OANDA said there is a lack of momentum to drive the precious metal in either direction and expects bullion to trade around $1,775-$1,815.00 this week.
Gold remains vulnerable to dollar strength and that "any meaningful rally will continue to be unwound aggressively at the first sign of trouble."
Copper prices were lower, extending last week's weakness on rising fears of higher interest rates in 2022.
Huatai Futures reckons the downturn may drag on in the near term, as investors increasingly expect interest rate hikes to start earlier than previously anticipated, which would weigh on commodity prices. Higher copper inventories due to more imports would be another negative factor pressuring buying interest, Huatai said.
TODAY'S TOP HEADLINES
Fed Vice Chairman Richard Clarida to Resign
Federal Reserve Vice Chairman Richard Clarida said he would resign from the central bank on Friday, two weeks before his term on the central bank's board is set to end.
His resignation follows questions raised over financial transactions he conducted at the onset of the coronavirus pandemic. The Fed announced Mr. Clarida's resignation on Monday afternoon, on the eve of Fed Chairman Jerome Powell's Senate confirmation hearing.
Powell Faces Senate Questions Over Fed Plans to Contain Inflation
(MORE TO FOLLOW) Dow Jones Newswires
01-11-22 0040ET
