MARKET WRAPS

Watch For:

Eurozone, Italy Balance of Payments; Germany CPI; U.K. Inflation, Producer Prices, House Price Index, Card Spending; IEA Oil Market Report; updates from ASML, EQT, Burberry, Antofagasta, BHP Group, Pearson, easyJet, OMV, Repsol

Opening Call:

Surging Treasury yields will likely hit European shares again on Wednesday. In Asia, there were widespread losses for stocks, with Treasury yields and oil extending their rallies. Elsewhere, the dollar and gold edged lower.

Equities:

European shares face more steep losses Wednesday as bond yields continued their charge higher and as investors fret over whether the Federal Reserve will raise interest rates more quickly and aggressively than expected.

All three major U.S. stock benchmarks closed sharply lower Tuesday, with losses led by Nasdaq, as the high-growth tech sector fell under pressure from the climbing Treasury yields and as investors began digesting a busy week for company earnings. Asian markets tracked those losses early Wednesday.

"We're looking at a year of a totally different monetary environment," said Sam Solem, portfolio manager for Intrepid Private Wealth. "Everyone is trying to digest what three to four Fed rate hikes look like this year."

Yield-sensitive tech and other growth stocks were weighing on Nasdaq, but "it is not all doom and gloom out there, because M&A activity is going well, and the ongoing vaccination efforts by Western governments means the soft patch in U.S. and global data could be short-lived," said Fawad Razaqzada, analyst at ThinkMarkets, in a note.

Stocks to Watch:

BHP's iron-ore output was better than expected, but its production of copper, metallurgical coal and thermal coal all missed expectations, RBC Capital Markets said.

"BHP's result is likely to drive modest consensus downgrades although weaker copper production from SGO [Spence Growth Option] may help pricing in what remains a very tight underlying market," RBC said. It added that with iron ore driving so much of BHP's cash flow, the impact from its 2Q operational report should be relatively muted.

Focus will quickly shift to votes on unification of the miner's stock, due to be held Thursday. RBC expects the plan to pass, "but we also highlight there is a potential asymmetrical benefit from holding the Limited line versus the PLC line if the votes do not pass."

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Fund managers have drastically cut allocations to tech stocks and moved into banking stocks as the prospect of interest-rate increases and quantitative tightening is seen as the top tail risk for markets, Bank of America's monthly fund manager survey for January shows.

Fund managers cut their net overweight holding in tech stocks to just 1% in January, the lowest level since December 2008, while the net overweight allocation to banks rose to 41%, closing in on the October 2017 all-time high, BofA said.

"Investors have gotten more cyclical [i.e. banks, materials] relative to history while at the same time [they are] very underweight assets that are vulnerable to interest rate hikes."

Market Insight:

Rumblings of a 50 basis-point rate rise keep moving through markets as the Fed makes its hawkish shift aimed at bringing inflation back down.

Bill Nelson, a former top central bank staffer now at industry group Bank Policy Institute, said the Fed "needs to prepare the public for the possibility that they will tighten by 50 basis points in March." He said the big move may need to happen because the Fed is behind the curve in getting inflation under control, and it could have some value in reshaping market expectations toward a policy stance that's serious about lowering inflation.

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Investors expect inflation to fall in 2022 and not grow, the BofA January fund manager survey shows.

A majority of investors surveyed said they thought inflation would be transitory and a net 48% forecast lower inflation, the most since 2009. At the same time, investors favor commodities, with the survey showing a record high net 31% were overweight in commodities, with the net overweight to equities also rising to 55%.

Investors are now more overweight in stocks versus bonds, than at any time since February 2011, BofA said. Investors are shifting from credit to commodities, growth to value, tech to banks, but not stocks to bonds, nor from developed markets to emerging markets.

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Turkey's pursuit of the "new economic model," espoused by President Recep Tayyip Erdogan, will likely mean low real interest rates and a persistently weak lira, but also a turn toward capital controls, Jason Tuvey of Capital Economics said.

Erdogan seeks to bolster exports, investments and employment by keeping interest rates low and the local currency competitive. But it is a "dangerous policy mix," Tuvey added.

Sharp falls in the lira risk entrenching inflation at very high levels, while fiscal and banking sector risks grow, with large dollar deposits posing a particularly big risk, he says. In Tuvey's view, there are two scenarios that could trigger a shift back to orthodox policy making: strains re-emerging in the banking sector and a major change in the political landscape.

Forex:

The dollar edged lower in Asia but kept most of Tuesday's gains after Treasury yields charged higher.

The yen also weakened against most G-10 and Asian currencies on prospects that interest rates in Japan could stay low while those in other countries may rise. The Bank of Japan is unlikely to begin tightening monetary policy for the foreseeable future, despite flagging a change to its inflation risk assessment on Tuesday, CBA said.

Hence, nominal U.S.-Japan rate differentials can support further USD/JPY gains, with CBA forecasting the currency pair to rise toward 120.50 by end-2022.

China's central bank may take more measures, including FX purchases, to limit yuan appreciation, Nomura said, referring to PBOC officials' comments at Tuesday's press briefing.

Deputy Gov. Liu said the central bank won't allow one-way moves in the yuan exchange rate, the brokerage noted, citing media reports. The PBOC appears to be sending a clear signal again that the exchange rate has been too strong and that it aims to limit the exchange rate from strengthening further, Nomura said.

In theory, the PBOC will probably stabilize the yuan when facing massive inflows, the brokerage added.

Bonds:

Treasury yields continued to push higher after they surged to their highest levels in roughly two years Tuesday as investors returned from a three-day U.S. holiday, factoring in the risk that the Federal Reserve may deliver a half-point interest rate hike in March.

The yield on the 2-year Treasury note, which is more sensitive to Fed rate expectations, held above the 1% threshold for the first time since February 2020. The 10-year yield climbed above 1.8% to reach its highest since January 2020.

Beyond the size of the first rate hike, some corners of the market are also considering the prospect for a faster-than-expected wind down of bond purchases by the Fed than the current March timeframe, one that might end in February or completely stop in January, though an abrupt halt at the Fed's Jan. 25-26 meeting is deemed as unlikely to happen.

"It's all about the Fed," Scott Buchta of Brean Capital wrote in a note. "The market is quickly beginning to reposition itself for higher inflation rates and a more aggressive Fed," with the probability of a March hike now seen at 100%. Meanwhile, "expectations are growing for a faster wind down of QE purchases [i.e. wind down in Feb, or stop completely in January]."

The 0% level is a key level for 10-year German Bund yields which is likely to emerge as resistance, Schroders said.

At a 0% yield level, buyers have come in, previously, which pushed yields lower, said James Ringer, a member of Schroders's fixed income team.

Looking at sentiment and positioning, many investors expect the 10-year Bund yield to rise significantly through the 0% barrier, Ringer added. He agrees in principle, but thinks this isn't imminent.

"I think that ultimately they will be right, but I see some resistance around 0%."

Energy:

Crude's rally extended early Wednesday, with geopolitical tensions remaining in focus after an attack on an Abu Dhabi oil facility by Iran-backed Houthi militants from Yemen.

"The fact that the Houthis are now capable of setting off explosives at the Abu Dhabi oil facilities must be raising blood pressure on the Nymex, " Michael Lynch, president at Strategic Energy & Economic Research (SEER), told MarketWatch.

ANZ added that Libya's deteriorating political stability has seen oil output suffer, while the likelihood of an Iran nuclear deal in the short term has diminished sharply.

Meanwhile global oil demand could remain resilient despite a surge in cases of the Omicron variant, CBA said. "So far, OPEC has been correct in their assessment that the impact of the Omicron variant is projected to be mild and short--lived."

Metals:

Gold dipped into the red early in the Asian session, caught between higher Treasury yields and lingering safe-haven demand.

The further rise in yields could weigh on prices of the nonyielding precious metal, while global economic risks posed by Omicron may support some safe-haven buying, analysts said.

Copper prices were slightly higher, supported by demand from the green-energy transition and push toward electric vehicles, ING said.

The continuing recovery in the large internal-combustion-engine vehicle market also supports copper demand in China, ING added. This is helping to offset some of the weakness due to the country's slowing property sector.

"We think that China should remain a major driver of growth for metals exposed to the energy transition."

TODAY'S TOP HEADLINES

Omicron's Impact on Oil Demand Weaker Than Expected in Late 2021

Demand for oil was stronger than expected in the final three months of 2021, as rising Covid-19 cases failed to diminish global appetite for crude or result in significant mobility restrictions, the Organization of the Petroleum Exporting Countries said Tuesday.

The major oil producers group raised its demand forecasts by 260,000 barrels a day for the fourth quarter of last year, as demand in wealthier nations, particularly for transport fuels, was stronger-than-expected despite the emergence of the Omicron variant of Covid-19.

Oil Prices Hit Seven-Year High on Rising Geopolitical Tensions

Crude prices rose to their highest level since the 2014 shale-induced oil crash, a milestone in a rally that is gathering momentum as geopolitical tensions threaten to knock supply.

Futures for West Texas Intermediate, the main grade of U.S. crude, added $1.61 per barrel, or 1.9%, to $85.43 on Tuesday. That marks the highest closing level since October 2014, when oil prices were moving in the opposite direction as a gusher of U.S. crude flooded the market.

EQT Aims to Raise Almost $23 Billion for Buyout Fund

EQT AB expects to raise at least EUR20 billion, equivalent to about $22.81 billion, for a 10th buyout fund to further expand its U.S. presence, according to a person familiar with the matter.

If EQT meets its target, the new fund, EQT X, would be more than 28% larger than its predecessor. The Stockholm investment firm raised EUR15.6 billion for EQT IX, its ninth main buyout pool, less than a year ago.

BHP Metallurgical Coal Operations Disrupted by Australia Covid-19 Surge

BHP Group Ltd. said a surge in Covid-19 cases in Australia is causing a shortage of workers at its coal pits that will likely constrain how much steelmaking coal the world's No. 1 miner can produce in its fiscal year.

BHP, which in eastern Australia runs the world's biggest metallurgical coal export operations in joint venture with Mitsubishi Corp., on Wednesday reported an 8% fall in first-half production of the commodity, to 17.7 million metric tons. That prompted the miner to downgrade its full-year production forecast to 38 million-41 million tons, from a prior 39 million-44 million ton estimate.

Houthis Fired Drones and Missiles in Abu Dhabi Attack, Investigation Finds

Iran-backed Houthi militants in Yemen used advanced missiles and drones to target the United Arab Emirates on Monday, according to people briefed on the investigation-a deadly demonstration of the expanding threat to Middle East security posed by Tehran's emboldened allies.

The Houthi strike amounted to the most visible display of the military advancements made by a militia that less than a decade ago relied on machine guns and rocket launchers but now can help Iran project power almost 1,000 miles away from their Yemeni mountain strongholds. The Houthis have hit the U.A.E. before, but this was the first time the Emiratis acknowledged it.

U.S. Aims Sanctions at Pro-Russian Agents as Blinken Plans Ukraine, Russia Meetings

The U.S. is preparing financial sanctions on pro-Russian agents in Ukraine as Secretary of State Antony Blinken heads to Europe to meet the Ukrainian leadership and his Russian counterpart, part of a show of diplomacy and pressure that Washington hopes will dissuade Russia from invading its neighbor, U.S. officials said.

As pressure mounts for the U.S. and its European allies to take swift action to deter Russian escalation, the coming action against individuals in Ukraine rather than the Russian government underscores some of the administration's interest in exhausting diplomatic avenues with Moscow, officials said. The U.S. and its allies hope for a diplomatic breakthrough after four rounds of talks last week failed to narrow the gap between Moscow and Western nations.

Apple Says Senate's Big-Tech Legislation Would Weaken Its User-Privacy Push

Apple Inc. is warning that Senate legislation aimed at reining in large tech companies would weaken a privacy-protection tool that it rolled out last year and has already stung Facebook, Snapchat and other online-ad businesses reliant on user data to target messages.

The Senate Judiciary Committee is set to debate a bipartisan bill, dubbed the American Innovation and Choice Online Act, on Thursday that supporters say aims to protect digital competition. The legislation is set to limit the power of the biggest U.S. tech companies, including Apple, Amazon.com Inc., Google-parent Alphabet Inc. and Facebook's Meta Platforms Inc.

Activision Blizzard's Workplace Problems Spurred $75 Billion Microsoft Deal

When allegations of a toxic workplace at Activision Blizzard Inc. surfaced last year and investors fled the video-gaming giant's stock, Microsoft Corp. rushed in.

A California regulatory agency had sued Activision in July alleging widespread sexual harassment. Then a Wall Street Journal article in November reported that longtime Chief Executive Bobby Kotick knew about allegations of employee misconduct across Activision that he didn't brief the board on, adding to pressure on the company and its stock.

Pfizer's New Covid-19 Pill Works Against Omicron in Lab

Pfizer Inc.'s new Covid-19 pill, Paxlovid, was effective against the Omicron variant in laboratory tests, an encouraging early sign the drug will be an important tool while the strain spreads.

Pfizer said Tuesday the drug's main component, nirmatrelvir, worked in three separate laboratory studies. Patients take two tablets of nirmatrelvir with one tablet of another antiviral called ritonavir twice a day for five days.

Goldman Pays Up for Talent, Sending Profits Down

The bill has come due for Wall Street's deal-making spree, and it is being sent by human resources.

Goldman Sachs Group Inc. said Tuesday it shelled out an additional $4.4 billion in compensation in 2021, sending the bank to its only quarterly profit decline of the year. JPMorgan Chase & Co. on Friday said it had spent an additional $3.6 billion on compensation in 2021, and Citigroup Inc. spent an additional $2.9 billion, dragging down its fourth-quarter profit as well.

Write to paul.larkins@dowjones.com

Expected Major Events for Wednesday

00:01/UK: Dec Scottish Retail Sales Monitor

07:00/GER: Dec CPI

07:00/UK: Dec UK producer prices

07:00/UK: Dec UK monthly inflation figures

09:00/FRA: Jan IEA Oil Market Report

09:00/EU: Nov Euro area balance of payments

09:30/UK: Oct Card Spending statistics

09:30/UK: Nov UK House Price Index

10:00/EU: Nov Construction output

10:00/ITA: Nov Balance of Payments

10:00/GRE: Nov Labour Force Survey

11:00/IRL: Dec CPI

17:59/POR: Nov Balance of Payments

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(END) Dow Jones Newswires

January 19, 2022 00:40 ET (05:40 GMT)

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