MARKET WRAPS

Watch For:

Eurozone Consumer Confidence Index; U.K. Retail Sales; updates from Volkswagen, Alstom, Investor, Mediclinic, Grandvision, X5 Retail, Babcock

Opening Call:

A late-session slide on Wall Street sparked by a Peloton warning, will likely hurt European shares early Friday. In Asia, stocks suffered widespread losses, with the dollar, oil and gold all weaker, while demand for bonds pushed Treasury yields lower too.

Equities:

European shares face steep losses Friday after a late-afternoon selloff on Wall Street, showing that investors are still concerned about the prospects of tightening monetary policy and slowing growth.

U.S. stocks slid Thursday, giving up their gains from earlier in the day, as troubling news about Peloton catalyzed Nasdaq's late-day swoon. The tech-heavy index dropped 1.3%, with the S&P 500 falling 1.1%, while the Dow closed almost 1% lower. Earlier in the day, all three major indexes were up, with Nasdaq rising more than 2%.

The drop started when CNBC reported that Peloton was halting production for February and March to adjust for lower demand. That news pushed the stock down 24% on the day, and sent chills through Nasdaq.

The afternoon selloff wasn't surprising, said Sameer Samana, a strategist at Wells Fargo Investment Institute. Even after the recent pullback, selloffs usually need time to find a true bottom. Moreover, on a day like Thursday, it's likely some traders decided to sell into the early gains in order to cut some of their losses from the prior selloffs.

"This is just how markets bottom," he said. "It just takes a few days."

Faced with the prospect of multiple interest-rate rises, cooling growth and inflation at multidecade highs, investors have been reassessing the pandemic-era playbook that focused on outsize gains for growth stocks, such as in tech.

"I don't see a whole lot in the market that is really alarming me. There is no one out there saying 'run for the hills,' but there are those saying they are going to take off risk and reposition to other areas of the market," said Kara Murphy, chief investment officer of Kestra Holdings.

Forex:

The dollar was slightly weaker early Friday but Westpac said the currency should continue to firm into next week's FOMC meeting. While a lot is priced in now, a straight comparison of USD Index versus yield spreads shows that the dollar hasn't fully priced in this story, Westpac added.

Corpay's Karl Schamotta said the latest rise in jobless claims underlies a wider slowdown linked to Omicron "weighing on Treasury yields across the curve and diminishing the dollar's appeal."

"We are starting to see a lift in currencies leveraged to growth in the rest of the world as economies start to catch up with the U.S." Schamotta sees strength ahead for currencies of commodity exporting countries like Australia and Canada.

Commerzbank said elevated U.S. inflation expectations have recently prevented the dollar from rising materially on the market's bets that the Fed will start raising rates in March and deliver four rate rises by year-end. The exact extent and timing of rate rises are less important to the currency market than whether the Fed will lift rates at or above the expected level of inflation.

Inflation should, however, ease to a level well below market expectations over the course of 2022 while the Fed will still lift rates at the projected pace, boosting the dollar, said Commerzbank currency analyst Ulrich Leuchtmann. "We therefore expect EUR/USD levels below the 1.10 mark in the summer."

Other Currency News:

The Turkish lira's stabilization since the government announced measures in December to stem a currency crisis won't last, Commerzbank currency analyst Tatha Ghose said. The measures fail to treat the cause of the currency's weakness--the central bank's unconventional policy of lowering rates to tame high inflation, Ghose said.

Inflation looks set to accelerate in coming months but there is "very little chance" the central bank will lift rates, hence, Turkey has the deepest negative real inflation-adjusted rate in decades, Ghose said. "This is a disaster for the exchange rate outlook." Commerzbank expects USD/TRY to rise to 15 by March this year and to 16 by December 2023.

Ghose said the Hungarian forint is likely to underperform the Czech koruna and the Polish zloty this year as Hungary's real inflation-adjusted rate remains deeply negative. Although Hungary's central bank continues to raise rates each month, the real rate remains negative due to high inflation.

"The real rate on the forint is less negative than on the zloty, but the gap has begun to narrow as the Polish central bank is now catching up." Commerzbank expects EUR/HUF to rise to 375 by September.

The Fed's digital dollar paper flagged that a prospective Fedcoin could have major implications for a central bank balance sheet officials already want to see made smaller. Launching a digital dollar could affect bank reserves and push them down, the Fed paper, released Thursday said.

"Over the long term, the Federal Reserve might have to increase the size of its balance sheet to accommodate CBDC growth, similar to the balance-sheet impact of issuing increasing amounts of physical currency." While there are a lot of moving parts, some economists have said a Fedcoin could lead to persistently very large Fed balance sheets, although how much isn't known.

Bonds:

Treasury yields fell back in Asia, as a generally risk-off mood dominated regional markets, with bonds in demand.

Yields climbed Thursday, with the two-year rate carving out a 52-week high, as investors looked beyond mixed U.S. data and toward next week's Fed policy meeting.

At next week's gathering, the Fed is expected to lay the groundwork for delivering a rate increase in March, with some investors even penciling in the prospect of a half percentage point rise in the fed-funds rate target rather than a quarter-point increase.

Apollo Global Management's chief economist Torsten Slok expects the U.S. economic recovery to accelerate in six months to a year. "Obviously Omicron has been holding back consumption on some high frequency indicators," he said at a Volcker Alliance event, pointing to restaurant bookings as well as travel and credit-card data.

Mark Zandi, chief economist at Moody's Analytics agreed with Slok's overall assessment and projected four rate hikes this year, adding that he expects the 10-year Treasury yield to be closer to 2.5% by year end. Among Zandi's key assumptions are that each wave of infection is less disruptive and that the Fed will normalize policy quickly.

Energy:

Oil futures extended their retreat in Asian trading. They settled with a modest loss Thursday, easing back from their highest levels since 2014, following an unexpected weekly rise in U.S. crude supplies, but geopolitical risks to global supplies helped to limit price losses.

OANDA said oil could head higher in the near term despite the surprise build in stockpiles, as the global market remains tight. Supply has been disrupted in countries including Libya and the UAE.

ANZ noted that OPEC+ production curb compliance was high, having surged to 120% in December, meaning the group underproduced its monthly target. CBA said the resilience of oil demand amid the spread of Omicron continues to support global prices.

Read: Oil Prices May Soon Rise to $100 a Barrel .

Metals:

Gold was a few cents lower on position adjustment ahead of the weekend, having ended with a slight loss Thursday. The focus of gold traders is shifting to next week's FOMC meeting, with Russia-Ukraine tensions probably factored into current prices, Phillip Futures said.

Rising U.S. interest rates remain a potential headwind since this translates into a higher opportunity cost of holding non-yielding bullion, the brokerage added.

"Gold is finally finding its footing, largely due to the inflationary environment we find ourselves in, combined with the recent weakness in the dollar," said Adam Koos, president at Libertas Wealth Management Group.

"While rising Treasury yields will surely continue to put a ceiling above price, that doesn't change the fact that there is a clear and distinct increase in relative strength not seen since the late-spring 2021 price spike."

Base metals were broadly, with aluminum leading losses.

Brokerage Marex said there are expectations of aluminum production increases in China, putting downward pressure on prices. The country's supply outlook is also improving, with aluminum ingot inventories in China rising from a week ago, the first weekly gain in stocks since Nov. 15.

TODAY'S TOP HEADLINES

Fed Launches Review of Possible Central Bank Digital Currency

WASHINGTON-The Federal Reserve on Thursday launched a review of the potential benefits and risks of issuing a U.S. digital currency, as central banks around the world experiment with the potential new form of money to keep pace with private-sector payments innovations.

Fed officials have been divided on the matter, making it unlikely they will decide soon on whether to create a digital dollar. Unlike private cryptocurrencies like bitcoin, a Fed version would be issued by and backed by the U.S. central bank, a government entity, as are U.S. paper dollar bills and coins.

Senate Panel Approves Antitrust Bill Restricting Big Tech Platforms

WASHINGTON-A Senate panel approved antitrust legislation forbidding the largest tech platforms from favoring their own products and services over competitors', scoring a win for backers of stricter Big Tech regulation against fierce industry opposition.

The American Innovation and Choice Online Act moves next to the Senate floor, where several senators said they wanted to see additional changes before backing the measure. Thursday's 16-6 vote in the Senate Judiciary Committee showed the bill had bipartisan support but also raised bipartisan concerns.

China Evergrande's International Bondholders Threaten Legal Action

A group of China Evergrande Group's international bondholders threatened to move forward with a legal enforcement plan that could potentially include liquidation of the company's assets, after being unable to engage substantively with the troubled property developer for months.

Advisers to the group on Thursday released a strongly worded statement accusing Evergrande of withholding crucial information about its liabilities and failing to engage with its creditors despite the company's recent pronouncements to the contrary. The bondholders, which include global funds, asset managers and distressed investors that hold Evergrande debt, are being advised by investment bank Moelis & Co. and law firm Kirkland & Ellis LLP.

Turkey's Erdogan Meets El Salvador's Bitcoin-Boosting Leader Amid Economic Crisis

ISTANBUL-Turkish President Recep Tayyip Erdogan met Thursday with the leader of El Salvador, the first country to make bitcoin legal tender, while the Turkish central bank kept interest rates on hold in a move that will likely do little to arrest the country's currency crisis.

With El Salvador planning to launch a $1 billion bitcoin-backed bond, Turks and foreign investors closely watched to see if the meeting between Mr. Erdogan and President Nayib Bukele in Ankara would mark a shift in how Turkey's government views cryptocurrencies, despite the past month's slump in bitcoin's dollar value.

Biden Seeks to Reassure Ukraine, Vowing a Strong Response to Russia and Transferring Weapons

President Biden said Thursday that any Russian troop movement into Ukraine would be considered an invasion, seeking to clear up confusion over his position on a potential incursion as the administration gave approval for U.S.-made weapons to be transferred to Kyiv.

"I've been absolutely clear with [Russian] President [Vladimir] Putin. He has no misunderstanding," Mr. Biden said at a White House event. "If any-any-assembled Russian units move across the Ukrainian border, that is an invasion."

Rio Tinto Reviewing Serbia's Move to Revoke Lithium Project Licenses

Rio Tinto PLC said Thursday it was reviewing the legal basis and implications of a decision by Serbia's government to revoke licenses for the mining company's lithium project.

"Rio Tinto is extremely concerned by the statement from the prime minister, Ana Brnabic, about cancelling the spatial plan and revoking licences related to the Jadar project," a company spokesman said.

U.K. Consumer Confidence Drops to a Near Year-Low on Inflation, Omicron Worries

British consumers turned more pessimistic in January as the spread of the Covid-19 Omicron variant and high inflation weighed on households' outlook of the economy and spending plans, according to a survey by the research firm GfK.

GfK's consumer-confidence barometer fell to minus 19 in January from minus 15 December, the lowest level since February 2021. Economists polled by The Wall Street Journal expected the confidence index to retreat slightly to minus 16.

BHP Shareholders Approve Unification Resolutions

BHP Group Ltd. said shareholders have approved a plan to end its dual listing in London.

The company still needs approval from a U.K. court, a hearing for which is expected to be held on Jan. 25, BHP said.

Peloton Warns Staff of Layoffs, Changes to Production

Peloton Interactive Inc.'s chief executive said the company is reviewing the size of its workforce and resetting production levels as the company adapts to more seasonal demand for its exercise equipment.

A note from Chief Executive John Foley was sent to Peloton employees Thursday following a news report that Peloton was temporarily halting production of its connected-fitness products. The report caused shares of the company to sink 24%.

Netflix Shares Sink as Company Sees Subscriber Growth Slowing

Netflix Inc. said it expects to add a much smaller number of subscribers this quarter than it did a year ago as it adjusts to growing competition and lasting disruptions from the coronavirus pandemic, sending the video streamer's shares down sharply.

The company on Thursday forecast an increase of 2.5 million subscribers in the current quarter, compared with four million a year earlier. It also slightly missed its subscriber estimate for the fourth quarter, adding 8.3 million subscribers instead of the projected 8.5 million.

Write to paul.larkins@dowjones.com

Expected Major Events for Friday

00:01/UK: Jan UK Consumer Confidence Survey

07:00/DEN: Jan Consumer expectations

07:00/UK: Dec UK monthly retail sales figures

08:00/SPN: Nov Industrial Orders & Turnover

09:00/POL: Dec Average gross wages

09:00/POL: Dec PPI

09:00/POL: Dec Industrial Production Index

11:00/IRL: Dec WPI

14:00/BEL: Jan Consumer Confidence Survey

15:00/EU: Jan FCCI Flash Consumer Confidence Indicator

All times in GMT. Powered by Kantar Media and Dow Jones.

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(END) Dow Jones Newswires

January 21, 2022 00:41 ET (05:41 GMT)

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