North American Morning Briefing: Stock Futures Down as Caution Dominates Again

MARKET WRAPS

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International Trade for August; EIA Weekly Petroleum Status Report: Canada International Merchandise Trade for August; Canada Building Permits for August

Opening Call:

Stock futures fell on Wednesday as a more cautious tone prevailed following a strong start to the fourth quarter.

Wall Street was on course for a relatively mild pullback, as futures suffered some selling after a sturdy rally over the past two sessions.

Johanna Chua, chief Asia economist at Citi, said that though U.S growth remained in better shape than other countries and Fed officials continued to sound hawkish, the market risked being wrongfooted by any signs that interest rates could soon peak.

"Even as the overall fundamental setup has not changed...trimming of bearish risk/bearish rates/bullish USD positions has driven a sharp reversal," Chua said.

This view that oversold conditions and overly bearish sentiment was a key contributor to the latest advance was endorsed by Tom Lee, head of research at Fundstrat, though he accepted that bulls may be chastened by the recent past.

"Given the generally poor win-ratio for rallies in 2022, investors are naturally viewing the gains over the past two days as just another 'bear market rally'," Lee said.

Still, a number of shifting factors suggest the positive run could continue, according to Lee.

These included the dip in Fed fund futures; a 5% pullback in the dollar index; and the Vix volatility index moving back below 30 with Vix futures back in contango.

In addition: "the Nasdaq 100 was '100% bid' Tuesday...since 1996, this has only happened 6 times, and 6 of 6 times the [Nasdaq 100] is higher 6M and 12M later with average gains of 27% and 34%," Lee said.

U.S. economic updates set for release on Wednesday include the September ADP employment report at 8:15 a.m.; international trade balance data for August at 8:30 a.m.; the September S&P services PMI survey at 9:45 a.m.; and the September ISM services report at 10 a.m.

The ADP report sets up the market for heightened nervousness when the crucial nonfarm payrolls data is published at the end of the week.

"All eyes are on the employment data on Friday, which has priced in tremendous one day volatility in the options market," said Stephen Innes, managing partner at SPI Asset Management.

Stocks to Watch:

Apple is asking its suppliers to shift the production of some AirPods and Beats headphones to India for the first time, as it seeks to diversify its supply chain away from China, Nikkei Asia reports.

Apple is talking with a few suppliers to ramp up production in India as soon as next year, the report said, citing three people familiar with the matter.

Read more here .

Economic Insight:

Oxford Economics said the evidence of the past year shows that inflation has been far from transitory. It believes supply factors and relative demand shifts have been important inflationary forces across advanced economies, and these pressure will subside.

"While we expect inflation to fall back, pressure has grown on central banks to ensure that this happens relatively quickly," Oxford Economics said.

Persistently high inflation has increased the risk that expectations become de-anchored, making central banks tip towards erring on the side of too much policy tightening.

Inflation could fall back sharply without recessions, he says. However, in most advanced economies recessions are more likely than not, Oxford Economics said.

Forex:

ActivTrades said the dollar's recent losses and shift in market sentiment was limited, with strong employment numbers on Friday likely supporting further aggressive Fed tightening, a scenario where the dollar would almost certainly regain the front foot.

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The euro touched parity against the dollar late on Tuesday, but ING said there's not enough "bullish push" to keep EUR/USD above parity on a sustainable basis, as it maintains its forecast of a drop to the low 0.90 area into year-end.

"It's hard to point to any material change in the eurozone's outlook that would warrant a significant return of market appetite for the euro just yet," ING said.

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Sterling looks vulnerable given the U.K.'s tarnished fiscal reputation and after Treasury Chief, Kwasi Kwarteng, pushed back against reports he would bring forward his debt-cutting plan, ING said.

"We suspect that the sterling rebound and the dollar correction may have come far enough and could easily see cable [GBP/USD] reversing to the 1.1200 area," ING said.

Bonds:

With higher yields across maturities, Pimco believes the case is now stronger for investing in bonds and is of the view that high-quality fixed-income markets can now be expected to deliver returns that are much more consistent with long-term averages.

"We think the front end of yield curves in most markets already price in sufficient monetary tightening."

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JPMorgan said bonds are oversold, expecting peaking inflation and inflation expectations, as well as activity weakness to likely cap yields.

It expects activity momentum to stay weak near term, while market pricing of a Federal Reserve terminal rate of 4.6% might not be delivered.

"As activity softens towards contraction, the Fed is likely to become more data dependent," JPMorgan said.

Energy:

Oil prices were little changed in Europe, with investors pausing ahead of an OPEC+ meeting which might see the cartel undertake its biggest supply cut since the pandemic.

Despite Wednesday's muted moves, oil has jumped this week as the market has priced in a large cut in OPEC+ oil quotas. Analysts are girding for a cut of between 500,000 and 1.5 million barrels a day as the group seeks to halt a slide in crude prices.

"OPEC+ has to convincingly demonstrate its desire to restore prices to market fundamentals in order to offer meaningful support for oil benchmarks, amid the wave of demand-destroying policy tightening by central banks around the world," Exinity Group said.

Metals:

Gold and base metals were higher in European trading, with prices supported by a weaker dollar on hopes the Fed will adopt a looser monetary stance.

"Tighter monetary policy has been a strong headwind for base metals, with concerns demand will falter amid higher borrowing costs," ANZ Research said.

TODAY'S TOP HEADLINES

Elon Musk Proposes Closing Twitter Deal on Original Terms

Elon Musk has offered to close his acquisition of Twitter Inc. on the terms he originally agreed to, a sudden and unexpected comedown for the billionaire entrepreneur that could end a monthslong battle he waged to get out of the $44 billion deal.

A lawyer for Mr. Musk communicated the proposal to Twitter's lawyers Monday, according to a copy of a two-sentence letter that was filed with the Securities and Exchange Commission Tuesday afternoon.

Icahn, Others Clean Up on Musk's Twitter About-Face

Elon Musk's decision to end his war with Twitter Inc. isn't just a big win for the social-media company, but also for some big-name investors like Carl Icahn.

Mr. Icahn quietly amassed a Twitter stake of well over $500 million in the past few months and made a sizable profit Tuesday after the shares shot up on news that Mr. Musk offered to close his $44 billion purchase of the social-media giant on the original terms, according to people familiar with the matter.

Juul Prepares to Seek Financing for Potential Bankruptcy Process

Juul Labs Inc. is expected as soon as this week to start discussions with lenders for financing that would carry the company through a potential chapter 11 bankruptcy filing, according to people familiar with the matter.

The vaping company has received inquiries from lenders and will soon formally request debtor-in-possession financing options, one of the people said. Such financing allows companies to pay day-to-day expenses and remain in possession of their business while under bankruptcy protection.

Amazon Freezes Hiring in Retail Division

Amazon.com Inc. is halting hiring in its core retail division through the end of the year, making it the latest big tech company to pull back on hiring as it contends with economic headwinds.

The company is pausing hiring for corporate roles that include tech positions in its retail business, a person familiar with the matter said. The company has posted thousands of openings in the segment in recent months. The New York Times earlier reported on the freeze.

Commodity-Trading Hedge Funds Are Having a Strong Year

Some hedge funds that trade raw materials have generated blockbuster returns this year, making them among the major beneficiaries of exceptionally volatile commodity markets.

Prices for oil, natural gas, metals and grains ripped higher earlier this year as economies reopened from lockdown and the Ukraine war disrupted flows of energy and raw materials.

RBNZ Continues to Raise Rate Sharply to Counter Inflation Threat

The Reserve Bank of New Zealand raised its official cash rate by a further 50 basis points on Wednesday, citing continued inflation pressures across the economy.

The hike takes the official rate to 3.50%, and marks the fifth 50-basis-point rise in the current tightening cycle. Most economists expect the RBNZ will take the cash rate well above 4.0% before it is satisfied that inflation has been tamed.

Student-Loan Forgiveness Plan's Cost Likely to Widen 2022 Federal Deficit

President Biden's student-debt forgiveness plan is likely to widen the federal budget deficit for the just-ended fiscal year, when compared with the White House's previous estimates.

Providing up to $20,000 in student-loan cancellations to millions of Americans will cost $379 billion over roughly three decades, the Education Department estimated. That entire cost will be reflected as a one-time item in the budget results for fiscal year 2022, which ended Sept. 30, a senior administration official said.

As Ukrainian Forces Advance, West Plays Down Threat From Russian Nuclear Weapons

Ukrainian forces accelerated their advance into Russian-held areas of the southern Kherson region as Western officials played down the likelihood of Russia using nuclear weapons in retaliation for its military defeats.

Ukrainian troops announced the liberation of several towns, while Moscow sought to prevent an encirclement of its forces in the east and south of the country. Soldiers posted footage of themselves unfurling the Ukrainian flag over Davydiv Brid and claimed the liberation of Starosillya, Arkhangelskoye and Velyka Oleksandrivka.

North Korea Tests World's Resolve by Sending Missile Over Japan

SEOUL-North Korea's latest missile launch over Japan represents a major escalation that returns Pyongyang to a pattern of provocation it hasn't used in years, testing how much international resolve can be summoned to thwart it.

A particularly strong reaction came from Japan, where in two northern prefectures and islands that stretch south of Tokyo, citizens started their Tuesday mornings with emergency alerts about Pyongyang's intermediate-range missile flying over their country. The incident will likely energize Japan's plans to increase military spending-a policy shift aimed at deterring North Korea and China.

Judge Dismisses Charges Against Seven Former Officials in Flint Water Crisis

A Michigan judge dismissed indictments against several former state officials related to their handling of the Flint water crisis.

The decision followed an earlier opinion from the state Supreme Court that canceled a lower court's ruling due to concerns over how the indictments were handled.

Alabama Argues Before High Court Against Second Black-Majority District

WASHINGTON-The Supreme Court heard Alabama's plea to stop creation of a second Black-majority congressional district, in arguments Tuesday that could reshape federal protections for minority voters.

Black voters and organizations challenged the state's House map under the Voting Rights Act of 1965. In January a special three-judge court in Birmingham, Ala., ordered the new Black majority district to be drawn.

Write to paul.larkins@dowjones.com TODAY IN CANADA

Earnings:

Trilogy Metals 3Q

Economic Indicators (ET):

0815 Official International Reserves

0830 Aug International merchandise trade

0830 Aug Building permits

Stocks to Watch:

Boyd Group Services Reopens Nearly All Florida and South Carolina Collision Repair Centers; Hurricane Will Modestly Impact 3Q and 4Q Results

Link Weighs A$1.27B Proposal From Dye & Durham for Some Business Units

Link Administration is considering an offer worth $830 million from Dye & Durham for its Corporate Markets business and its entire Banking and Credit Management unit.

Link said Dye & Durham had made three proposals recently to acquire some of its businesses, but it had decided not to engage with Dye & Durham on two of them.

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