Watch For:

Eurozone, Italy Balance of Payments; Germany PPI; U.K. Retail Sales, BOE/Kantar Inflation Attitudes Survey, CBI Economic Forecast, BOE statistics on UK banks' external claims; ECOFIN meeting of EU finance ministers; update from Iberdrola, Tesco

Opening Call:

Cautious post-Fed action will continue to weigh on European shares on Friday. In Asia, stocks mostly drifted, the dollar, Treasury yields and gold steadied, while oil extended its retreat.


European stocks may struggle for momentum on Friday as investors continue to digest the Federal Reserve's new rate outlook.

On Wall Street on Thursday, major stock benchmarks put in a mixed performance, with technology and other growth-oriented shares rallying, but the Dow falling for a fourth day.

"Just as recent data should enable the Fed to be patient as additional economic developments unfold, we believe that interest rates within the current range, should allow investors to also be patient as they evaluate what's next for the economy and financial markets," wrote analysts at Janus Henderson, on Thursday.

"The stage is set for what I feel is a period of somewhat higher volatility as the narrative changes and traders adjust to a future reduction in liquidity conditions," said Chris Weston, head of research at Pepperstone, in a note. "Powell et al will make it clear that any changes will be glacial and will be communicated well in advance and there is no reason to believe we'll see a collapse in risk sentiment."


The dollar eased back slightly in Asia after its solid push higher on Thursday, with further gains likely as the Fed's hawkish shift continues to affect financial markets, said analysts.

The impulsive nature of the ICE Dollar Index's gains, even as Treasury yields decline, suggests a major washout in dollar shorts is playing out, said Westpac, adding that the index has room to test the March 2021 highs in coming weeks.

Cambridge Global Payments' Karl Schamotta said: "The dollar is smiling once again: In a more-muted echo of the 2013 'taper tantrum', traders and investors are suddenly grappling with the possibility of tighter U.S. monetary policy--something that could lift the greenback out of the belly of the dollar smile. If so, markets could be in for some unexpected summer turbulence."

Saxo Bank said the euro could weaken further against the dollar following the latest Fed projections. "EUR/USD broke down through 1.2000 without much afterthought and the ease with which it did so suggests there may be enough momentum here for more downside still, as the European Central Bank is undergoing no such shift in its stance."

A break below 1.1920 in EUR/USD could see it drop to 1.1750 next, and if EUR/USD drops below 1.1750, that could bring 1.1500 into play.

Nomura said it continues to expect sterling to appreciate against the dollar, though it takes profit on long positions that bet on the exchange rate rising.

Following the Fed's hawkish shift, the market will be expecting more of the same from the Bank of England at its June 24 meeting, said Nomura forex strategist Jordan Rochester. GBP/USD will still strengthen but mostly for "non-BOE reasons" such as the U.K.'s improving social mobility, which will be reflected in upcoming economic data, he said. Nomura expects GBP/USD to rise to 1.51 by year-end from 1.3954 at present.


Yields on U.S. government debt firmed slightly in Asia after they whipped around on Thursday with long-dated Treasurys seeing the biggest slump in weeks in turbulent post-Fed action.

There weren't a lot of clear reasons for the moves, but traders and strategists attributed the gyrations partly to short positioning, bets on bonds being unwound and the view that government bond yields may have gotten out of whack with inflation expectations, which were pared on Thursday. The yield curve, reflecting the difference between long-dated and short-dated debt, also flattened.

The Fed "signaling the intent to take a foot off the accelerator and hovering it over the brake is an effective way to communicate cool reflationary ambitions," said BMO's Ian Lyngen.

PIMCO reckons the Fed will probably lay out its plan to pull back on bond buying at its September policy meeting.

"When the Fed does taper the monthly pace of purchases, it will likely follow a pre-planned, gradual path that takes roughly two to three quarters," wrote bond fund economists, Tiffany Wilding and Allison Boxer, adding they believe the Fed will at some point, amend its current guidance to say it believes it will meet the "substantial further progress" marker "soon."

A day after the Fed pushed up its reverse-repo rate from zero to 0.05%, already high demand has exploded upward. The reserve-repo facility took in a record $756 billion on Thursday, up from $520 billion on Wednesday and near-zero levels only a few months ago.

Some analysts had warned of this outcome amid forecasts the facility could soon be taking in as much as a trillion dollars.


Oil prices continued to retreat in Asia after they fell almost 2% on Thursday, as the dollar strengthened in the wake of the hawkish shift in tone by the Fed.

The rise in the dollar was certainly "a renewed headwind for oil and all commodities," prompting some "cross-asset funds to lighten up on oil positions," said Tyler Richey, co-editor at Sevens Report Research. "Looking across commodities, it does seem like some cracks are emerging in the broader bull run."

OANDA also highlighted concerns over a surge in Covid-19 cases in the U.K. It said that despite mass vaccinations, the surge will likely raise alarm bells over how quickly the rest of Europe will reopen.

Meanwhile, Brent crude may be ripe for further profit-taking if there are more positive developments coming out of the U.S.-Iran nuclear deal talks. "Brent crude might not find much support at the $70 level, but a major pullback seems unlikely," OANDA said.


Gold futures steadied in Asian trade in a likely technical upward correction, after they suffered their biggest one-day percentage drop of the year on Thursday, sliding almost 5%.

Pepperstone said the precious metal is in a grossly oversold condition, based on the daily chart, adding gold might recover toward the $1,800 level.

Copper extended its recent losses, with the Fed's hawkish tone continuing to weigh. Copper's weakness was also exacerbated by China's plan to release base metals onto the market from its strategic reserves, said ANZ. The three-month LME copper contract was last down 0.6% at $9,262.00 a metric ton.

For investors wagering on mining, companies that rely on iron ore are still likely to be the best bet in the near term due to expectations of very large capital returns come earnings season this August, said Jefferies. There's also "the fact that China is not selling iron-ore inventories to drive prices lower," it said, which make the likes of Vale, Rio Tinto and BHP a good defensive play in the short run.

Looking out six months and beyond, it will be time to bet on copper, Jefferies reckons. "Freeport, First Quantum and Glencore are best for 2022."

Citi reckons pockets of weakness in Chinese metals demand won't derail the commodity bull run and more important, will be its supply cuts to domestic steel, aluminum and coal operations, which leave those commodities at risk of price spikes.

"The past month saw more administrative shutdowns of aluminum smelters in Inner Mongolia and Guizhou, as well as curtailments in Yunnan due to power shortages," while local governments elsewhere drew up steel-output reduction plans tied to decarbonization and coal miners faced stringent safety checks after recent mine accidents. Citi said investors should "stay tuned and buy dips."



Fed Reverse Repos Surge to Record of $756 Billion After Rate Tweak

A day after the Federal Reserve boosted the return on a key part of its interest rate control tool kit, a record $756 billion flowed into the central bank's reverse repo facility on Thursday.

The reverse repo facility takes in cash primarily from money-market funds, as well as government-sponsored companies and banks. Until Wednesday, this facility offered a return of zero percent to eligible users, which the Fed moved up to 0.05%, while at the same time lifting another rate, called the interest on excess reserves rate, to 0.15% from 0.10%.


Bipartisan $1 Trillion Infrastructure Package Gains Steam

WASHINGTON-A growing bipartisan group of lawmakers and the White House haggled over how to finance a roughly $1 trillion infrastructure proposal, awaiting feedback from President Biden as Democrats began discussions on a separate economic package that could cost up to $6 trillion.

Since negotiations between Mr. Biden and a group of Senate Republicans collapsed last week, an alternative set of Republican and Democratic senators have held talks on a infrastructure plan that would spend $973 billion over five years, with $579 billion of that funding above expected baseline levels. Initially a group of five Democrats and five Republicans, the group expanded to include 11 Republicans and 10 members of the Democratic caucus on Wednesday.


Supreme Court Rules Cargill, Nestle Can't Be Sued in Child-Labor Case

WASHINGTON-The Supreme Court ruled Thursday that Nestlé USA and Cargill Inc. can't be sued in U.S. courts for abuses allegedly committed in Ivory Coast, where plaintiffs accused the food-processing giants of obtaining cocoa from plantations that relied on the forced labor of children.

The court, in a decision by Justice Clarence Thomas, said the plaintiffs' case didn't have enough of a connection to the U.S. to proceed.


Canada Vaccine Panel Recommends Against AstraZeneca for Second Dose

OTTAWA--A Canadian vaccine panel said Thursday that people who received a first dose of AstraZeneca PLC's vaccine against Covid-19 should get a different vaccine for their second dose.

Canada's national advisory panel on immunization said earlier this month that authorized Covid-19 vaccines could be mixed, and noted some people might prefer to get a messenger RNA vaccine for their second shot. The panel has previously said mRNA vaccines, such as the ones produced by Pfizer Inc. in partnership with BioNTech SE, as well as Moderna Inc., are preferable to viral vector vaccines, such as those developed by AstraZeneca and Johnson & Johnson.


Turkey Commits to Securing Afghan Airport After Americans Leave, U.S. Says

WASHINGTON-The U.S. and Turkey have agreed to a plan for the Turks to continue providing security at the airport in Kabul, U.S. officials said, ensuring the U.S. and other nations can maintain a diplomatic presence in Afghanistan following the withdrawal of troops, expected by next month.

Jake Sullivan, President Biden's national security adviser, told reporters Thursday that both sides had made a "clear commitment" on the security of Hamid Karzai International Airport in Kabul.


Israel Strikes Militant Targets in Gaza After More Arson Attacks

JERUSALEM-The Israeli military hit the Gaza Strip with a series of airstrikes Thursday night, rattling a shaky month-old cease-fire between the two sides that mediators are trying to keep from falling apart.

Soon after, for the first time in nearly a month, air raid sirens sounded the alarm in southern Israel when Gaza militants used heavy machine guns to fire across the border, the Israeli military said.


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Expected Major Events for Friday

06:00/GER: May PPI

06:00/UK: May UK monthly retail sales figures

06:00/ROM: 1Q Employment and unemployment

08:00/POL: May Average gross wages

08:00/EU: Apr Euro area balance of payments

08:30/UK: May Bank of England/Kantar Inflation Attitudes Survey

08:30/UK: 1Q Bank of England statistics on UK banks' external claims

09:00/ITA: Apr Balance of Payments

10:00/POR: May PPI

15:59/GRE: Apr Balance of Payments

17:59/UK: CBI Economic Forecast

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

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This article is a text version of a Wall Street Journal newsletter published earlier today.


(END) Dow Jones Newswires

June 18, 2021 00:26 ET (04:26 GMT)

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