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Opening Call:

A post-Powell selloff on Wall Street will likely hammer European shares on Thursday, as concerns mount about the pace of Fed interest rate rises this year. Asian stocks and U.S. futures were deep in the red, while the dollar and Treasury yields pushed higher, adding to Wednesday's hefty gains. Commodities were lower, however, with oil, gold and base metals all suffering modest losses.

Equities:

European shares are likely to slide Thursday as investors digested the possibility of multiple interest-rate hikes by the Federal Reserve this year, starting as soon as March.

The Fed's statement and subsequent news conference kicked off a wild end to the day on Wall Street. Trading was volatile again, with the major U.S. indexes reversing big early gains after Jerome Powell signaled that changes are coming to U.S. monetary policy.

While saying no final decisions have been made yet, Powell said the Fed "was of a mind" to raise the federal-funds rate at its mid-March meeting for the first time since 2018, and didn't rule out the prospect of rate increases larger than 25 basis points given the scope of the inflation challenge. Economists interpreted his comments as opening the possibility of more than four rate hikes this year.

Investors also got new, if vague, details over officials' plans to shrink the Fed's $9 trillion balance sheet, which has doubled since the start of the pandemic and represents nearly 40% of U.S. gross domestic product.

"For now, we maintain our base case for 4 hikes this year, but we now view it as a floor rather than a cap," said Aneta Markowska, chief economist at Jefferies. "The Fed did nothing to contain market expectations to 4 hikes, effectively inviting the market to price in even more."

Forex:

The dollar continued to charge higher against other major currencies, thanks to rallying Treasury yields, after the Fed hinted at an aggressive path of interest-rate hikes.

"Even if the Fed is correct in thinking that intermediate price pressures are abating on many fronts, markets will remain on edge if an inflection point in consumer inflation data is not visible soon," said Corpay Senior Market Strategist Karthik Sankaran.

"Any data that ratifies fears that the Fed's measured approach to hiking is too little--or too late-- could push short-term interest rate markets to price more aggressive rate increases in 2022, hitting equities and commodities and boosting the dollar more broadly."

Westpac said the USD Index has yet to fully price in yield support that has formed in the past several months, let alone what may be in store in the coming months.

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BNP Paribas said if U.S. inflation picks up faster, the Fed could raise rates about six times this year. Economist Ryutaro Kono said that's up from his previous expectation of an increase every quarter.

Kono said the Fed will likely lift rates a quarter-percentage-point at a time rather than trying a bigger move such as a half-point increase. "If the Fed raises interest rates by 50 basis points or more at once, it suggests that it has fallen into a panic. It would upset global financial markets and also increase the chance of overkill."

Other Currency News:

Sterling could come under pressure as the market may be getting ahead of itself in pricing in four U.K. interest rate rises this year, said Validus Risk Management.

The Bank of England has "limited tools" to tame high inflation mainly caused by external factors including rising energy prices and supply chain bottlenecks, Validus analyst Jesus Cabra Guisasola said.

The BOE also has a history of not wanting to hike rates, having left rates unchanged between 2010 and 2013 when inflation was elevated, and it could do the same this time, he says. Coupled with uncertainty surrounding the U.K. government and risk aversion related to Russia-Ukraine tensions, sterling faces "significant headwinds" throughout 2022.

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The Russian ruble remained under pressure as tensions between Russia and the West over Ukraine persist. on Wednesday, USD/RUB rose 1.4% to 79.9210, its highest level since November 2020.

Recent developments suggest "some form of hot conflict" is becoming likely, said TD Securities strategists. Against this backdrop, the ruble and other Russian assets have suffered losses but nowhere near close to that experienced in 2014 and 2015 following Russia's annexation of Crimea, they said.

"We think Russian assets would not sell off as much this time around, unless the worst-case scenario materializes."

Bonds:

Treasury yields extended gains in Asia after 10- and 30-year rates hit their highest in over a week on Wednesday following Jerome Powell's press conference. In addition, the 2-year yield climbed to another 52-week high.

Yields turned higher during Powell's speech even though he said policy makers haven't made any decisions on the path of future rate hikes, and that they will make final choices on shrinking the central bank's almost $9 trillion balance sheet at "upcoming meetings."

Strategists said the lack of specificity around the pace of balance-sheet runoff implies that policy makers are still working out the details

The FOMC "continued to alert markets that it would begin Quantitative Tightening," said Northeast Investors Trust Chairman Bruce Monrad. "If Quantitative Tightening will serve as an active tool to tighten financial conditions, that is a notable change compared to the passive approach to balance sheet runoff taken several years ago."

Reaction to Fed, Powell:

Powell worked hard to keep his options open for both rate rises and balance sheet reduction. But with the Fed chief pretty much locking in an increase at the next Fed meeting, he hinted that balance sheet reduction could start at the June meeting.

How? He flagged the need to debate balance sheet actions at the meeting right after a rate rise, and if that's March, then June appears to be in play for cutting back on the now $9 trillion balance sheet.

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The Fed's new guidelines for the upcoming monetary tightening, called "Principles for Reducing the Size of the Federal Reserve's Balance Sheet, " suggest to Wells Fargo that "the Committee will not rush headlong into shrinking its balance sheet, but that it is moving closer."

Wells Fargo economist Jay Bryson expects that "the FOMC will announce at the September policy meeting that it will begin balance sheet reduction in the fourth quarter, and that the amount of run-off will accelerate over the subsequent few months."

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Capital Economics' Michael Pearce noted that Fed officials agreed to "a short set of principles for reducing the size of the balance sheet, reaffirming that interest rates remain the main policy tool and that the FOMC wants to hold primarily Treasury securities in the longer run."

Pearce said the FOMC statement failed to give details such as caps and how quickly it will allow assets to run off. He said "the Fed is still on track to deliver four rate hikes, beginning in March, and to start normalising the size of the balance sheet by mid-year."

Energy:

Oil prices were lower in Asia after fears of a potential Russian attack on Ukraine helped lift futures Wednesday back to their highest levels in over seven years.

Goldman Sachs said it expected a limited disruption to energy flows despite the tensions, adding that historical precedent suggests sanctions to limit Russian energy exports would be unlikely. Furthermore, an impact from a possible oil or gas pipeline outage in Ukraine should be modest.

It said prices may rise just $2/bbl as a fallout of the ongoing tensions, given that only a limited quantity of undivertible pipeline volume will be affected, because Russia can reroute flows away from Ukraine and use other pipelines instead.

However, Goldman Sachs cautioned that tight inventories remained a concern, so price risks are skewed to the upside.

Metals:

Gold futures fell deeper into the red in Asia after they settled at their lowest in over a week Wednesday, following "Powell's hawkish press conference," said OANDA.

However, rising geopolitical risks remained, so "the path higher for gold is there, but it will likely be a tough grind higher," OANDA added.

Goldman Sachs said gold is likely a good hedge against geopolitical risk, as long as the event is severe enough to impact the U.S. economy, such as the 9/11 attacks or the 2003 Iraq War. The precious metal moves less when events don't have a direct link to the U.S., it said, citing examples including the annexation of Crimea and the 2005 London bombings.

"This may be due to the fact that dollar itself often acts as the safe haven when tensions arise in other parts of the world, rather than gold. But when the U.S. itself is affected investors go for gold as a hedge of last resort."

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Base metals were broadly lower too, as traders weighed supply risks caused by the Russian tensions, said ANZ. Nickel and aluminum could be affected if tensions escalate given Russia's significant market share in these metals.

   
 
 

TODAY'S TOP HEADLINES

Fed Interest-Rate Decision Tees Up March Increase

The Federal Reserve signaled it would begin steadily raising interest rates in mid-March, its latest step toward removing stimulus to bring down inflation.

Fed Chairman Jerome Powell said Wednesday that the central bank was ready to raise rates at its March 15-16 meeting and could continue to lift them faster than it did during the past decade.

   
 
 

China Industrial Profits Rose 34.3% in 2021

China's industrial profit climbed 34.3% in 2021 thanks to strong growth from raw material producers and high-tech manufacturers, official data showed Thursday.

Profit growth slowed sharply at the end of the year, however, rising just 4.2% in December from a year ago, according to figures from the National Bureau of Statistics. In November, industrial profit grew 9.0% from the year-earlier period.

   
 
 

China Evergrande Promises to Play by the Book in Offshore Debt Restructuring

Embattled property developer China Evergrande Group said Wednesday that within six months, it aims to release a global restructuring plan that would respect offshore creditors' legal rights, after a group of its bondholders threatened last week to sue the company for failing to engage with them.

During a call with offshore creditors, Evergrande promised to follow the rule of law and respect bondholders' rights, which in some cases include claims on the company's secured offshore assets, according to people familiar with the matter. Evergrande also said on the call that its founder and Chairman Xu Jiayin might provide additional financial support to the company as it navigates a prolonged restructuring, said the people, who declined to be identified because the call was private.

   
 
 

New SEC Proposal Could Steeply Increase Private-Equity Reporting, Industry Says

A new Securities and Exchange Commission proposal would require private-equity firms to report many more transactions than they do now, a prospect that unnerves many in the industry.

SEC commissioners voted Wednesday for a proposed expansion of the amount of information that private-fund managers report and the frequency with which they have to do so. The agency can put the changes into effect following a public comment period.

   
 
 

Bank of Canada Says Rate Increases Are Coming

OTTAWA-The Bank of Canada held its main interest rate steady at 0.25%, but said rate increases are on the horizon to deal with elevated inflation and an economy running at or near full tilt.

Gov. Tiff Macklem said the decision Wednesday marked the end of emergency policies to support the economy through the pandemic. In the fall, the central bank ended its large-scale asset-purchase program, or quantitative easing, based on economic progress to date. "We're signaling to Canadians that they can expect a rising path for interest rates," he told reporters at a press conference.

   
 
 

UBS Buys Wealthfront for $1.4 Billion to Reach Rich Young Americans

UBS Group AG is buying online wealth adviser Wealthfront for $1.4 billion to reach the young rich and manage more money for people through their devices, the company said Wednesday.

UBS said it would pay cash for the digital platform, one in a clutch of startups whose assets have grown rapidly in an industry shift to automated advice. California-based Wealthfront has $27 billion under management for nearly half a million clients.

   
 
 

U.K. Car Manufacturing Hits 65-Year Low

U.K. car manufacturing fell 6.7% in 2021, marking its worst year since 1956, an industry body said Thursday, blaming the drop mostly on Covid-19-related factors.

The Society of Motor Manufacturers and Traders said that a total of 859,575 cars drove off the production lines last year compared with 920,928 in 2020 and 707,594 in 1956.

   
 
 

U.K. Ad Market Set to Improve After Strongest Year Ever in 2021

The U.K.'s advertising market recovered faster than previously anticipated in 2021 to post its best ever year and spending for 2022 is expected to reach 32.2 billion pounds ($43.44 billion), according to the latest Advertising Association/WARC Expenditure Report released Thursday.

Revised estimates for U.K. advertising market growth for 2021 now stand at 26%, reaching a total value of GBP29.7 billion, up from October's projection of 25% growth.

   
 
 

UK Government Supports Development of Nuclear Project With GBP100 Million of Funding

The U.K. government said Thursday that it will provide 100 million pounds ($135.1 million) of funding for a project to build a new nuclear plant in Suffolk, in the east of England, which is being developed by Electricite de France SA.

The Department for Business, Energy and Industrial Strategy said the funds will be used to continue the development of Sizewell C, attracting further financing from private investors and potentially the U.K. government.

   
 
 

Italian Executives Meet With Putin Amid Tension Over Ukraine

Big European and U.S. businesses are attempting to balance their business interests in Russia with increasing pressure from their home governments to isolate Moscow, as tensions between the West and Russia grow over Ukraine.

In Italy, top business executives held a videoconference with Russian President Vladimir Putin on Wednesday, although some companies pulled out of the long-scheduled event following pressure from Italy's government.

   
 
 

Facebook's Cryptocurrency Venture to Wind Down, Sell Assets

Facebook's ambitious effort to bring cryptocurrency to the masses has failed.

The Diem Association, the consortium Facebook founded in 2019 to build a futuristic payments network, is winding down and selling its technology to a small California bank that serves bitcoin and blockchain companies for about $200 million, a person familiar with the matter said.

   
 
 

Tesla Is a Proven Automaker, an Unproven Tech Giant

With help from China, Tesla has turned itself into an unusually profitable car maker. Whether that makes it a tech company worthy of a near-trillion-dollar valuation is less clear.

As it has scaled up production in its Shanghai factory over the past two years, the electric-vehicle pioneer has accumulated enough profit to make up for all the losses in its previous history. Late Wednesday it reported a 14.7% operating margin for the fourth quarter in an industry where single-digit margins are considered normal.

   
 
 

Write to paul.larkins@dowjones.com

   
 
 

Expected Major Events for Thursday

00:01/UK: Dec Zoopla House Price Index

00:01/UK: Dec UK monthly automotive manufacturing figures

07:00/GER: Feb GfK consumer climate survey

07:00/NOR: Nov Labour force survey SA, incl unemployment

07:00/NOR: 4Q Labour force survey

07:00/SWI: Dec Trade Balance

08:00/SVK: Dec PPI

08:00/SPN: 4Q Economically Active Population Survey

08:00/HUN: Dec Employment & unemployment

09:00/ITA: Nov Industrial turnover & orders

09:00/AUT: Jan Austria Manufacturing PMI

09:00/ICE: Dec Labour Force Survey

11:00/UK: Jan CBI Distributive Trades Survey

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

January 27, 2022 00:45 ET (05:45 GMT)

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