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
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.
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
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
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
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."
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.
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
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
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.
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
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.
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
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
"I think that ultimately they will be right, but I see some
resistance around 0%."
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."
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
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
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
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
Oil Prices Hit Seven-Year High on Rising Geopolitical
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
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
Houthis Fired Drones and Missiles in Abu Dhabi Attack,
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
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
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
Apple Says Senate's Big-Tech Legislation Would Weaken Its
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
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
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.
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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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