MARKET WRAPS
Watch For:
Germany Retail Trade, Labour market statistics; France Provisional CPI; UK Money and Credit, BOE Effective Interest Rates, Manufacturing PMI; Italy presidential election; OPEC+ Meeting; no major corporate updates expected
Opening Call:
New records on Wall Street should help European stocks continue their advance on Tuesday. In Asia, equities were mostly higher, along with the dollar, oil and gold, while Treasury yields were flat after they hit their highest levels since November to start 2022.
Equities:
European shares should continue their positive start to the year with further gains likely on Tuesday, after U.S. stocks rose in the first session of 2022.
Apple briefly touched a $3 trillion market capitalization on Monday, which was enough to push the Dow Jones Industrial Average and S&P 500 to fresh record highs, with returning traders betting that Omicron won't shift central bank policy in the months ahead.
"With an underlying omicron is omigone theme pervading, today should see a positive start to European trading," wrote Jeffrey Halley, Senior Market Analyst, Asia Pacific, OANDA.
Forex:
The dollar continued to advance in Asia with the currency's strength bolstered by two narratives, according to Silicon Valley Bank's Minh Trang: it's a bit of a safety play following Omicron-variant headlines and that the U.S. economy remains solid, which will allow the Federal Reserve to raise rates.
Bannockburn Global Forex said the buck is likely to strengthen further in the near term on rate-rise expectations before turning lower in the second half of 2022. The market has priced in nearly 75 basis points of rate rises in 2022 and sees a two-thirds chance of an increase in March, said Bannockburn strategist Marc Chandler. The risk is "on the upside" for inflation in January and February, which will support rate rise expectations.
"We suspect that the dollar's high isn't yet in place and look for a more sustained pullback in the second half of the year as the economy [we anticipate] slows toward trend."
For some on Wall Street, it's not just a question of how soon the Fed might raise rates, but whether the central bank might bump up its currently near zero target by more than the customary quarter percentage point.
BMO Capital Markets said a 50 basis point rate increase could happen if inflation expectations data really started to surge higher. With expectations already swirling toward the possibility of a March rate increase, BMO said "the most compelling scenario for a 50 basis point hike is in the event the Fed waits to see if inflation eases during April/May and are wrong; leaving the FOMC decidedly behind the curve," and needing to catch up with a more aggressive tightening.
The yen weakened against most G-10 currencies as risk appetite improved following equity-market gains in the U.S. and most of Asia.
IG said sentiment may ride on the optimism from Wall Street, although market players have generally been more cautious in taking on more risks in Asia, noting developments such as the Covid-19 resurgence. According to a media report, China's Zhengzhou city in Henan province has entered a partial lockdown from today after some Covid-19 cases were detected Monday.
Sterling continued to pull back against the dollar after recent gains that saw it hit a seven-week high of $1.3551 on Friday.
However, Jefferies sees scope for the pound to rise again on diminishing Covid-19 concerns and prospects of the Bank of England raising interest rates. GBP/USD is well-placed to vault above chart resistance at the 100-day moving average, currently at 1.3564, said Jefferies.
"The U.K. has done a great job trying to remain open and there are early indications that Omicron may be peaking." If true, this could "add further momentum" to sterling's rise in recent weeks and could put more pressure on the BOE to raise rates again on Feb. 3.
Bonds:
U.S. government bond yields were unchanged in Asia after they rose on Monday to their highest levels since November, with returning traders betting the Omicron Covid-19 variant won't shift central bank policy in the months ahead.
"There's still a lot of uncertainty but it seems as if investors are looking through the Omicron variant and thinking about Fed rate hikes," said Gennadiy Goldberg, senior U.S. rates strategist at TD Securities.
Investors will watch for employment numbers coming out Friday, expecting December will show strong job creation, although possibly curbed by the Omicron spread toward the end of the month. Spartan's Peter Cardillo said that, historically, the direction of the markets in the year's first week of trading "generally sets the tone for the ongoing market's performance."
A U.S. stock-market correction and rising bond prices are among this year's list of 10 surprises from legendary Blackstone investor Byron Wien.
Wien and Joe Zidle, chief investment strategist in Blackstone's private wealth solutions group, said they expect strong earnings to clash with rising interest rates, resulting in the S&P 500 making no progress this year. The duo also forecast a correction that approaches but doesn't exceed 20%.
Wien and Zidle said they expect the Fed to complete its tapering and raise rates four times in 2022, and that the bond market will respond to rising inflation and the Fed's tapering, with the yield on 10-year Treasurys hitting 2.75%.
Energy:
Oil extended its gains in Asia rises, with investors looking ahead to the OPEC+ meeting later in the day.
Benchmark crude tested the $80 handle in the last days of trading in 2021, but it has so far failed to return to that level, said OCBC. However, the oil rally is expected to continue in 2022 on recovering Asian demand and persistent inventory tightness globally.
It appears OPEC is unlikely to "change from the script," and will raise output by its expected 400,000 barrels a day, said Phil Flynn, senior market analyst at The Price Futures Group, in Monday note.
Reaction to the early talk on production out of OPEC is "rather muted and oil prices are rising after a big selloff going into the New Year's Day holiday, where we saw prices fall on very light volume," Flynn said. The market appeared to rise "on a risk-on mode and on reports of threats to global supply."
There are reports that Libya expects its oil production to fall by another 200,000 barrels a day as crews work on a damaged pipeline - two weeks after news reports said militias shut down the OPEC member's biggest field, prompting output to drop by 350,000 barrels per day, said Flynn.
"This becomes a bigger issue because OPEC is predicting [a supply] deficit in the next two quarters," he said. "This should be very supportive for prices, especially if [Libyan output] can't get this back online soon."
Metals:
Gold edged higher on a likely technical adjustment, after prices settled at a nearly 2-week low on Monday in the wake of rising stocks and Treasury rates.
Phillip Futures said that from a technical-analysis perspective, the benchmark February gold contract hasn't been able to garner strength to follow through after breaking above resistance at the $1,830 level. In the absence of market-moving fundamentals, gold is expected to continue to form a strong base before moving higher on haven demand, Phillip Futures said.
Copper prices were almost 1% lower, as the commodity continued its fluctuating trading pattern of recent weeks. While any tightening in U.S. monetary policies would curb inflation and pressure down copper prices, low inventory levels around the world will prevent any substantial weakness and support prices, said Guangzhou Futures.
The brokerage thus expects range-bound trading and said that more price weakness may emerge in coming weeks as China's demand eases ahead of the Spring Festival holidays.
Fitch Solutions said copper prices look set to fall, but not by as much as it previously expected. It has raised its copper price forecast for 2022 to $9,200 a ton from its earlier $8,000 a ton estimate, retaining its bearish outlook as fundamentals weaken in the coming months.
Fitch reckons that tight copper inventories at both the London Metal Exchange and the Shanghai Futures Exchange would ease, while consumption should stay stable. However, copper price declines should be limited by higher 'green demand' amid the expansion of the renewables sector.
Iron ore prices were higher, for the first session of the year on the Dalian Commodity Exchange. The upturn is likely driven by rising expectations of higher steel production in coming months as output curbs ease in the new year, said Huatai Futures.
The brokerage said that an upbeat steel market with good demand and high prices should support buying of iron ore, while restocking demand ahead of the Spring Festival would offer an extra boost.
TODAY'S TOP HEADLINES
China's Manufacturing Sector Rebounded in December, Caixin PMI Shows
A private gauge measuring activity in China's manufacturing sector rebounded in December, ending a two-month contraction and reaching the highest level since June, as output remained strong and input cost inflation eased.
The Caixin China purchasing managers index rose to 50.9 from 49.9 in November, according to data released Tuesday by Caixin Media Co. and researcher Markit. A reading below 50 indicates contraction, while a result above that signals expansion.
Covid-19 Cases Soar to New Records in U.S.
Covid-19 infections continued to soar far above previous peaks across the U.S., as students returned to classrooms while some workers remained home after contracting or being exposed to the virus.
(MORE TO FOLLOW) Dow Jones Newswires
01-04-22 0045ET
