MARKET WRAPS
Watch For:
Eurozone Harmonised CPI, Construction Output; Germany PPI, Ifo Index; U.K. Retail Sales, BOE Quarterly Bulletin; Bundesbank Semi-Annual Forecasts; updates from Julius Baer, Phoenix Group
Opening Call:
A U.S. tech selloff on policy tightening fears is likely to drag on European markets on Friday. In Asia, most stock indexes were lower, along with oil, Treasury yields and the dollar, while gold was firmer.
Equities:
European stocks are likely to retreat at Friday's open, as investors tackle the prospect of tightening monetary policy and possible growth risks due to Omicron.
Most Asian benchmarks were in the red following a downbeat session on Wall Street Thursday. A sharp fall in tech shares pushed major U.S. stock indexes lower, with Nasdaq closing down 2.5%.
"There's a lot going on under the surface," said Adam Phillips, managing director of portfolio strategy at EP Wealth Advisors. "The underlying narrative and sentiment has changed."
Some analysts said that the prospect of higher interest rates has made growth stocks less attractive.
Market Insight:
U.K. companies are facing a range of problems even before any potential impact from the omicron coronavirus variant, said Hargreaves Lansdown. The brokerage points to government survey showing 13% of businesses had no cash reserves in early December--the highest reported percentage since June 2020--while a quarter said coffers were low.
Companies also faced risks from higher-than-usual wages, falling consumer confidence and more customs checks taking effect on Jan. 1 as a result of the U.K.'s EU exit.
"The controls will mean more red tape and checks at ports and could lead to fresh supply-chain bottlenecks, which could be the last straw for some struggling importers and exporters," said analyst Susannah Streeter.
Forex:
The dollar was largely unchanged in Asia, with the USD Index hovering just below the 96.00 level.
TD Securities said with major central bank risks out of the way, there could be little informational value in price action in coming days. The dollar could consolidate into year-end as FX markets work off some residual positioning and value excesses.
Bank of America said dollar support is fading as a high beta rally extends. In the medium term, BofA said it's bearish the dollar against all currencies but the Swiss franc.
"With the December FOMC meeting concluded, we flag with interest that our signals have broadly shifted away from USD and toward the higher beta segment of the FX spectrum. USD signals vs. EUR, CHF & JPY are roughly neutral."
Sterling's gains after the Bank of England raised interest rates could prove temporary, Nomura said.
"The U.K. is likely to continue to witness rising inflation but lagging growth, and this will make it difficult for markets to price in an aggressive BOE above and beyond what is already priced."
The state U.K. investment flows are also "not in a healthy place "with exchange-traded fund inflows having dried up, Nomura said. While real inflation-adjusted rates have "perked up" after Thursday's decision, they don't explain why sterling should materially strengthen over the medium term, especially as inflation will "remain sticky" until at least April.
The Swiss National Bank's decision to leave its assessment of the franc unchanged may seem surprising given the currency's recent appreciation but the central bank justified this by emphasising inflation differentials, ING said.
Swiss inflation has risen but to a much lesser extent than elsewhere, significantly widening the inflation differential, said ING economist Charlotte de Montpellier. "Therefore, if we look at the real effective exchange rate, the value of the franc has not changed a lot since the beginning of the pandemic."
That explains why the SNB still described the franc as "highly valued" rather than "significantly overvalued" as some expected it to say, de Montpellier said.
Bonds:
Treasury yields edged lower still in Asia, extending Thursday's falls.
The two-year Treasury rate saw its biggest drop in almost three weeks on Thursday as investors focused on the impact of Omicron and questioned whether the U.S. can handle higher interest rates projected by the Federal Reserve.
"Even though Powell is talking tough, the bond market doesn't believe the economy can get its legs underneath it," said Michael Franzese, head of fixed-income trading at MCAP. "What the market basically is saying to the Fed is, you won't be able to raise rates much. And if you did, you would have done it by now."
The European Central Bank made a shift in its stance on Thursday which was extremely limited, removing some monetary accommodation only on the margins, said Lombard Odier.
The ECB announced that reinvestments from the PEPP will continue over a very long horizon, and that these can be adjusted flexibly, including the possibility to purchase Greek government bonds, while the regular APP will stay in place for an open-ended period, said Bill Papadakis, macro strategist.
"Rate hikes remain a very distant prospect in the euro area, and the ECB's projection of core inflation below-2% throughout the forecast horizon offer further confirmation," Papadakis said. Lombard Odier expects the deposit rate to remain at -0.50% until late-2023 at the earliest.
HSBC said the ECB's plan for scaling back asset purchases in 2022 implies a "fairly steep" tapering but it's still a long way from raising interest rates.
Noting that the ECB expects asset purchases to end shortly before it lifts rates, HSBC said: "With net purchases now pretty much nailed on until at least the end of 2022, market expectations of a 15 basis points policy rate rise next December look a little overdone."
Inflation is likely to ease below the 2% target in 2023 and 2024, giving the ECB reason to argue against a swift increase in rates.
Energy:
Oil prices retreated in Asia as worries over Omicron persisted and despite upbeat data on U.S. inventories and growing tensions between Russia and Ukraine.
This week's EIA report stoked sharp gains for oil on Thursday, with U.S. prices settling at a roughly three-week high.
The data showed "blockbuster demand for products...and a big drawdown on crude supply, suggesting that the omicron fears that have permeated the marketplace since Thanksgiving Day have been way overstated," said Phil Flynn, senior market analyst at The Price Futures Group.
Metals:
Gold futures gained in Asia, extending Thursday's advance which saw bullion hit a more than 3-week high.
A softer dollar has helped the precious metal but Oanda said it remains to be seen whether gold can continue to push higher in the near term seen, with central banks addressing inflation concerns likely to be bearish.
Copper also rose on supply concerns, after the Las Bambas copper mine in Peru was forced to shut following failure to reach a deal to end community demonstrations and clear a roadblock.
ANZ said that this is the second Peruvian mine, after Cerro Lindo, to suspend operations this week due to protesters. ANZ added that these developments come as inventories of the industrial metal hover near 13-year lows.
TODAY'S TOP HEADLINES
BOJ to Scale Back Some Covid-19 Emergency Stimulus Measures
TOKYO-The Bank of Japan said Friday it would scale back its purchases of commercial paper and corporate bonds, joining other central banks in winding down emergency stimulus related to the Covid-19 pandemic.
The central bank said that starting in April, it would reduce its holdings of commercial paper and corporate bonds to a total of about 5 trillion yen ($43.97 billion) from the previous limit for Y20 trillion. The decision returns the level of the credit-asset holdings to where they were at the beginning of the pandemic in 2020.
U.K. Consumer Confidence Falls Slightly in December on High Inflation, Omicron Fears
British consumers turned slightly more pessimistic in December as high inflation and news about the coronavirus Omicron variant clouded the short-term outlook for both the economy and personal finances.
GfK's consumer-confidence barometer fell to minus 15 in December from minus 14 in November. The decline is less steep than the minus 18 consensus forecast from economists polled by The Wall Street Journal.
EU Leaders Warn Russia to Stay Out of Ukraine
BRUSSELS-European Union leaders warned Russia on Thursday that it would pay a "severe cost" if it carries out a fresh military intervention in Ukraine, but held back for now from detailing the actions they could take to deter the Kremlin.
EU leaders discussed the situation on Ukraine's border on Thursday afternoon after NATO Secretary-General Jens Stoltenberg earlier urged Russia to reverse a buildup of troops, artillery, tanks and drones close to Ukraine that "undermines security in Europe."
U.S. Blacklists Dozens of Chinese Entities Over Surveillance, Military Work
WASHINGTON-The Biden administration added dozens of Chinese companies and research institutes to blacklists restricting access to U.S. investment and technology for their alleged support for China's military and the mass surveillance of mainly Muslim ethnic groups.
The Commerce and Treasury departments targeted an array of Chinese businesses, from a company that lays undersea fiber-optic cables to developers of facial-recognition technology to the world's largest commercial drone-maker, DJI Technology Co. The Commerce action also took aim at China's Academy of Military Medical Sciences and a complex of research institutes under its control.
CDC Recommends Pfizer, Moderna Covid-19 Vaccines Over J&J's
The Centers for Disease Control and Prevention recommended adults take a Covid-19 vaccine from Pfizer Inc. or Moderna Inc. over Johnson & Johnson's after agency officials reported the rate of a rare but serious blood-clotting condition was higher than previously detected.
(MORE TO FOLLOW) Dow Jones Newswires
12-17-21 0043ET
