MARKET WRAPS
Watch For:
New Home Sales for December; EIA Weekly Petroleum Status Report; Bank of Canada rate decision; results from AT&T, Boeing, Intel, Tesla
Opening Call:
Stock futures climbed Wednesday, with the outcome of a Federal Reserve meeting in the spotlight, along with a fresh batch of earnings from Boeing, Tesla and other big names.
Investors have been whipsawed by recent volatility for markets, driven by disappointment over the earnings season thus far, geopolitical and Covid-19 worries and, most of all, apprehension over Fed tightening to come.
Markets largely expect the first Fed interest-rate hike won't arrive until March, but Wednesday's outcome and comments will still garner close attention.
"It's probably soon time to chill for the Fed hawks, as the Fed hasn't got anything to gain in sending out hawkish messages today: slaughtered equity markets won't help them to get the inflation situation straight," wrote Ipek Ozkardeskaya, senior analyst at Swissquote, in a note to clients.
"On the contrary, a deep dive in the financial markets would only refrain the Fed from doing what it's got to do and worsen inflation," added Ozkardeskaya.
Read: How Powell May Try to Calm Market's Frazzled Nerves
Microsoft shares rose 3% in premarket following the tech giant's results Tuesday. Its stock initially fell, then rebounded after the company's strong revenue forecast for the current quarter.
Overseas, the pan-continental Stoxx Europe 600 jumped 1.6%, while major stock indexes in Asia closed mixed.
Market Insight:
The current correction in global equity markets is unlikely to deepen much further and turn into a bear market, Goldman Sachs said. It added, while higher interest rates are a concern to investors, they are expected amid a transition from an era of deflationary tail risks to one characterized by inflationary risks.
Goldman Sachs forecasts rates will peak around 2.75% in the U.S.--still around 100 basis points higher than market pricing--but this would still be very low relative to history and unlikely to generate a recession. "Rising interest rates are generally not outright negative for equity markets."
The Fed:
Citi said the market has fully priced in a 25 basis point interest rate rise by the Fed in March and it will be looking for a confirmation of that at Wednesday's FOMC meeting. However, it added that the Fed's hints on the terminal rate could be more of a mover for euro duration.
Citi rates strategists' base case is four interest rate hikes in 2022, each for 25 bps. "For euro duration, what perhaps matters more is not what the Fed signals for 2022--where the ECB effectively has closed the hiking window--but if the Fed says anything to prompt a re-pricing of the terminal rate for USD, to which EUR is currently trading with a high beta," Citi said.
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Abrdn said the Fed's meeting is likely to bring few surprises in terms of direct policy moves, but will confirm its recent hawkish pivot and heavily signal the start of interest rate increases in March.
" We think the risk of a short term hawkish surprise--such as ending QE earlier than March--is relatively low, but further out the forecast horizon the risks are skewed towards the Fed delivering more than the 100bps in rate hikes we expect this year," said James McCann, deputy chief economist.
A faster withdrawal of monetary policy support will coincide with a more abrupt tightening in fiscal policy as pandemic support measures fully wind down, McCann added.
Stocks to Watch:
Hawaiian Airlines said the first two of its Boeing 787s due to arrive this year will now come "no earlier" than the first half of 2023, with the delivery dates yet to be firmed. That bumped up cost guidance for the year by half a percentage point.
The airline does plan to expand the premium cabin section on the aircraft, in line with other carriers, and has pushed the ramp up of flights to and from Japan into the second quarter, assuming the country reopens to international travelers.
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Texas Instruments' Dave Pahl said conditions in the latest period were pretty much unchanged from the previous quarter, with strong orders and backlog and lead times for most products stable though "hot spots" continue to exist.
"Customers continue to be selective in their expedite requests, increasingly focusing on products that complete a 'matched set' rather than expediting products across the board," he said in an earnings call.
Inventory days were 116, up four days sequentially but still well below the company's target of 130 to 190 days, CFO Rafael Lizardi said. "We went from draining inventory to now, the last two quarters, we've actually increased inventory, albeit at a relatively low level."
Lizardi added that additional capacity will give TI more legroom. Days of inventory were 123 at the end of 2020 and 144 at the end of 2019.
Forex:
The dollar may weaken if the Fed refrains from suggesting it will tighten monetary policy more aggressively than previously indicated, said UniCredit.
The Fed should confirm expectations that it will raise interest rates in March when the asset purchase program ends and that it won't start quantitative tightening before the fourth quarter.
"An outcome of this type might disappoint those in the market that had in mind a more active Fed today and this may trigger some profit taking against the greenback," said UniCredit. Any declines should be brief, however, offering investors opportunity to buy the dollar at cheaper levels.
Concerns over Russia-Ukraine tensions are likely to prevent the euro from rising considerably against the dollar even if the greenback falls after the Fed's policy decision, said ING.
"The implications of forthcoming sanctions to Russia for the EU-Russia relationships [in particular related to the gas supply] are important factors for the EUR's short-term outlook," ING analysts said.
Until these implications become clearer, the euro will "keep feeling the drag" of Russia-Ukraine tensions so a weaker dollar after the Fed's decision wouldn't be enough to significantly lift EUR/USD.
Bonds:
Treasury yields edged lower in Europe, with investors awaiting a statement from Fed rate-setters that could set the tone for trade in 2022.
Fed policy makers "really need to get their arms around the balance sheet and what the plan is there, in order to not do any pre-emptive tightening, and come to a mind meld about what they are doing in March and whether a 50-basis-point rate hike is on the table," said Greg Staples, head of fixed income in North America for DWS Group in New York. "They're not going to want to commit way too soon."
"The balance sheet would impact inflation and be far more effective in terms of mortgage rates than hiking would be," Staples said via phone. "They could signal there will be no more reinvestment in agency MBS or choose to sell those assets, which would impact the longer end of the curve - whereas a 25- or 50-basis-point hike in the fed-funds rate would affect the front end."
Commodities:
Oil prices ticked higher in Europe as supply remains tight and tensions continue to linger in Ukraine, with market participants concerned about dwindling spare capacity.
"With OPEC's effective spare capacity razor thin, any given nation's underproduction is increasingly difficult to offset," said TD Securities. It added: "The conflict between Russia and Ukraine and tensions in the Middle East [is] the largest source of supply uncertainty."
Read Barron.com: A Rare Oil Bear Thinks $100 Predictions Are Premature
Investors who bet on gold ahead of the recent market turmoil are likely pleased to see that the precious metal has held on to recent gains while most other asset classes have suffered. Comex gold futures were down 0.4% Wednesday but have gained almost 1% so far this month.
"With most asset classes losing money in recent days, even standing still is helpful for an investor's portfolio, so gold has still performed its role as a safe haven," said Rupert Rowling, an analyst at Kinesis Money.
After shunning gold exchange-traded funds for months, investors are flocking back to them amid the turbulence in stock markets. The SPDR Gold Shares ETF saw its largest ever inflows of more than $1.6 billion on Friday, according to data from FactSet.
Inflows have continued this week with a further $273 million flowing into the fund on Monday. The sizable inflows coupled with more modest inflows into other, smaller funds means the 17 gold ETFs tracked by FactSet have seen net inflows of $2.35 billion dollars over the past 30 days.
Copper rose 1.5% on the LME as traders awaited the conclusion of the Fed meeting for guidance on rate rises, with TD Securities saying "a growing cohort of participants [are] hoping the Fed will manage to provide a soothing tone for markets."
TD Securities said that with the central bank's stated goal to dampen inflation, "it's unlikely the Fed will pivot from its plan to start hiking rates as soon as March."
TODAY'S TOP HEADLINES
Intel Wins EU Antitrust Appeal as Court Annuls $1.2 Billion Fine
BRUSSELS-Intel Corp. won an annulment of a $1.2 billion fine issued by the European Union's antitrust regulator more than a decade ago over allegations the microchip producer had used its commercial power to squeeze out a competitor.
The court's decision is a blow to the European Commission, the bloc's main antitrust regulator, which is seeking to expand its reach through new regulations and a reinterpretation of its existing powers. Lawyers said a ruling in favor of Intel could put a greater burden on the commission in pursuing some antitrust cases.
IBM Cloud Makeover Shows Results
International Business Machines Corp.'s yearslong makeover into a hybrid cloud and artificial intelligence company is resonating with customers whose information-technology strategies have been reshaped by Covid-19, industry analysts said.
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01-26-22 0550ET
