MARKET WRAPS

Watch For:

U.S. Employment Report for December; Canada Labor Force Survey for December.

Opening Call:

Stock futures edged up ahead of the latest jobs report that is expected to provide insight into the labor market recovery and monetary policy ahead.

Stocks came under pressure this week after the Federal Reserve's minutes confirmed its intention to pull back stimulus and suggested it might do so sooner and faster than previously planned, due to high inflation. The S&P 500 is down 1.5% this week, on track for the worst weekly performance since mid-December.

"Everything happening in markets this week was about expectations on how fast the Fed is going to tighten policy," said Fahad Kamal, chief investment officer at Kleinwort Hambros. "This is a transition year where we go from record policy support toward actual tightening. There will be huge volatility as we figure out how to work in this paradigm."

Meme stock GameStop surged over 18% in premarket trading after The Wall Street Journal reported the company was planning to enter the cryptocurrency and nonfungible token markets. AMC Entertainment, another company popular with retail traders, jumped 6.5%.

The jobs report for December is slated to go out at 8:30 a.m. ET, with data on nonfarm payrolls, the unemployment rate and average hourly earnings.

Economists are forecasting that U.S. companies added jobs at a faster pace in December, although the surveys were done before the recent sharp rise in Covid-19 cases.

Fed officials have said labor market health is a crucial factor in their monetary policy decisions. Investors will be scrutinizing the report closely to see if it is consistent with the Fed's plans outlined in the minutes and whether wages are continuing to increase, which could mean more sustained inflation.

"If the data shows the labor market is still running pretty hot, it strengthens the case for hawks that the Fed needs to get on and tighten policy," said Sebastian Mackay, a multiasset fund manager at Invesco.

Lighting company Acuity Brands and transport firm Greenbrier Companies scheduled to report earnings ahead of the opening bell.

Forex:

The dollar fell as investors look ahead to the latest U.S. nonfarm payrolls report. "Investors remain prudent ahead of the first key economic test of the new year," Unicredit analysts said.

A strong payrolls number is expected, meaning the dollar is potentially exposed to some setback should the data disappoint, they said.

However, any declines will be limited with EUR/USD unlikely to breach 1.1380 as the dollar remains supported by the progressive rise in long-term U.S. Treasury yields, they say. If the data meet expectations, fresh dollar strength should emerge and EUR/USD 1.1220 is the first support level to monitor, they said.

The euro may weaken in the first half if eurozone inflation eases before it does in the U.S. and the U.K. ING said.

That would support bets the European Central Bank will lag its peers in raising interest rates.

"We have recently revised our EUR/USD profile to allow for a brief move to the 1.08 area this summer before a recovery back to 1.10 by year-end ahead of the first ECB [interest rate] hike in March 2023," ING analysts said.

Bitcoin fell due to a lack of risk appetite and the internet shutdown in Kazakhstan amid mounting social unrest, Swissquote Bank analyst Ipek Ozkardeskaya said.

"Kazakhstan is one of the biggest power houses for bitcoin miners," she said. Last year the nation became the world's second-largest center for bitcoin mining after the U.S., according to the Cambridge Centre for Alternative Finance.

Bitcoin could test the $40,000 psychological support level, which probably won't attract investors looking to buy the cryptocurrency at lower levels just yet as the prospects of tighter monetary policy globally will weigh on the market mood, Ozkardeskaya said. Bitcoin dropped 1.7% to $42,465, having earlier reached a three-month low of $40,920, according to FactSet.

Bonds:

Government bonds have sold off as markets price in the possibility of earlier interest rate increases and the Fed shrinking its portfolio of bonds in the near future.

The yield on the benchmark 10-year Treasury note steadied, edging down to 1.728% Friday from 1.733% Thursday after four consecutive days of rises. Yields increase as bond prices decline.

European government bond yields rose, with the 10-year German bund yield climbing to minus 0.09%. If it surpasses 0, it will be in positive territory for the first time since 2019.

Commodities:

Oil prices edged up. Global benchmark Brent crude added 0.7% and traded at $82.54 a barrel, the highest level in over eight weeks. Oil supply could potentially be lower due to freezing conditions in North Dakota and Alberta, Canada and if protests in crude producer Kazakhstan affect output, according to analysts at ING.

Bank of America said the physical aluminum market is poised to get tighter still as sharply higher power prices put a cloud over more European smelters.

In Europe, around 650,000 tons of capacity has already been cut, and another 900,000 tons are at risk of closing down fully or partially over high energy prices. BofA said those issues "exacerbate concerns over aluminium shortfalls globally."

Stockpiles have already been dwindling, with LME warehouses now holding around 900,000 tons of aluminum, almost 1 million tons less than a year ago.

Fitch Solutions said industrial metals prices appear set to decline this year on concerns over global economic growth due to Omicron and continued weakness in China's property sector.

"We forecast the 2022 annual average for all metals under our coverage to be below current levels," adding that it believes base-metal prices peaked in 2021.

While manufacturing-linked metals like aluminum and tin may find some support from industrial demand, copper, often seen as a barometer of wider macroeconomic health, may underperform due to a poor macro outlook, Fitch said.

While unrest in Kazakhstan has put a spotlight on the uranium market--as it accounts for two in every five pounds produced globally--the country is also an important supplier of some other commodities, such as ferrochrome, that risks disruptions, too.

"Kazakhstan is also a significant player in the global ferrochrome market [12% share] via Kazchrome, which is owned by Eurasian Resources Group," said Morgan Stanley.

Should its supplies be disrupted, Finland's Outokumpu could find its ferrochrome--which account for roughly 27% of that company's Ebitda--in high demand, said MS.

Gold prices have suffered this week as expectations of policy tightening from the Fed drive up bond yields.

Comex gold futures were flat, but are on course to end the week down more than 2%.

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01-07-22 0613ET