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North American Morning Briefing: Dow on Track for Worst Week Since January

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Stock futures wobbled Friday, leaving the Dow on track for its worst weekly performance since the end of January.

Futures tied to the Dow Jones Industrial Average wavered between gains and losses. The index of blue-chip stocks had dropped 1.9% this week through Thursday, leaving it poised for its worst showing since it fell almost 3.3% in the last week of January.

Investors have gained some confidence that the Federal Reserve will act to curb rising inflation after policy makers signaled Wednesday that they expect to raise interest rates by late 2023. That has started to take the steam out of a recent rally in stocks linked to a broad economic recovery, leading to a retreat in banking and energy shares this week.

It is also reviving appetite for technology stocks and other assets that could benefit from lower inflation and higher rates.

"If the Fed tapers bond purchases and it raises rates, then all of a sudden the inflation dragon gets tamed," said Gregory Perdon, co-chief investment officer at private bank Arbuthnot Latham. "If inflation gets tamed, you want to buy the long-duration assets," or investments that are sensitive to interest rates, he added.

In the near term, Mr. Perdon expects inflation to creep higher, due to supply-chain bottlenecks, chip shortages, strong demand for goods and services and easing pandemic restrictions. Stocks are still likely to advance, he said.

"The Fed hasn't done anything yet. All they've done is signal, and they're a long way off from doing anything," Mr. Perdon said. "Markets are supported by the trifecta of monetary and fiscal policy and the vaccine rollout. Markets may face a reckoning, but that won't happen in 2021."

Some investors are also booking profits after a strong monthslong rally that has left the S&P 500 off just 0.78% from its record close on June 14.

"Given that a lot of investors are sitting on huge gains, the temptation is to reduce risk," said Luca Paolini, chief strategist at Pictet Asset Management. "When you have the combination of expensive valuations and changes in Fed policies, it's better to lock in gains."

Overseas, the pan-continental Stoxx Europe 600 edged lower, while major indexes in Asia closed on a mixed note.

Stocks to Watch:

Pilgrim's Pride Corp. agreed to acquire the Meats and Meals business of Kerry Group PLC's Consumer Foods segment, as the company expands its prepared foods and branded products business.

The chicken and pork processor said the Meats and Meals businesses have an enterprise value around 680 million British pounds ($947.1 million).

Pilgrim's will add brands such as Denny, Richmond and Fridge Raiders to its portfolio with the deal.

Forex:

The dollar extended its rise, hitting a two-month high against a basket of currencies, after the Fed this week.

Positioning data indicate that the market had been running substantial short dollar positions, which are now being unwound, MUFG said.

However, given that longer-term U.S. bond yields have dropped back, perhaps reflecting the Fed's much tamer message on prospects of tapering asset purchases, a "sustained move stronger for the dollar might not materialize," MUFG's Derek Halpenny said.

The Swiss franc and the Japanese yen's correlation with risk appetite has fallen since the pandemic took hold and the dollar is now the favored safe haven but this isn't sustainable, RBC Capital Markets said.

"The U.S. has some of the properties one would expect to see in a haven (a large, relatively closed economy and light exposure to commodities) but lacks others (it is a net debtor)," RBC's Adam Cole said.

Markets have probably taken yield as a proxy for riskiness recently, lifting the dollar, he said. But as yields normalize, the dollar will turn more risk-neutral and the yen and the franc will re-assume their roles as key havens, he said.

The pound fell, hitting a six-week low of 1.3855 against the dollar after U.K. data showed retail sales fell, raising concerns about a slowing economic recovery.

The currency is also vulnerable to trade tensions between the U.K. and the EU, with the former threatening to unilaterally extend a grace period for processed meat exports to Northern Ireland, ING said.

The next few weeks "could be a vulnerable period" for GBP/USD, which risks falling to 1.3800, ING said,

Bonds:

In bond markets, the yield on the 10-year Treasury note ticked down to 1.489%, from 1.509% Thursday.

Treasuries continue to look attractive to foreign investors on a currency adjusted basis, despite the recent decline in yields, as extraordinary policy actions by global central banks have kept global bond yields low, said U.S. rates strategists Subadra Rajappa and Shakeeb Hulikatti of Societe Generale.

They say foreigners' demand was evident in recnet three- and 10-year UST auctions despite the recent rally which brought the 10-year UST yield below 1.50%.

"Strong demand from Japanese and European investors is also likely to persist in a low interest rate regime," they said.

Commodities:

Oil was lower in Europe, with the firmer dollar continuing to weigh on prices.

DNB Markets' Helge Andre Martinsen points to the dollar's move as being responsible for oil's slip in the past day or so.

Separately, Iran's presidential election takes place today. While that vote might see a hard-liner oust moderate Hassan Rouhani, the backing of Iran's supreme leader means "a change in president is not expected to derail [nuclear] talks," Martinsen added.

Gold futures rose, recovering some of their losses from Thursday, when they suffered their largest drop in over 10 months.

The price of the precious metal tends to decline when investors anticipate rates rising and yield-bearing investments becoming more attractive.

Copper prices also rebounded somewhat but the gains did little to erase the sharp losses the red-metal has seen this week.

Three-month copper on the LME was up 0.6% at $9,246.50 a metric ton, but is set to close the week 7.5% lower.

That would be its worst weekly loss since the pandemic first roiled markets in March 2020. The red-metal has been hit by a combination of Chinese plans to offload stockpiles and a hawkish turn by the Fed.

"Less liquidity from the U.S. and a firmer dollar, plus prospects of a slowdown in China as the top consumer tries to rein in overheated markets weighed on sentiment," said Anna Stablum at brokerage Marex.

   
 
 

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(MORE TO FOLLOW) Dow Jones Newswires

June 18, 2021 06:05 ET (10:05 GMT)

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