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North American Morning Briefing: Stock Futures Point to Rebound in Dow

MARKET WRAPS

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Federal Reserve Bank of Philadelphia President Patrick Harker, Federal Reserve Bank of St Louis President James Bullard and Federal Reserve Bank of Dallas President Robert Kaplan to speak at Fed Week.

Opening Call:

Stock futures rose Monday, pointing to a rebound following a tumultuous week that saw the Dow drop by the most in more than seven months.

Stocks appear poised to recover some ground at the start to the week. Investors' risk appetite took a hit last week after Federal Reserve officials signaled that they may raise interest rates sooner than they had previously anticipated. The comments prompted a pullback in prices on stocks, lumber and gold last week, before they ground higher on Monday.

"There are no very strong convictions in the market for the time being," said Nadège Dufossé, head of asset allocation strategy at asset manager Candriam. "The market is really focused on the evolution of rates and central bank comments."

Stocks are likely to remain at roughly current levels, albeit with increased choppiness, if market sentiment doesn't shift in some way, she added.

Higher economic growth and inflation in the coming months is likely to support stocks because Americans will increase spending on goods and services when pandemic restrictions ease, said Fahad Kamal, chief investment officer at Kleinwort Hambros. Technology stocks and long-dated government bonds are likely to outperform if growth and inflation slow after 2023, he added.

"For most investors, looking across the asset landscape, there still remains no alternative to equities," Mr. Kamal said. "Hiring is happening and normality is returning, and all of that is really positive for cyclicality. That is never going to happen in a straight line. As last week showed, there is huge volatility still in equities."

Forex:

The dollar is likely to rise further, especially against low-yielding currencies such as the euro and the Japanese yen, as expectations grow that the Fed will start raising interest rates earlier than previously thought, said ING.

Last week, the Fed unexpectedly forecast rate increases during 2023, while on Friday, St. Louis Fed President James Bullard said he expects interest rates to start rising in 2022.

ING said the market is currently pricing the first U.S. rate rise around November 2022.

These expectations could lift the DXY dollar index--which is "heavily weighted towards European low-yielders"--towards the late-March high of 93.44, from a current level of 92.1110. EUR/USD could fall towards 1.1700, from 1.1892 currently, ING said.

Bitcoin fell 7% from its 5 p.m. ET level on Friday to $32,991.09 Monday. Ether, the second-largest cryptocurrency by market cap, shed more than 8% of its value and joke cryptocurrency dogecoin fell more than 11% to about 25 U.S. cents. The digital assets in recent weeks have come under pressure as China has intensified a clampdown on bitcoin mining.

The euro is likely to fall towards $1.18 on the prospect of a move toward monetary policy tightening in the U.S. while the eurozone retains ultra-accommodative policy, UniCredit said.

On Friday, Federal Reserve Bank of St. Louis President James Bullard said he expects interest rates to start rising in 2022, earlier than the central bank's revised forecast at Wednesday's meeting.

UniCredit also notes comments by Italian Prime Minister Mario Draghi calling for economic stimulus in European countries to bring growth back to pre-pandemic levels.

"The prospect of the Fed accelerating tapering while the eurozone is still considering additional stimulus does not bode well for the common currency," the Italian bank said.

Bonds:

In bond markets, the yield on the 10-year Treasury note ticked down to 1.423%, from 1.449% Friday. The 10-year yield has dropped for five consecutive weeks, its longest stretch of declines since August 2019.

"It is completely linked to the decline in inflation expectations," Ms. Dufossé said. "The market is not pricing overheating anymore in the U.S. economy. Investors think the Fed will be able to contain any overheating in inflation."

The so-called yield curve flattened, with shorter-dated yields rising to reflect higher rate expectations, while longer-dated yields fell because higher interest rates in the near term would likely mean slower growth and lower interest rates further into the future. The biggest moves have been in the difference between 2-year yields and 30-year yields since last Wednesday.

Central banks are likely going to try to brace markets for an eventual removal of monetary accommodation and the U.S. Fed is leading the way on that front by signalling two rate increases in 2023, said Brian Jacobsen, senior investment strategist at Wells Fargo Asset Management.

The first step on what will be a long road to a rate hike will likely need to be a tapering and ceasing of asset purchases, he said, expecting tapering possibly starting late this year. "With enough lead-time, the market can take a taper in stride," he said.

Commodities:

Oil prices edged higher on hopes for strong summer demand and after a hardliner won the Iranian elections. The victory of cleric Ebrahim Raisi in Iran's elections could delay a nuclear deal, said analysts at ANZ.

"The possibility of Iranian oil hitting the market in the short term...looks unlikely," they wrote in a note.

Prices for both varieties have risen over 40% so far this year on strong demand expectations. "The rebound in demand in the northern hemisphere summer is so strong that the market is becoming increasingly concerned about further sharp drawdowns on inventories," said ANZ.

Copper prices continued their selloff as investors fear tighter monetary policy is on the way. Three-month copper on the LME was down 0.8% at $9,073.50 a metric ton.

The metal has now dropped over 11% so far this month after a hawkish turn from the Fed. The Fed's James Bullard said late last week that the central bank could raise rates as early as next year. Those comments have helped intensify the selloff for copper, said Anna Stablum at brokerage Marex.

Investors said comments from Fed officials are now likely to be of key focus until the central bank's officials meet at the next Jackson Hole Symposium in late August.

Gold prices stabilized after ending the week sharply lower as the Fed said it would raise rates sooner than expected.

The precious metal has found support from falling bond yields which have pared back on the gains they made last week after the Fed's meeting.

Some investors have also used the low gold price as a buying opportunity, said Carsten Fritsch, commodities analyst at Commerzbank, pointing to inflows into gold ETFs on Friday.

The SPDR Gold Shares ETF saw inflows of over $632 million on Friday, the biggest one-day gain since January, according to data from FactSet.

   
 
 

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(MORE TO FOLLOW) Dow Jones Newswires

June 21, 2021 06:08 ET (10:08 GMT)

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