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North American Morning Briefing: Stock Futures Edge Lower After Dow's 550-Point Rally

MARKET WRAPS

Watch For:

U.S. Existing Home Sales for May.

Opening Call:

Stock futures ticked down Tuesday as investors awaited comments from Federal Reserve Chairman Jerome Powell on the outlook for inflation and the labor market.

Futures tied to the Dow Jones Industrial Average slipped a day after the blue-chip index posted its biggest advance in more than three months. Contracts linked to the S&P 500 index also edged lower, while Nasdaq-100 futures pointed to technology stocks paring back gains at the opening bell.

Stocks have been volatile in recent days as investors looked for clues about how quickly the Fed will move to pull back its support of the economy, and whether the rebound may be stunted. Money managers' concerns about a spike in inflation and the prospect of higher rates have eased, but markets remain on edge.

Mr. Powell plans to tell Congress on Tuesday that job growth should pick up in coming months and temporary inflation pressures should ease as the economy continues to recover from the effects of the pandemic.

He is likely to take questions on the outlook for inflation and the labor market, which may offer fresh insights into the potential pace of interest-rate hikes and the easing of the Fed's bond-buying program.

"The market is in a very fragile, emotional state," said Altaf Kassam, head of investment strategy for State Street Global Advisors in Europe. "It will be a rocky road, it will be bumpy and pronouncements from central bankers are going to get very quick, knee-jerk responses."

Money managers are reconciling themselves to the idea that stimulus measures will be pared back slowly, but not in the immediate future, he added. "There is still plenty of time for markets to get accustomed to [a rate increase]. It really doesn't feel like the beginning of the end just yet."

Existing home sales data, due at 10 a.m. ET, will offer a view into how the American housing market is faring. Economists expect that sales fell in May for the fourth consecutive month as record-high prices put off potential buyers.

Forex:

The dollar may struggle to continue to build on its gains after last week's Fed meeting where policy makers predicted an earlier-than-expected timeframe for raising interest rates, UniCredit said.

Long-term U.S. bond yields "remain low," with the 10-year Treasury yield still "finding it difficult" to breach the 1.50% level, the bank said.

"We warned that if long-term yields continue to face difficulty in moving upwards in the near term, this would dent the post-FOMC USD rally, and this has already been visible in the dollar index (DXY) backpedaling to around the 92 threshold," UniCredit said.

The DXY index was last up 0.1% at 91.9750, having dropped down from a two-month high of 92.4050 reached Friday.

Bonds:

In bond markets, the yield on the 10-year U.S. Treasury note edged up to 1.502%, from 1.481% on Monday. The 30-year yield, which has been particularly volatile in recent days, ticked higher to 2.117% from 2.103% on Monday.

The Fed must walk a tightrope to navigate a successful end to an extremely accommodative stance, with key rates close to 0% and monthly asset purchases of $120 billion, said Olivier de Berranger, chief investment officer of La Financiere de l'Echiquier.

Economic growth is skyrocketing, the employment market is returning to normal and inflation is making a surprise return, he said.

"This therefore seems the ideal time for the Fed to start preparing financial markets for an end to its liquidity injections as the scars of the crisis for the U.S. economy fade," he said.

LFDE sees the Fed's meeting last week as a success despite the anticipation of an earlier start to rate rises by Fed members, de Berranger said.

The Fed's preferred plan and timing for tapering will become clearer in the coming months and Pimco expects an announcement on this could come as soon as the central bank's September meeting, said economists Tiffany Wilding and Allison Boxer.

"When the Fed does taper the monthly pace of purchases, it will likely follow a pre-planned, gradual path that takes roughly two to three quarters," they said.

Commodities:

Oil prices briefly hit their highest level in over two years before edging lower, as investors mulled the outlook for demand.

Brent initially rose above $75 in the Asian session for the first time since late-2018. Analysts said recovering demand should continue to support prices while suppliers keep taps only half-open.

"The ongoing demand outlook continues to outweigh the limited supply response amid cautious increases from OPEC+ and no still no agreement on the Iranian nuclear front," TD Securities said.

Copper prices inched higher as the metal stabilizes after concerns about demand prospects prompted several days of weakness. Three-month copper on the LME is up less than 0.1% at $9,182.50 a metric ton.

While losses appear to have halted, analysts remain concerned about the prospect of tightening monetary policy, slowing demand, and Chinese efforts to tamp down rising commodities prices.

"Underlying fundamentals are pretty much unchanged," said Malcolm Freeman, CEO of brokerage Kingdom Futures.

"There is still the real prospect of interest rate rises and the very fast bounce back from shutdown due to Covid is slowing."

Gold gained in early European trading ahead of Mr. Powell's testimony.

   
 
 

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June 22, 2021 06:07 ET (10:07 GMT)

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