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North American Morning Briefing: Stock Futures Edge Higher Ahead of Major Earnings

MARKET WRAPS

Watch For:

U.S. Housing Starts for September; Johnson & Johnson 3Q results; Procter & Gamble 1Q results.

Opening Call:

Stock futures ticked up ahead of a slew of earnings that investors will parse for insight into how companies are faring with inflation and supply-chain disruptions.

A spate of companies are due to report quarterly earnings ahead of the market open, including Johnson & Johnson, Bank of New York Mellon, Travelers, Procter & Gamble and Philip Morris International. Netflix will report earnings after the closing bell.

Investors are using earnings and companies' guidance for the future to assess how corporations are faring with a number of issues. Inflation is expected to be stickier than originally anticipated by central-bank officials, exacerbated by continued supply-chain disruptions, higher energy costs and labor shortages.

About 81% of S&P 500 companies that have reported so far have beat earnings-per-share expectations, according to FactSet data through early Monday.

"It is a market now where you're going to see more differentiation because it is a more challenging environment," said Daniel Morris, chief market strategist at BNP Paribas Asset Management. "If you look at earnings so far, ex-financials, it's been very good."

U.S. housing starts, which are due at 8:30 a.m. ET, are expected to have moderated in September. Builders have been caught between strong demand from buyers-spurred in part by low interest rates-and shortages of materials, labor and lots.

Forex:

The dollar fell broadly, with the DXY dollar index dropping 0.4% to a three-week low of 93.5850, as risk appetite improves and amid uncertainty over whether U.S. President Joe Biden will give Federal Reserve Chairman Jerome Powell a second term, MUFG said.

Although Powell remains favorite to keep the job, questionable trading activities by two Fed bank presidents cast a cloud over his prospects, The Wall Street Journal reported last week.

"The decision does not appear as much as a done deal as before which has increased uncertainty and downside risks for the U.S. dollar," MUFG currency analyst Lee Hardman said. He added that recent dollar weakness has coincided with a rebound in global equity markets.

Bitcoin's dollar value edged up 1.3% from its 5 p.m. ET level Monday, trading at $62,258.17 Tuesday. The U.S.'s first bitcoin exchange-traded fund will start trading Tuesday under the ticker symbol BITO. Cryptocurrency analysts say they will be watching to see how strong flows into the fund are, to assess whether the cryptocurrency's recent price rally will hold.

The Bank of England could start raising interest rates in November but the pound is still likely to depreciate in coming months, MUFG Bank said.

"GBP is more likely to weaken heading into year-end given the more challenging backdrop of slowing global growth, higher inflation and tightening liquidity conditions, which should be less supportive for risk assets and high beta currencies like the pound," MUFG currency analyst Lee Hardman said.

BOE policy tightening could also be viewed as a policy mistake if the U.K. economy slows more notably, which would dent sterling, he said.

Bonds:

Inflation pressures are persistent but are likely to ease, said BlackRock, which doesn't consider the current situation as stagflation.

The asset manager keeps its moderately pro-risk investment stance on a tactical basis, even as it sees a narrower path for risk assets to rise.

It attributes inflationary pressures to the economic restart after the pandemic rather than to rising energy prices and it expects the near-term supply-demand imbalances to ease.

"We see the restart price pressures eventually resolving themselves, and believe central banks with credible policy frameworks will look through most of them," BlackRock said.

J.P.Morgan expects the European Central Bank's monetary policy meeting on Oct. 28 to provide some clarity on the form of monetary policy accommodation for the era after the Pandemic Emergency Purchase Programme, said rates strategists Fabio Bassi and Sampathh Vijay. In the short term, European rates will face uncertainty around the Bank of England's delivery in early November, they said.

However, JPM remains confident in fading the amount of excessive tightening expectations that are currently priced at the short end of the EUR curve. Eurozone government bonds sold off heavily Monday, causing yields to rise, amid inflation fears and some spillover from U.K. rate-rise expectations, but yields trade lower Tuesday.

Commodities:

Oil prices were higher, with both benchmarks paring most of their gentle Monday losses that came with the news of a fall in U.S industrial production and weaker GDP numbers out of China according to ING's Warren Patterson.

Markets were generally calm Tuesday, though investors are awaiting the release of the API's weekly inventory figures later in the day and the EIA's inventory data due Wednesday.

Benchmark European gas prices were down 2.3% after a volatile Monday during which worries that Russian producers won't follow through with more supply caused temporary price spikes.

Gold gained as the dollar slipped and investors worry about the impact of the energy crunch on inflation. Expectations that central banks will raise interest rates to tamp down inflation are keeping the precious metal in check, said TD Securities.

However, investors are likely overestimating how quickly the Fed will move to raise rates. The Fed is likely to look through inflation driven by the energy shock, they said. "This suggests gold is an ideal hedge against rising stagflationary winds, and reasons to own the yellow metal are growing more compelling," the bank said.

Copper prices rose on a weaker dollar and worries about supply disruptions in major producer Peru. A Peruvian community said they'd block a key road used by mining companies in protest over pollution and poverty.

Analysts said that even without those disruptions, the background for copper is bullish. Inventories are dwindling while demand remains strong, said Anna Stablum, at the brokerage Marex. "Focus was still on the tightening of spreads as traders scrambled to get hold of available metals and scrap markets were tight," she said.

   
 
 

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October 19, 2021 06:12 ET (10:12 GMT)

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