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North American Morning Briefing: Futures Point to Modest Gains After Powerful Start to Week

MARKET WRAPS

Watch For:

Bank of Canada Rate Decision; EIA Weekly Petroleum Status Report

Opening Call:

Stocks were poised for modest gains at the opening bell, potentially pushing the S&P 500 toward record territory, on optimism that the economic impact of Omicron will be less drastic than first feared.

"The markets generally-if you look back in 2021-they have looked through any of the episodes of even partial lockdowns or that kind of risk," said Willem Sels, chief investment officer for private banking and wealth at HSBC. "They assume vaccines would be effective or partially effective."

Mr. Sels expects more volatility. "I think we're going to get a lot of flip-flopping," he said, pointing to an uncertain outlook for inflation and the potential for mixed economic data next year.

Global markets got another boost this week from Beijing's moves to stimulate the slowing Chinese economy. Investors remain on edge, however, about the Federal Reserve's plans to tighten monetary policy to tap the brakes on inflation in 2022.

One reason why some investors expect inflation to persist is the tight labor market. More evidence of hiring difficulties is expected to emerge with the U.S. job openings and labor-turnover survey, due at 10 a.m. ET. Economists forecast that the data will show employers had more than 10 million unfilled positions in October.

Stocks to Watch:

As prices for battery metals surge, Fitch expects auto makers world-wide will look to cushion the blow for consumers. It thinks global EV sales will climb 40% in 2022 as demand continues to be fueled by decarbonization efforts. However, EV adoption could stumble in countries that don't give consumers incentives, such as tax credits, to make the switch to electric. That makes them vulnerable to further increases in already higher purchase costs of EVs relative to traditional vehicles.

Fitch reckons auto makers could try to offset that by rolling out mild and plug-in hybrid models for lower-income markets. It expects Asia, Europe and North America to remain the dominant EV markets over 2021-30, while developing countries keep lagging behind.

Forex:

The dollar dipped in Europe, but UniCredit said positive sentiment, as reflected in strong global stock market gains hasn't weakened the buck as much as it has in the past, as the currency becomes less appealing as a safe haven.

"This represents an important change, which is mostly caused by the increased importance of higher interest rates in the U.S. and widening interest rate differentials with respect to the rest of the world in driving the FX market."

Fitch said global interest rates may rise sooner than expected as inflation risk looms. "The scale and longevity of the global inflation shock has taken most forecasters and central banks by surprise and is bringing forward the start of global monetary policy normalization."

It now expects the Fed to raise interest rates in September 2022 and the Bank of England to do so later this month. It also thinks China's central bank will cut interest rates in 2022, but reckons the European Central Bank will hold rates steady through 2023.

Goldman Sachs said China could cut its reserve requirement ratio again in the first quarter of 2022. This would imply a total of three RRR cuts including the July and December reductions, which is on the lower end of historical precedents. It noted the 2015-2016 downturn saw five rounds of RRR cuts in total.

"Policymakers appear to be in the 'do just enough' mentality in managing the balance between cyclical growth and structural reforms," said Goldman Sachs. It said a first-quarter timing seems likely because large numbers of USD bonds are due in January and March, so there could be greater financial risks then.

Bitcoin was down 2.1%, but Swissquote Bank analyst Ipek Ozkardeskaya said the recent improvement in market sentiment isn't fully reflected in risk-sensitive cryptocurrencies.

"I believe that's because the latest 20% dive has wiped out a good amount of leveraged positions and it will take a bit more time to restore the risk appetite. But Bitcoin is consolidating above the $50K mark, and the downside risks have reduced after a large amount of leverage positions have been cleared."

Bonds:

Treasury yields edged down after Tuesday's gains, with investors looking ahead to next week's Fed meeting.

Returns on government debt still remain relatively low, though, considering the Fed is likely to announce a plan next week for faster tapering of its monthly bond purchases to combat surging inflation. The Fed's next policy gathering is set for Dec. 14-15 and policy makers are in a media blackout period until then.

"We continue to look for higher yields ahead of the Fed taper between now and in early 2022," wrote Tom di Galoma, managing director of Treasurys trading at Seaport Global Holdings, in a daily note.

Commodities:

Oil prices nudged higher after strong early week gains. "Around two thirds of the previous price slide has been corrected, a downswing that had been brought about by demand concerns sparked by the new Omicron variant," said Commerzbank.

And while concerns over the newly-discovered strain appear to be overstated and investors wait for a more solid assessment on potential risks, the market also focuses on growing fears of a Russian invasion of Ukraine.

European natural-gas prices rose after news reports that Nord Stream 2 could be shut down if Russia invades Ukraine. The controversial pipeline linking Russia and Germany had been expected to start operations in 2022, helping to ease Europe's gas shortage.

Gold edged higher, helped by a slightly weaker dollar. According to Commerzbank, the precious metal is currently benefiting from escalating Russia, Ukraine tensions. Analysts at the bank expect prices to move moderately until Friday, when the inflation data for November is released.

   
 
 
   
 
 

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December 08, 2021 06:04 ET (11:04 GMT)

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