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EMEA Morning Briefing: Stocks to Fall, PMI Figures Eyed

MARKET WRAPS

Watch For:

Eurozone Flash PMI; UK Flash PMI; Germany Bundesbank monthly report; results from Philips.

Opening Call:

European shares could fall at the open Monday, as U.S. stock futures point for a higher open on Wall Street. Dollar rises slightly. Treasury yields steady after a pull back on Friday. Oil gains and gold remains unchanged.

Equities:

European stocks are set to start the week lower after a sell-off on Wall Street that saw the S&P 500 and Nasdaq Composite Index wrap up their worst weeks since March 2020.

The S&P 500 and Nasdaq Composite Index wrapped up their worst weeks since March 2020; the Nasdaq has fallen for four weeks in a row. The Dow Jones Industrial Average finished its worst weekly performance since October 2020.

Meanwhile, U.S. stock-index futures made solid gains Sunday, following the worst week on Wall Street since March 2020.

The upcoming week will see a number of quarterly earnings reports from big-name companies, including IBM, Microsoft, Tesla and Apple. The Federal Reserve will also meet Tuesday and Wednesday, where policy makers are expected to lay the groundwork for raising interest rates, likely in March.

Up ahead surveys of purchasing managers in Europe and the U.S. will be closely watched for fallout from the Omicron wave of Covid-19 in the opening weeks of January. The indicators, some of the first big data points for the month, should offer insight on whether efforts to contain the variant as well its impact on worker health are affecting demand, supply chains and prices-all key gauges during the pandemic.

Investors have been growing increasingly worried about how aggressively the Federal Reserve, which holds a policy meeting this week, might act to cool rising inflation.

"The FOMC (Fed) meeting dominates the macro calendar this week and is likely to keep risk sentiment on the hesitant side with an end to QE and imminent rates hikes likely to be announced," economists Nicholas Mapa and Robert Carnell of ING said in a commentary.

In Asia, shares were mostly lower.

Forex:

The dollar rose in Asia after ending last week a bit higher, reversing some of its recent declines.

"But dollar strength has mostly been against G10 currencies, said Capital Economics' Jonathan Petersen. "Despite a fall in US equities last week, the 'riskier' emerging market (EM) currencies have generally risen."

Petersen doubts this will last because he expects financial conditions from rising US Treasury yields to put pressure on EM currencies. "Indeed, we expect the Fed to signal a rate hike in March and an accelerated pace of quantitative tightening when it announces policy next Wednesday, which could prove the next catalyst for a stronger greenback."

Asian currencies were mixed against USD in the morning Asian session amid ongoing worries over Fed tightening.

Bitcoin prices slumped further over the weekend to levels not seen since last August, as a selloff of riskier assets like stocks spread to cryptocurrencies. Bitcoin has now shed about 50% from its record high in November.

Bitcoin fell as low as $34,042.78 Saturday, a drop of 7.2%, before paring losses. The world's largest cryptocurrency by value stabilized late Sunday, at one point back crawling back above the $36,000 level.

Bonds:

The yield on the 10-year Treasury was steady Monday at 1.78%. The Fed's benchmark short-term interest rate is currently in a range of 0% to 0.25%. Investors now see a nearly 70% chance that the Fed will raise the rate by at least one percentage point by the end of the year, according to CME Group's Fed Watch tool.

Treasury yields remain up sharply in 2022, the selloff in Treasurys that has driven yields sharply higher to begin the new year took a pause on Friday. The move higher in yields has been driven by signals the Fed will be much more aggressive than previously expected in raising interest rates and otherwise tightening monetary policy in response to persistently high inflation.

The Fed meets on Tuesday and Wednesday and is expected to lay the groundwork for delivering a rate increase in March, with some investors even penciling in the prospect of a half percentage point rise in the fed-funds rate target rather than a quarter-point increase.

Energy:

Oil rose in early Asian trading on signs of tight supply, with OPEC under-producing oil by 747,000 barrels a day in December compared with its own monthly target, ANZ said.

This brings the group's compliance rate to 120% in December, it said. Demand is also high, defying earlier expectations that oil consumption would waver due to high Omicron infection rates globally, the bank added.

"Despite reaching record levels in many parts of the world, infection rates haven't impacted demand for oil as much as the market had been expected," ANZ said.

High natural gas prices could persist even after the peak winter heating season ends in February, Goldman Sachs said. European gas markets were in focus, the investment bank said; while storage levels there look sufficient, "we estimate that a one-standard-deviation colder-than-average Feb-Mar would lead end-winter inventories below the record lows of 2018, with electricity blackouts likely," Goldman said.

A wider, global economic impact is also probable, it said. Not only is gas one of the most important commodities for winter heating and power generation, but large swathes of industry rely on the fuel for manufacturing.

Earnings of companies in energy-intensive sectors could also take a hit, it said.

Metals:

Gold was little changed in early Asian trading, but rising real yields on U.S. ten-year Treasuries could weigh on the precious metal, Commonwealth Bank of Australia said. U.S. yields are rising due to expectations that the FOMC will raise Fed fund rates earlier and faster than previously expected.

"Markets are pricing in around 4 rate hikes this year, implying a target Fed Fund rates of 1.00%-1.25% by the beginning of next year," CBA said. This may drag on prices of the non-interest-bearing asset, it said.

The price of nickel fell in early Asian trade amid profit-taking and as China's Lunar New Year holidays poses a near-term demand risk, ANZ said.

However, the bank thinks that the price of the commodity could remain supported due to dwindling inventories and supply disruptions as major exporter Indonesia mulls a tax on the metal. The three-month forward nickel contract on the LME fell 0.2%.

Iron ore was slightly lower in Asia morning trade, declining after a strong upturn in the past week when sentiment was buoyed by China's rate cut and industry data from Mysteel showing lower-than-usual inventory.

Huatai Futures thinks the steel-making material's outlook in the longer run seems promising, especially with the upcoming Lunar New Year holidays in China, when steel producers are expected to accelerate production, boosting demand for iron ore. The most-traded benchmark May iron-ore contract on the Dalian Commodity Exchange edges down 0.1%.

   
 
 

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January 24, 2022 00:47 ET (05:47 GMT)

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