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EMEA Morning Briefing: Stocks to Rise, Fed Meeting in Focus

MARKET WRAPS

Watch For:

New Commercial Vehicle Registrations in Europe statistics; U.S. interest rate decision; updates from Hapag Lloyd, Lonza, Sage Group.

Opening Call:

European stocks could rise for a second day, while U.S. stock futures also point to early gain on Wall Street. Dollar strengthens. 10-year Treasury yields unchanged. Oil falls. Gold edges higher.

Equities:

European stocks could extends gains Thursday ahead of a U.S. Federal Reserve meeting that will indicate how aggressive it will be in fighting inflation.

U.S. stock futures were also pointing higher. Tuesday on Wall Street, shares came well off their lows by late afternoon. But another burst of selling in the final hour of trading pulled them lower again. Technology stocks were the biggest drag on the market.

Wall Street is dealing with signs of slowing economic growth because of COVID-19 and a Fed that can't really go back on what it said it would do, said Barry Bannister, chief equity strategist at Stifel.

"The market has come to terms with that and that's a big deal," he said. "Fiscal and monetary tightening, together, is tough on financial assets when they're coming off of a rip-roaring party from stimulus."

Still, the fact that the major stock indexes came off their lows of the day could be a sign that some investors are betting that a dimmer outlook for economic growth may prompt the Fed to take a more measured approach to raising interest rates.

"Weaker economic growth projections have contributed to investors breathing a sigh of relief that the Fed won't have to be overly aggressive," said Sam Stovall, chief investment strategist at CFRA.

Stocks in Asia were mixed.

Forex:

The dollar strengthened 0.4% against the euro and is a hair weaker against the yen. The dollar's recent strength isn't complicated, Scott Petruska, chief currency strategist at Silicon Valley Bank, told WSJ.

"It's a dollar story. It's a rush into safer currencies." He said the dollar is outperforming the Swiss franc and yen due to more attractive interest rates and yields.

"The Fed meeting is coming up and they're ready to cut stimulus more aggressively" than the Swiss, Japanese or other major central banks. The risk-off mood that's helping the dollar is driven by the "spectacular fall and volatility" in the US stock market, especially in tech, and the Russia-Ukraine crisis, Petruska said.

Asian currencies consolidated against the U.S. dollar in the Asian morning session ahead of the FOMC meeting's outcome later in the day.

Sentiment seems to have tilted to the cautious side, with market participants bracing for the FOMC decision, DailyFX.com said.

With inflation running high and commodity prices edging up, markets may be expecting the Fed to tighten policy sooner and quicker, DailyFX.com added.

Bonds:

The 10-year Treasury yields was unchanged. Investors are looking at the Fed meeting and presser, with some discussion about whether policy makers are seeing any reason to speed up monetary tightening, or rather to get a little more dovish after the Omicron impact.

The impression left from the previous meeting is that tapering will wrap up, and rates will lift off, in March. The prospect of higher rates is blamed for the recent volatility in equity markets, while the 10-year yield is up 0.288 percentage point year to date.

Energy:

Oil fell in early Asian trade, tracking equity-market weakness amid fears of interest-rate increases by the Fed, Rystad Energy said. Investor pessimism is outweighing bullish fundamentals, the energy consulting firm said, pointing to crude-supply concerns due to Ukraine-Russia tensions and OPEC+ struggling to hit its targeted monthly output increases.

Regardless, Rystad reckons these factors should cap any near-term losses in oil prices. "Oil prices will remain bullish through the end of February" although bearish blips may occur, it said.

Metals:

Gold edged higher in Asia on Fed-tightening fears and as geopolitical risks grow, according to Oanda. It said the precious metal is rallying as investors scamper to safety over fears the Fed, which is holding a regular policy meeting, will signal an aggressive tightening of monetary policy.

Oanda also points to tensions between the Ukraine and Russia, the Iranian nuclear deal and North Korea's recent missile launches as further reasons for investors to flock to the asset.

Copper prices were slightly lower in early trade, as risk-off sentiment weighs amid uncertainty surrounding the outcome of the Federal Reserve meeting, ING said.

ING also expects copper supply to rise, as the risk of mine supply disruptions ease after a strike was avoided at Teck's Highland Valley Mine. The three-month forward LME copper contract was down 0.2%.

Chinese iron-ore futures were higher in early trade amid expectations of increased steel production after the Lunar New Year, said Goldman Sachs.

"With no material policy constraints in place for steel production this year, the normal post-CNY seasonal ramp up in steel mill output is set to play out," it said.

It forecasts China's steel output to rise to 242 million tons in 1Q and 269 million tons in 2Q, compared with 211 million tons in 4Q 2021. The likely higher steel production should in turn lift demand for iron ore. The most-traded May iron-ore contract rose 2.0%

   
 
 

TODAY'S TOP HEADLINES

Analysis: Why the Fed Is Unlikely to Start Raising Rates With a Half-Point Increase

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While the Fed isn't likely to rule out a half-percentage-point increase as an instrument in its tool kit, the central bank is unlikely to begin any sequence of rate rises with such a move, in part because it would essentially concede that it had made a policy mistake.

   
 
 

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EU, U.K. Drop Border Travel Restrictions, Lessening Burden of Flying

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January 26, 2022 00:32 ET (05:32 GMT)

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