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North American Morning Briefing: S&P 500, Dow on Track for Fourth Weekly Loss

MARKET WRAPS

Watch For:

U.S. Personal Income & Outlays for December; U.S. 4Q Employment Cost Index; U.S. U. Michigan Final Consumer Survey for January; Chevron Corp. 4Q results; Caterpillar Inc. 4Q results.

Opening Call:

Stocks were poised for a fourth consecutive weekly loss as investors awaited earnings from Chevron and Caterpillar, as well as the Federal Reserve's preferred inflation gauge.

In premarket trading, Apple shares rose 4.9% after the biggest U.S. company by market capitalization posted record revenue and profits.

Shares of brokerage Robinhood Markets, which reported a quarterly loss of $423 million, dropped 14% premarket. Tesla recovered 1.9% premarket after sliding 12% Thursday, highlighting the volatility wracking technology and growth stocks as investors prepare for the Fed to tighten monetary policy.

"Cheap money is like a comfort blanket for investors and for markets," said Jane Foley, senior foreign-exchange strategist at Rabobank. "Almost inevitably, you start to withdraw some of that cheap money and you're going to have more volatility in the markets."

Stocks have been choppy despite another solid round of earnings. Almost a third of the companies on the S&P 500 have reported fourth-quarter results and 78% of them have beaten analysts' estimates for earnings per share, according to FactSet. Companies due to report before the bell Friday include Chevron, Caterpillar and Colgate-Palmolive.

Investors will parse consumer-spending data from the Commerce Department at 8:30 a.m. ET. Economists expect the figures to show spending fell in December as rising coronavirus infections dented demand. Also due at 8:30 a.m., the Fed's preferred inflation gauge is forecast to show a continuation of the price pressures that have pushed the central bank to unwind stimulus.

Forex:

Expectations for five interest rate rises by the Fed within the next year are priced in but the dollar still has scope to appreciate, UniCredit said.

"We think that there is still room for the USD to strengthen as the U.S. interest-rate advantage with respect to the rest of the world becomes more evident and there is no major incentive for investors to consider a trend reversal," UniCredit analysts said.

However, some profit-taking against the safe-haven dollar might emerge Friday after a rebound in Asian equity markets, they said.

The euro's recent depreciation against the dollar is likely to be on the European Central Bank's radar at its Feb. 3 meeting, Barclays said. EUR/USD has plummeted lately on the Fed's "notable hawkishness," Barclays analysts said, noting that the Fed indicated it would start raising interest rates in March.

The ECB might also turn "hawkish" as eurozone and global inflation continue to accelerate above forecasts, they said. "Indeed, euro-area flash inflation data for January will be released the day before the meeting: another upside surprise relative to consensus (following on from December's upside surprise) could potentially encourage a somewhat more hawkish tone."

Bonds:

Government-bond prices fell, pushing up prices. The yield on interest-rate sensitive two-year Treasury notes ticked up to 1.212% from 1.190% Thursday and 0.993% at the end of last week.

Yields on 10-year notes haven't risen as fast, which some analysts interpret as a sign investors think interest-rate rises by the Fed will squelch economic growth. They stood at 1.831% Friday, up from 1.747% a week ago.

Economic data over the coming quarters in the U.S. is likely to surprise to the downside, but it will be very difficult for the Fed to pivot back toward a more dovish stance given high inflation and its political ramifications, T. Rowe Price's chief international economist Nikolaj Schmidt said.

A tightening of the monetary policy stance of the central bank in a context of slowing growth is likely to present a challenge for growth-fuelled risk assets, he said.

"I see an environment of further yield curve flattening with higher yields in the front-end, driven by the changing stance of monetary policy, whilst yields in the longer-end of the curve will fall to reflect increasing uncertainty about the growth outlook," Schmidt said.

Investors may be forced to price in a higher peak for U.S. interest rates than 2%, UniCredit said. The Fed's statements and dot plot, a chart that summarizes the central bank's outlook for the federal funds rate due in mid-March, should shine a light on the issue, analysts at the bank said.

The focus remains the prospect of the first rate-rise in March "seemingly cast in stone," while Treasury yield curve movements are likely to be predominantly determined by shifts in views about the pace of rate hikes this year, they added.

Commodities:

Oil prices were on course for a sixth weekly rise amid tight supplies and geopolitical tensions in Eastern Europe and the Middle East. For the week, Brent is on course for a 0.7% gain while WTI is set for a 2.2% gain.

Tensions between Russia--a major oil producer--and Ukraine--a major conduit for natural gas supplies--have helped drive prices higher this week. At the same time, producing nations in OPEC are struggling to keep pace with their own supply targets.

"In effect, spare capacity is at a level which may not be enough to cover any geopolitical disruptions," said ANZ.

As tensions between Ukraine and Russia mount, energy prices are likely to push higher. The situation in Eastern Europe increases geopolitical premium in oil prices, causing more inflation, Rob Thummel from TortoiseEcofin said.

However, the biggest concern for Europe at the moment could be regarding natural gas supply security, as the continent is highly dependent on Russia.

"Given that there's a lot of winter left, I think there are scenarios where it could become really challenging, and inventories could go really low," Thummel said.

Conversely, the U.S. has a large supply of gas and exports LNG to Europe.

"Post conflict between Russia and Ukraine, post winter and when Covid cases have lessened, I think there's potential for [U.S.] gas prices to fall to around $3.00 [per million British thermal units] by the end of 2022," Thummel said.

Gold fell and while Oanda said gold is vulnerable to further technical selling now that the $1,800 level has been breached, risk aversion should provide price support for the safe-haven asset. Oanda puts support for the precious metal at $1,760 an ounce.

Most base metals are on course for a weekly loss as a stronger dollar and equity market jitters have weighed on prices. Three-month copper is down 0.9% Friday and set for a nearly 3% weekly loss.

All other base metals with the exception of aluminum are also set for weekly losses, with the largest being nickel at more than 7%. "A stronger dollar, high energy prices and wobbly equity markets--all occurring against a backdrop of a hawkish Fed and lingering geopolitical tensions--are creating a feeling of unease," said Ed Meir, a metals consultant for ED&F Man.

Chinese manufacturing PMI data is due Sunday, while Tuesday is the start of China's Lunar New Year holidays, which could sap liquidity from the market and heighten volatility.

   
 
 
   
 
 

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January 28, 2022 06:10 ET (11:10 GMT)

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