MARKET WRAPS
Watch For:
Eurozone Labour Cost Index; Germany Ifo; U.K. Monthly Inflation,
Producer Prices, House Price Index, Card Spending; U.S. Interest
Rate Decision; updates from Delivery Hero, Babcock,
STMicroelectronics, G4S, Tullow Oil, Provident Financial, IAG
Opening Call:
European shares should open higher, but gains are likely to be
tentative at best, as investors wait for the latest Fed policy
signals. In Asia, most major benchmarks tipped lower, while the
dollar and bond yields held firm. Oil and gold prices moved higher,
however.
Equities:
European stocks face a cautious start on Wednesday as investors
prepared for a key announcement on rates and fiscal policy from the
Federal Reserve, which could provide a clearer picture of the
central bank's view on the economy and inflation outlook.
"We're all on pins and needles to see if the Fed is tapering,"
said Louis Navellier, founder of asset-management firm Navellier
& Associates.
The Fed could signal it's close to reducing the size of its bond
purchasing program. That would lower bond prices and lift their
yields, a negative for stock valuations. Additionally, there is
some concern that the Fed will lift the short-term lending rate
sooner than currently expected, with inflation running fairly
hot.
"Concerns [that] FOMC language will take a hawkish turn seem to
be impacting market internals," wrote Dennis DeBusschere, head of
portfolio strategy research at Evercore.
U.S. shares fell on Tuesday as investors digested the latest
retail sales data. Technology stocks took the hardest hit, which
could reflect that investors are concerned about higher bond
yields. If the Fed reduces the size of its bond buying program too
quickly, bond prices would fall and their yields could rise fairly
fast as well.
Forex:
The dollar was steady, with Asian markets in a wait-and-see mood
before the FOMC decision. The Fed's dot plot, economic forecasts
and Jerome Powell's comments will be closely scrutinized for clues
on the timeline for tapering, said IG.
TD Securities said the dollar stands to benefit from a potential
shift in the Fed's ultra-loose policy stance at Wednesday's policy
meeting. Mr. Powell is likely to say the Fed has started talking
about plans for tapering asset purchases while also emphasizing
that action will require much more progress.
The Fed's dot plot for interest rate projections will probably
indicate a rate rise by the end of 2023. "A less dovish tone would
support our view that the dollar has started to carve out a bottom,
stabilizing through the early parts of the third quarter."
Commerzbank previously thought said GBP/USD should still reach a
low in 3Q, but Brexit risks are having less on an impact than the
bank previously thought. It also thinks speculation of an
interest-rate hike in the U.K. should ease downward pressure on the
pound, noting some investors think monetary policy could tighten by
the end of next year.
"In view of the improving economic outlook, we have brought
forward our forecast for a first rate hike and expect rates to be
normalized from the first quarter of 2023 onward," said
Commerzbank. It thinks GBP/USD will fall to 1.4000 by the end of
September, from 1.4087 now, before rising toward 1.4300 by the end
of 2022.
Commerzbank expects sterling to weaken against the euro next
year but again, slightly less than previously forecast. It sees
EUR/GBP rising to 0.88 by the end of 2022 compared with an earlier
estimate of 0.90.
The Norwegian krone should be the best-performing G-10 currency
against the euro between now and year-end as the Norges Bank looks
set to raise interest rates in the coming months, said Capital
Economics.
The Norway government's success in handling the coronavirus and
concerns about rising house prices mean the Norges Bank will likely
start raising rates in September, said Capital Economics economist
David Oxley. That would make it the first G-10 central bank to
start normalizing policy by some margin, he said.
"While Norwegian policymakers have made no secret of their
intentions, and a series of rate hikes are priced into markets, we
still think there is scope for gains in the NOK as reality
bites."
Bonds:
Treasury yields mostly held firm in Asia as the Fed meeting
loomed.
On Tuesday, short-term yields extended their climb to monthly
highs, but long-dated bonds were subdued, as investors diverged
about how major central banks will react to inflation.
Bank of America said it's worried the Fed may need to act soon,
while Oxford Economics said monetary authorities in both the U.S.
and Europe weren't mentioning inflation in their statements much
more than they usually do, which could be a sign that policy will
remain soft.
Tradeweb has noted the yield curve has been flattening since the
last FOMC meeting in April. The 5/10-year spread moved from 75.3
bps on April 28 to 82.9 bps after and then moved to its current
closing point of 71.2 bps. Likewise, the 5/30-year spread moved
from 143.4 bps to 155.7 bps to its current closing point of 141.3
bps.
Barings Investment Institute said foreign investor demand for
Treasurys and a comfortable temporary inflation uptick are the main
two factors pushing yields lower.
"Buying Treasury bonds is an attractive investment for
foreigners," said Agnes Belaisch, Chief Strategist, Europe, noting
that as the dollar weakens, selling it forward to hedge Treasury
bond holdings adds to their return.
Data last week showing annual U.S. inflation of 5% "wasn't
scary" as "markets know that it's a glitch and the acclaimed
recovery may peter out if financial conditions already tightened in
response," she said. "It's not inflation that matters, but the
Fed's reaction function."
Energy:
Oil prices were higher in Asia after they climbed back to more
than 2-year highs on Tuesday, on demand optimism and as traders
watched Iran talks.
OANDA said crude may be pressured if the Fed has a less dovish
tone at its upcoming meeting, which should send the dollar
tentatively higher. "WTI crude should struggle to extend gains well
beyond the $72.00 level."
Demand for oil is expected to keep growing throughout the summer
as coronavirus restrictions continue to be relaxed in the U.S. and
many parts of the world. Holdout states on the East Coast such as
New York and Vermont announced this week they were lifting almost
all remaining restrictions, citing high vaccination rates.
Late Tuesday, the American Petroleum Institute reported
inventories of crude oil in the U.S. fell by a large 8.5 million
barrels in the latest week, according to a source citing the data,
while gasoline supplies rose by 2.9 million barrels.
The mixed-to-bullish results were released ahead of official
inventories data from the Department of Energy set to be published
later Wednesday. Average forecasts in a WSJ survey indicate the DOE
report will show crude supplies fell by 2.9 million barrels the
previous week and that gasoline supplies fell by 800,000
barrels.
Metals:
Gold futures nudged higher despite lingering worries over
possible Fed tapering. CBA said it's worth noting that when the Fed
began discussing tapering in 2013, following the global financial
crisis, gold futures responded negatively, tumbling by around 28%
in 2013.
The main indicator to watch is the direction of the U.S. 10-year
real yield, which has a negative correlation with the price of gold
and has been historically strong, said CBA.
Copper prices steadied after falling sharply on Tuesday, with
the market's focus on the Fed. While technical factors may have
accelerated copper's selloff, a combination of macro and
fundamental factors suggest that the bull run in base metals may
need to take a breather, said ING. Speculation about Fed tapering
could result in strong market gyrations and a bumpy road ahead for
copper, it added.
Recently, the three-month LME copper contract was 0.3% higher at
$9,599.00 a metric ton.
TODAY'S TOP HEADLINES
Legislation Aimed at China Seeks to Expedite Probes of
Trade-Secret Thefts
Several senators introduced legislation Tuesday aiming to make
it easier for businesses that believe they are victims of
intellectual property theft to halt imports made with their trade
secrets while their allegations are being investigated.
The bill by Sen. John Cornyn (R., Texas) and Sen. Christopher
Coons (D., Del.) would amend the Tariff Act of 1930 to create a new
committee at the U.S. International Trade Commission, a federal
agency that already investigates violations of U.S. intellectual
property rights, such as patents and trademarks.
Federal Judge Stops Biden Administration From Blocking New Oil
and Gas Leases
A federal judge in Louisiana issued a preliminary injunction
blocking the Biden administration from pausing new oil and gas
leases on federal land.
Judge Terry A. Doughty of the U.S. District Court in Monroe said
the administration doesn't have the legal right to stop leasing
federal territory for oil-and-gas production without approval from
Congress.
Uranium Investors Have Become Overly Reactive
A group of uranium mining companies saw their stock prices
plunge on Monday after news emerged that a nuclear power plant in
Southeast China flagged a performance issue. It was yet another
unnecessary investor meltdown.
Canadian uranium mining companies Cameco and NexGen Energy
dropped 10% and nearly 9%, respectively, and a basket of
uranium-related companies tracked by the Global X Uranium ETF fell
6.5%. They regained some of that lost ground by Tuesday
afternoon.
JPMorgan, Other Major Banks Excluded From Landmark European Bond
Program
The European Union excluded some of the world's largest banks
from working on a huge new debt-issuance program, citing recent
cases in which regulators punished them for forming cartels in the
bond and currency markets.
The banks include Barclays PLC, JPMorgan Chase & Co., Nomura
Holdings Inc., UniCredit SpA, Bank of America Corp., Citigroup Inc.
and Credit Agricole SA, according to an EU official.
Democratic Leaders Start Talks on Second Infrastructure Bill
WASHINGTON-Democratic leaders began to discuss the contours of a
broad-ranging child care, climate and education package Tuesday in
an effort to appease the concerns of the party's liberal wing over
the narrower scope of a bipartisan infrastructure proposal under
discussion.
Progressive Democrats in both chambers criticized the size and
breadth of a more limited agreement reached late last week by a
bipartisan group of 10 senators. They threatened to withhold their
votes unless they received assurances that it would be accompanied
by a far-reaching package that could pass with only Democratic
votes.
Lina Khan, Critic of Large Tech Firms, to Lead Federal Trade
Commission
WASHINGTON-The Senate on Tuesday confirmed Lina Khan for a seat
on the Federal Trade Commission, and President Biden tapped her to
lead the agency, a post that will allow her to pursue aggressive
enforcement of U.S. antitrust and consumer-protection laws.
Ms. Khan, a 32-year-old Columbia University law professor who
has been a vocal critic of powerful technology companies, was
confirmed on a 69-28 vote. With her confirmation secured, Mr. Biden
immediately designated her as FTC chairwoman, a move that caps the
ascendancy of a progressive camp that favors far-reaching changes
to antitrust enforcement.
Copper Falls to Eight-Week Low on Fear China Might Release
Stockpiles
Copper prices fell Tuesday to their lowest level in eight weeks
on concerns that China may tamp down on rising commodity prices and
that the metal's red-hot rally has gone too far.
Front-month copper futures slid 4.2% to $4.34 a pound, falling
9% below their May record. Tuesday marked the worst day for the
industrial metal, which has a variety of uses from electronics to
cars and home building, since late April. In London, three-month
copper forward contracts on the London Metal Exchange dropped about
4% to $9,553.50 a metric ton.
Israeli Airstrikes Hit Gaza After Nationalists' March Stokes
Jerusalem Tensions
JERUSALEM-Israeli police fired rubber bullets at Palestinians
trying to disrupt a right-wing nationalist march in Jerusalem,
while Hamas militants launched incendiary balloons into Israel that
triggered Israeli airstrikes in the Gaza Strip, raising the specter
of renewed violence in the region.
The Israeli military said it carried out a limited series of
airstrikes on the militant group's compounds across the Gaza Strip,
marking the first time the rival forces have traded blows since the
two sides agreed to a May 21 truce that brought an end to an 11-day
conflict.
FDA Authorizes More Covid-19 Vaccine Doses From Troubled
Baltimore Plant
The Food and Drug Administration cleared an additional batch of
Johnson & Johnson Covid-19 vaccine doses Tuesday from a
troubled production plant in Baltimore.
The agency cleared 15 million doses, bringing the total doses
authorized for export to 25 million, according to a senior U.S.
official.
Oracle Reports Record Annual Profit, Revenue
Oracle Corp. reported an 8% revenue increase in the latest
period, ending the year with a record $40.48 billion in
revenue.
The business software giant also reported a record $13.75
billion profit for the year ended May 31 and pointed to
accelerating growth rates of both its applications and
infrastructure cloud businesses.
Write to paul.larkins@dowjones.com
Expected Major Events for Wednesday
06:00/DEN: 1Q Labour force survey
06:00/UK: May UK producer prices
06:00/UK: May UK monthly inflation figures
07:00/SVK: Apr New orders in industry
07:00/CZE: May PPI
08:00/GER: Ifo Economic Forecast
08:30/UK: Mar Card Spending statistics
08:30/UK: Apr UK House Price Index
09:00/CRO: May CPI
09:00/EU: 1Q Labour Cost Index
09:00/CYP: May Harmonised CPI
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(END) Dow Jones Newswires
June 16, 2021 00:23 ET (04:23 GMT)
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