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Stocks could finish the week higher after broad-based rally in U.S. stocks. The dollar was a touch weaker against major currencies while the Japanese yen weakened as risk appetite increased. 10-year treasury yields rose slightly to 1.525%. Commodities were mixed as oil rose and gold remained unmoved.
European stocks are set to continue their winning streak Friday after U.S. stocks rallied Thursday, propelling the S&P 500 to its best performance in more than seven months.
U.S. stocks rose on a combination of after better-than-expected earnings and economic data eased concerns about the outlook for the economy.
As earnings season progresses, investors will be watching for commentary that indicates how executives are feeling about many of the economic issues that have weighed on markets in recent weeks. Already, Delta Air Lines said Wednesday that it expects higher fuel prices to undercut its profits in the fourth quarter.
“The big uncertainty right now continues to be around the duration of this higher inflationary period,” said Allen Bond, managing director and portfolio manager at Oregon-based Jensen Investment Management, which has about $12.8 billion under management. “We are going to be looking for evidence and data that gives us a sense of how companies are managing” that, as well as supply-chain constraints.
Money managers and strategists said Thursday’s rally doesn’t necessarily mean that the U.S. stock market has turned a corner. Many expect more uncertainty in the months ahead. Still, with bond yields so low and few other places for strong, consistent returns, many remain bullish on stocks.
“We don’t think any of these problems are going to end the bull market,” said Chris Zaccarelli, chief investment officer at Independent Advisor Alliance. “I think this is a natural period of consolidation and volatility and that it’s completely normal as part of any economic recovery.”
Stocks on the move: Spanish utility stocks could remain in focus on Friday after they traded higher Thursday after the Spanish government on showed itself willing to walk back a measure that would cap their profits.
Teresa Ribera, Spain’s ecological transition minister, said Thursday that the government wouldn’t apply the measure, which limits windfall profits from a rise in the cost of electricity, if utilities provide businesses with energy at reasonable prices, Spanish media report.
Endesa shares and Iberdrola both traded higher. Utility company Naturgy was after Australian fund IFM Global Infrastructure’s offer for a $2.69 billion stake in the company was accepted.
The Japanese Yen weakened against most G-10 and Asian currencies amid risk appetite. There seems to be some renewed risk-on sentiment, IG said, noting developments including Wall Street’s rally, the decline in U.S. initial jobless claims and a U.S. core PPI reading that was below expectations.
The dollar remained flat against the euro, but a touch weaker against other major currencies in early Asian trade. Bank of America said at the end of 3Q, the market remained short USD, “but this position is less stretched than earlier in the year.”
The firm added that hedge-fund aggregate positions were broadly flat, after they cut their dollar shorts in 3Q. Meanwhile, “real money remains short USD, but somewhat less so than during H1.”
UBS Global Wealth Management advises buying the Australian dollar against Swiss franc, targeting a level of 0.71 and placing a stop loss at 0.662. AUD/CHF rises 0.4% to 0.6846.
The AUD “still has some juice left in it” after recent gains due to rising commodity prices, the lifting of coronavirus restrictions and better-than-expected domestic activity, UBS strategists said.
The CHF has “unduly strengthened” in recent days, they said. The Swiss National Bank is likely to maintain its loose polices and foreign exchange interventions, while many of its G10 peers consider withdrawing support, they said. “Higher commodity prices, particularly prices for energy, which Switzerland imports, should be a headwind rather than a tailwind for the Swiss franc.”
Currencies of oil exporters including the Russian ruble, Canadian dollar and Norwegian krone rallied as crude prices rise. “Although we wouldn’t be surprised if energy prices remained elevated for a while, we still think they will fall back over the next year, weighing on the currencies of net energy exporters,” Capital Economics economist Joseph Marlow said.
Goldman Sachs expects a mix of higher inflation and slower growth in the near term, but correlation patterns across macro assets to look more consistent with “reflationary” rather than “stagflationary” dynamics, the bank said.
This means bond yields rising while risky assets appreciate given still-high growth levels in most regions, the bank said. Despite the recent selloff in U.S. yields, analysts at the bank think any overshoot of their year-end U.S. 10-year yield target of 1.6% is likely to be relatively contained based on the bank’s expectation for a growth slowdown in 2022.
Market pricing appears to question the European Central Bank’s current guidance on the sequencing of monetary policy normalization, whereby interest-rate rises are unlikely until the pandemic-emergency and the regular asset-purchase programs are scaled back, said Nordea’s chief analyst Anders Svendsen.
“Markets are pricing the first ECB rate hike in early 2023, which might be after Pandemic Emergency Purchase Programme tapering is done, but most likely not before Asset Purchase Programme tapering is done,” he said.
Svendsen said ECB monetary policy will be determined by developments in inflation and wage growth. He sees both transitory and persistent factors to current inflation. “When the transitory factors have played out, I believe we’ll still have inflation markets that are anchored at 2% forward,” which will allow a very gradual normalization of policy rates, he said.
Oil rose in early morning Asian trade following a media report that Saudi Arabia has dismissed calls for additional OPEC+ supply. This report along with the International Energy Agency saying that natural gas prices could increase demand for oil among power generators have led to higher oil prices, Phillip Securities Research said.
Carbon pricing, a relatively new and popular financial instrument in Europe that tabulates the external costs to greenhouse emissions, is being singled out as a main culprit for European consumers’ soaring natural gas prices.
Chris Midgley, global head of analytics at S&P Global Platts, said the aim of carbon pricing is noble, as it incentivizes power companies to use less high-polluting coal and more renewables or cleaner-burning fuels.
But he said the current environment of high energy demand and low energy supply makes coal usage necessary no matter how many carbon credits need to be purchased, and those costs are passed on to consumers. “So carbon pricing isn’t making people use less coal, it’s just creating consumer pain.”
Gold was steady in the morning Asian session but has a bright outlook. U.S. real yields are likely to stay in negative territory even as the Fed debates rate increases for next year, so gold’s outlook should turn bullish, Oanda said. The precious metal’s rebound is facing a lot of resistance around $1,800/oz, but gold should eventually rise toward $1,840/oz, Oanda said
Zinc fell in a likely technical correction in Asian morning trading. Futures jumped 3.7% Thursday after major producer Nyrstar said it was halving output at three European plants. Citi Research expects zinc to hit $3,700 a metric ton within three months, given that Nyrstar’s production cuts add to an already tight physical market.
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