U.S. ADP National Employment Report for September; EIA Weekly Petroleum Status Report; Federal Reserve Bank of Atlanta President Raphael Bostic delivers University of George Mason Public Leadership Lecture.
Stock futures fell and bond yields rose Wednesday, pointing to another bumpy day on Wall Street as investors gird for a spell of higher inflation, driven by roaring energy markets.
In premarket trading, shares of American Airlines Group and Delta Air Lines were both about 3% lower, weighed down by concerns about fuel costs and a slowing economic growth. Palantir Technologies jumped 9% premarket after saying it won a data and analytics contract with the U.S. Army.
A leap in energy prices has added a new element of uncertainty for investors already jittery over the prospect of a reduction in pandemic-era stimulus measures by the Federal Reserve. Higher oil-and-gas prices have the potential to fuel inflation, introduce blockages in supply chains and slow down the world economy as it recovers from shutdowns, analysts say.
That mix of forces has forced government bond yields higher. Higher yields can knock tech stocks whose future profits are worth less in today's currency when discount rates climb. It has also raised concerns that inflation, seen as a transitory, will stick around longer than previously thought.
"At what point do central banks have to say, hang on, two years, maybe that does need some degree of policy adjustment?" said Jane Foley, head of foreign-exchange strategy at Rabobank. She pointed to the Bank of England, which has said it could raise rates in coming months as energy price inflation surges.
Up ahead, investors will parse the ADP employment survey at 8:15 a.m. ET for clues about the health of the labor market.
In a sign that investors were moving into assets they consider to be havens, the WSJ Dollar Index strengthened. The greenback has benefited from higher yields in the U.S., which draw investors into American bond markets, and from dimming growth prospects in the world economy.
The safe-haven dollar rose as stocks fall on concerns about soaring energy prices. The key focus for the U.S. currency is Friday's monthly jobs data, however, which should give some indication on whether the Federal Reserve remains on course to start tapering asset purchases in November, Commerzbank said.
Since Fed Chair Jerome Powell said at September's press conference that jobs figures for September only needed to be "reasonably good" for this criterion for tapering to be met, any falls in the dollar "should not go far and be over quite quickly," said currency strategist Antje Praefcke. Meanwhile, investors will watch ADP private payrolls figures due at 1215 GMT.
Sterling should remain under pressure in the near-term as rising energy prices, supply constraints and post-Brexit tensions dampen the U.K.'s economic outlook, MUFG Bank said.
Noting a jump in U.K. natural gas futures, MUFG analyst Derek Halpenny said the Bank of England is likely to look beyond rising price pressures and refrain from raising interest rates in a "very fragile economic environment."
Government policy in response to the U.K.'s fuel crisis resulting from a shortage of drivers will also cloud the outlook, while Brexit risks will rise after U.K. Brexit minister David Frost said the government is moving toward suspending parts of the Northern Ireland protocol, he said.
U.S. government bonds extended a recent selloff. Yields on 10-year Treasury notes rose to 1.561% from 1.528% Tuesday.
The bond market currently depends entirely on how central banks look at inflation and how they decide to deal with it, said Althea Spinozzi, fixed income strategist at Saxo Bank.
"Therefore, the question that should press investors is what is the amount of inflation that central banks are willing to tolerate, and at what pace may they pull support," she said.
Saxo Bank is of the view that the later support is pulled, the more aggressive central banks need to be, provoking an unexpected rise in real yields that Spinozzi says will increase market volatility and put weaker corporates at risk.
Fixed income isn't a "dead asset class" and its assets remain a key core component of investors' portfolios, both for diversification purposes versus equity and for income needs, said Amundi.
In the current environment, when a tapering of asset purchases by the Fed is looming and inflation could be sticky, a short duration stance remains the key call, it said.
"Investors should move away from a static benchmark approach (high duration risk) and embrace a more flexible allocation in the search for income," Amundi said.
It sees pockets of value across the board in securitised markets in the U.S., peripheral bonds in Europe, and selective emerging market bonds.
Oil prices handed back their early gains and are now swinging around flat as broader markets head lower and risk appetite appears to dissipate.
Despite the continuing gas crunch and surging prices in that particular market, oil market news is a little more downbeat.
API inventory data released Tuesday were "bearish" according to DNB Markets's Helge Andre Martinsen, while Aramco's decision to slash almost all of its November selling prices for the Far East, Europe and the U.S. were "very much in line with market expectations to accommodate increased allocations on the back of continued tapering of OPEC production cuts," he said.
European natural-gas prices, meanwhile, surged again, presenting a major challenge to the region, which relies on the fuel for electricity, home heating and industrial uses. Benchmark gas futures jumped 17% to EUR136.20, equivalent to $157.41, a megawatt-hour.
European gas prices have jumped 46% this week alone, and more than sevenfold this year as the energy-starved nations in Europe and Asia bid for limited supplies before the cold winter weather.
Gold edged lower as it responds to moves higher in the dollar and bond yields. The moves in bonds and the dollar, coupled with strong risk appetite and the insistence of central banks that inflation will be transitory, explains why gold has been stuck in a narrow range for more than a year, said Ole Hansen, head of commodity strategy at Saxo Bank.
Still, strong consumer and central bank demand should help keep the metal supported and enable the precious metal to withstand further bond yield rises, Hansen added.
Copper prices fell as a stronger dollar weighed on the metal. Three-month copper prices on the LME awere down 1.3% at $9,022 a metric ton.
The ICE Dollar Index, which tracks the greenback against a basket of other currencies, gains 0.3% and is hovering close to its highest level in a year.
The global energy crunch is threatening to also take a toll on base metals demand, said TD Securities. Higher power prices are likely to crimp industrial activity, reducing metals demand, the bank said.
"A cold winter could particularly dent the production of goods, ahead of a busy shopping season, threatening to intensify the manufacturing slowdown in both China and Europe," TD said.
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