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Persistent worries about inflation will likely drag on European stocks on Wednesday. In Asia, shares were trading mostly in the red, the dollar's rally continued and Treasury yields extended their gains. In commodities, oil was lower but gold inched higher.
European stocks face moderate opening losses on Wednesday, as the mood sours slightly on worries the Federal Reserve may accelerate its asset tapering to combat stubbornly high inflation.
Shares on Wall Street closed slightly higher as investors reviewed data that showed strong consumer spending and more robust earnings reports.
However, worries remained about inflation that have sapped markets of momentum in recent weeks. Possible higher interest rates could knock stocks and other riskier assets that have benefited from 18 months of monetary stimulus.
"We're moving toward a period now of maybe a bit more volatility," said Frank Øland Winther, global chief strategist at Danske Bank, pointing to Covid-19 cases in Europe, trouble in China's property sector and inflation in the U.S. as potential challenges for the market. "The returns we have seen this year so far just cannot continue."
Stocks to Watch: BHP's shareholders could share in an extra $5 billion-plus capital pot--on top of an expected 80% ordinary dividend payout--by the end of fiscal 2022, Macquarie reckons. The bank expects the miner, which is offloading its petroleum business and sold its BMC coal stake, to offer investors material cash returns even if it chooses to keep net debt at a conservative level.
Factoring in an 80% payout ratio for fiscal 2022, BHP could end the year in a net cash position of $3.2 billion, Macquarie said. "This net cash position indicates ample additional cash return capacity." Macquarie reckons the collapse of BHP's dual listing could prompt it to resume large off-market buybacks in addition to increased cash payouts.
The dollar remained in strong demand against other major currencies, with the USD Index breaking the 96.00 level.
However, IG said there were some mixed signals for currency dealers to consider: the U.S. retail sales data backed the case that strength in the country's economic conditions can withstand an earlier interest-rate lift-off; positive developments surrounding the U.S. infrastructure bill seem to have been priced in, and an increase in Covid-19 cases in the U.S. may damp risk sentiment.
TD Securities said the dollar could weaken in 2022 as the Fed is unlikely to raise interest rates as expected. The Fed's tapering is expected to be completed in June 2022 and markets are pricing in an interest-rate rise shortly after that, TD said.
"With U.S. growth expected to decelerate through 2022, we don't see much incentive for the Fed to lift rates next year." TD thinks the Fed is likely to hold off on lifting rates until late 2023 and expects the DXY Dollar Index to fall to 92.5 by the fourth quarter of 2022.
Separately, TD said sterling is likely to strengthen in 2022 as the Bank of England will lead many of its G10 peers in raising rates, albeit at a slow pace.
Sterling has the "ultimate split-personality" across major currencies as it has the most challenging mix of growth and inflation based on year-ahead consensus expectations but it's trading at a significant discount and the BOE looks set to lift rates at its February, August and November meetings next year.
"As a result, we think buying GBP around current levels offers a decent amount of compensation for the tricky macro backdrop." TD sees GBP/USD rising to 1.41 by the fourth quarter of 2022.
Read: Traders Ramp Up Bets on Swift UK Rate Rises After Strong Jobs Data
T.Rowe Price said policy accommodation has peaked and the path for rates, credit and currency markets could be bumpier next year.
"Expect a rockier road in rates, credit and USD," said Chris Brown, co-portfolio manager for US total return bond strategy, in a webinar.
T.Rowe Price said the Fed faces a tough task convincing markets that tapering of its asset purchases is not a tightening of policy, and that flexible average inflation targeting is still alive. The dollar should be relatively well supported in the near term but could ease next year, Brown said.
Royal London Asset Management said inflation should remain high in the coming months before starting to ease around the second half of 2022. Craig Inches, head of rates and cash at RLAM said it means interest rates in the U.K., U.S. and eurozone may rise later than some in the market are currently anticipating.
Read more of Inches's interview with Dow Jones Newswires here.
Long-dated Treasury yields continued to push higher in Asia after they hit their highest levels in three weeks on Tuesday following data that showed a surge in U.S. retail sales and after a Fed policy maker said the central bank might need to move in a more hawkish direction to account for the recent rise in inflation.
In an interview on Bloomberg, St. Louis Federal Reserve President James Bullard said the Fed could "speed up the taper" to $30 billion per month so that asset purchases would be finished at the end of the first quarter. That would be roughly three months sooner than many currently anticipate.
Since late October, longer-dated yields had seen more of a sideways move, which analysts say reflected worries that an eventual effort by the Fed to rein in inflation could spark an economic downturn.
Meanwhile, a sharp rise in yields at the short end of the curve since September has reflected growing expectations the Fed will be forced to move more aggressively than it has signaled to squelch inflation that is running hotter and proving more persistent than expected.
AmeriVet's Gregory Faranello said "the funds curve is too flat right now pricing in more aggressive rate hikes relative to taper, and perhaps underestimating the peak tightening cycle."
JPMorgan Asset Management said the Bank of England's new approach to corporate-bond buying to reflect environmental and climate goals is likely to influence how some investors will look to build their portfolios. Hugh Gimber, a global market strategist at JPM AM, also said yields on U.K government debt of up to two years would fall if the BOE held its official interest rate unchanged at the December policy meeting.
Read more of Gimber's interview with Dow Jones Newswires here.
Also read: Investors See Inflation as Transitory, Dollar Overvalued, BofA Survey Says
Crude futures were lower in Asia, but Commerzbank said prices will likely be supported by a still-tight oil market in the near term. In addition, Russia, Saudi Arabia and the United Arab Emirates have signaled that OPEC+ will raise oil output cautiously, resisting U.S. calls for more output.
Oil futures ended on a mixed note Tuesday, with U.S. prices settling at their lowest in over a week, but Brent crude posting a gain after back-to-back session declines.
Oil found support after comments from U.S. House Majority Leader Steny Hoyer lowered expectations that the U.S. will tap the Strategic Petroleum Reserve to help lower gasoline prices.
However, the IEA said it expects growth in crude-oil production to help ease tight global supplies, putting some pressure on prices.
"The market is now thinking that it's less likely that the U.S, will use the [SPR] is a band aid for higher gasoline prices," Phil Flynn, senior market analyst at The Price Futures Group, told MarketWatch.
Natural gas prices lost steam in the last hours of U.S. trade, but still recorded another strong gain, rising 3%. Prices were driven mainly the decision by German courts to delay the certification of the Nordstream 2 pipeline.
"The decision is likely to delay the ultimate start-up date for the pipeline, and in the meantime, European gas supply this winter remains quite tight," said Schneider Electric's Christin Redmond.
Gold prices nudged higher, after finding support around $1,850/oz.
Gold has tangible upside risks over the next month, said Citi Research. It recently got an inflation boost and could attract fresh investor inflows and call options buying. However, factors such as inverted rates breakeven curves and strong USD momentum are possible headwinds, said Citi.
Gold ended lower on Tuesday, after touching its highest intraday price in five months, as investors digested the latest U.S. economic data.
Copper also edged higher on concerns that supply chains may stay disrupted.
Despite pledges from China's producers and traders to deliver the metal into the LME to relieve a historic squeeze, only some supply has trickled in, said TD Securities. This implies that commodity traders, consumers and producers are reluctant to offload their inventories while supply chains remain distorted.
Investors' renewed excitement about green energy and electric vehicles could turbocharge demand for silver and make current supply investments inadequate, Hecla Mining CEO Phil Baker told WSJ.
Silver miners need to annually add 7 to 10% more silver to the current 1 billion ounce market, said Baker. Currently, one of Hecla's largest mines, Greens Creek in Alaska, produces around 10 million ounces annually. "You need seven new Greens Creeks; a big ask and difficult to do," he said.
Some investors expect environmental constraints and other supply limitations to boost metals like silver that are heavily used in solar panels and other green projects. Still, silver also trades alongside gold based on investor demand for haven assets and has fallen about 6% this year.
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