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North American Morning Briefing: Stocks Poised to Recoup Some Losses After Selloff


MARKET WRAPS

Watch For:

U.S. International Transactions for 3Q; Canada Retail Trade for October; Canada New Housing Price Index for November.

Opening Call:

Stock futures rose, resuming the seesaw action that has become the signature of markets since the emergence of the Omicron Covid-19 variant.

Investors have grappled with a mix of concerns heading into the end of the year. The rise in Omicron cases has spurred concerns about global growth and whether it will prolong the global supply-chain disruptions that have added to inflation. However, signs that vaccine boosters offer protection against Omicron have bolstered hopes that its impact on growth can be mitigated.

Meantime, hopes were raised that a version of the U.S.’s $2 trillion spending package could still be passed, after Senate Majority Leader Chuck Schumer said Democrats would take up the legislation early next year, despite opposition from Sen. Joe Manchin.

“It seems we’re continuing to get this risk-on, risk-off environment. Investors are kind of torn,” said Louise Dudley, an equities portfolio manager at Federated Hermes. Despite heightened uncertainty, investors are still incentivized to buy stocks, as government bonds don’t offer enticing yields, she said.

Traders checking out early for the holidays, leaving less liquidity and exaggerating some market moves, are also a hurdle for those trying to navigate a shortened week of trading. Markets will close on Friday, Christmas Eve.

The only data on tap for Tuesday are the third-quarter current-account deficit.

Forex:

The dollar fell slightly as traders take profits on long positions that bet on the currency rising, Oanda analyst Jeffrey Halley said.

Some profit taking of the dollar’s recent rally has set in but declines will be limited as markets remain vulnerable to headlines on the Omicron coronavirus variant, which has driven investors towards safe havens, he said.

“I expect the chop-fest to continue, with a move through either 96.00 or 97.00 indicating the [DXY dollar index’s] next directional move.”

The dollar could edge lower heading into the year-end as investors take some profit on recent bets on further gains in the currency, though it might recover again in the new year, MUFG said.

“The U.S. dollar has continued to hold up well though so far even though there is a risk that popular long positions could be pared back heading into year-end as positions are lightened to take risk off the table,” MUFG currency analyst Lee Hardman said.

MUFG’s seasonal analysis shows the dollar tends to underperform in December, before reversing losses in January, he said.

Bitcoin-the world’s largest cryptocurrency by market value-gained 3.4% to $48,623.

The Turkish lira recovers versus the dollar after President Recep Tayyip Erdogan announced measures to curb the currency’s slide. Late Monday Erdogan unveiled a scheme aimed at encouraging Turkish residents to hold their savings in liras rather than dollars.

That eased pressure on the lira, which recovered strongly after hitting an all-time low on Monday after Erdogan on Sunday cited Islam as a reason for not raising interest rates.

“We are quite doubtful this is the end to the current lira story,” Danske Bank analyst Lars Sparreso Lykke Merklin said. USD/TRY is last up 0.2% at 13.4850 after earlier hitting a near four-week low of 11.8450, according to FactSet.

Bonds

The yield on the benchmark 10-year Treasury note ticked up to 1.424% Tuesday from 1.418% Monday.

The clarity provided by the European Central Bank regarding the asset purchase reduction in 2022 is a surprise, Ostrum Asset Management said.

“A surprise is the visibility provided, as the ECB has accurately described the path of QE throughout 2022,” Ostrum AM said.

The ECB confirmed the scheduled end of the Pandemic Emergency Purchase Programme at end-March, and to help offset this, it will increase the regular Asset Purchase Programme in 2Q and 3Q, though this will still mean a reduction in overall purchases.

The ECB purchases will absorb eurozone countries’ net bond issuance in 2022, Ostrum AM says, adding that the central bank will limit tensions in sovereign rates and spreads.

Commodities:

Oil rose with both benchmarks paring some of Monday’s losses that came amid increasing worries about the impact of the Omicron variant. Arresting that decline is supply disruption in Libya, where armed groups have shut down the country’s largest oil field at Sharara, which contributes 300,000 barrels a day, DNB Markets’ Helge Andre Martinsen said.

That has forced the country’s national oil company to declare force majeure on two important terminals. With a presidential election around the corner, the risk of further disruption is growing, the analyst added.

European gas prices were up 7.5% having soared to record highs which DNB Markets’s Helge Andre Martinsen said put it at an equivalent of more than $300 a barrel. That latest rally comes as Russian flows to Europe continue to dwindle.

According to Reuters, flows through the Yamal pipeline between Russia and Germany via Poland that normally move from East to West actually reversed earlier Tuesday.

On top of this, wind output in Germany is at its lowest level in five weeks, boosting demand for gas even further. In short, “the combination of low wind power and very restricted flow of Russian gas is leading to soaring gas prices in Europe,” Martinsen said.

London three-month copper futures are up after worries over the Omicron variant weighed on prices during Monday.

Equities and commodities markets all appear to be staging a relief rally on Tuesday with a weaker dollar also helping dollar-denominated commodities become less expensive for other currency holders.

Still, “low liquidity and volatility combined have intensified market weakness across the board, and further tightening of lockdown restrictions should add to the weakness during the Christmas period [in copper],” Sucden Financial’s Daria Efanova said.

Meanwhile, the weaker dollar means London gold prices were up.

   
 
 
   
 
 

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