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Dollar edges lower as Fed policy decision looms

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November 1, 2021

By John McCrank and Saikat Chatterjee

NEW YORK/LONDON (Reuters) – The dollar eased versus its main rivals on Monday, after posting its biggest daily rise in more than four months in the previous session as hedge funds cut back bearish bets ahead of this week’s highly-anticipated U.S. Federal Reserve policy meeting.

Monetary policy in the United States, Australia and the United Kingdom is in focus, with the Federal Reserve widely expected to announce a tapering of stimulus, a factor that has fueled the greenback’s rise in recent weeks.

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Quickening inflation data has prompted some investment banks such as Goldman Sachs to advance their expectations of a rate hike by the Fed as early as July 2022, compared with the third quarter of 2023 previously.

The dollar index, which measures the U.S. currency against six rivals, was down 0.098% at 94.104, hovering close to Friday’s peak of 94.302, its highest since Oct. 13.

“You had a move on Friday based on the PCE and you’ve got a little bit of a pullback right here,” Joseph Trevisani, senior analyst at FXStreet.com said. “Nobody is quite sure of what the fed is going to do.”

The greenback leapt 0.8% on Friday, its biggest single-day spike since mid-June after a 4.4% surge in the government’s index of core personal consumption expenditures – the Fed’s preferred inflation measure – solidified market expectations for a rates lift-off around the middle of next year.

Money markets assign a 50% probability of a 25 basis point rate hike by the Fed by next June, compared with 15% a month earlier, CME futures data shows.

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The euro edged up 0.04% to $1.15665 after having given up most of its European Central Bank policy gains, touching $1.1535 on Friday, its weakest since Oct. 13.

Hedge fund manager Stephen Jen of Eurizon SLJ Capital in a note to clients said FX markets seem too hawkish on the ECB and too dovish on the Fed.

“With a large overhang of long euro positions among the real money community, I believe the euro will remain vulnerable in the months and quarters ahead against the dollar,” he said.

The Reserve Bank of Australia will also decide policy on Tuesday, with markets challenging the central bank’s contention that rates won’t rise until 2024.

The Aussie dollar ticked 0.01% higher to $0.7521, having fallen off its nearly four-month high of $0.75555 reached last week.

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The British pound touched its lowest in more than two weeks versus the dollar, pressured by uncertainty over the Bank of England’s policy stance and an escalating post-Brexit spat with France over fish.

Most expect the Bank of England will raise rates by 15 basis points to 0.25% on Thursday, although a split vote is likely and some think the bank may hold fire, contenting itself with a hawkish signal.

(Reporting by John McCrank in New York and Saikat Chatterjee in London; Additional reporting by Kevin Buckland; Editing by Rashmi Aich, Andrew Heavens and Barbara Lewis)

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Investors brace for potential hit to earnings because of Omicron

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December 6, 2021

By Caroline Valetkevitch

NEW YORK (Reuters) – As details of a new COVID-19 variant emerge, investors are bracing for a potential hit to U.S. corporate earnings, particularly among retailers, restaurants and travel companies.

News of the Omicron variant comes in the middle of the holiday shopping period, and many businesses are already struggling with higher inflation and supply chain snags because of the pandemic.

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That is putting the focus again on these companies affected by the reopening of the economy, said Kristina Hooper, chief global market strategist at Invesco in New York.

“Are we still going to see traffic into restaurants and retailers, or at least retailers that derive most of their revenue from in-store traffic as opposed to online?” she said. “The other area of vulnerability of course is supply chain disruptions.”

She and other strategists said it’s too early to tell the extent to which the variant could affect earnings.

The Omicron variant that captured global attention in South Africa less than two weeks ago has spread to about one-third of U.S. states, but the Delta version accounts for the majority of COVID-19 infections as cases rise nationwide, U.S. health officials said on Sunday.

Goldman Sachs on Saturday cited risks and uncertainty around the emergence of the Omicron variant as it cut its outlook for U.S. economic growth to 3.8% for 2022. While the variant could slow economic reopening, the firm expects “only a modest drag” on service spending, it said in a note.

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U.S. companies have just wrapped up a much stronger-than-expected third-quarter earnings season, and the rate of fourth-quarter earnings year-over-year growth has been expected to be well below the previous quarter’s.

Analysts see fourth-quarter S&P 500 earnings up 21.6% from the year-ago quarter, while third-quarter earnings growth was at about 43%, according to IBES data from Refinitiv.

That fourth-quarter forecast has not changed since Nov. 26, just after the new variant became headline news.

Omicron may be affecting travel plans. Airline shares have already come under pressure, with the NYSE Arca airline index down 8.3% since the close of the session before Nov. 26.

For companies, “the significance of the impact will depend on how long the Omicron measures last,” said Peter Tuz, president of Chase Investment Counsel in Charlottesville, Virginia. “There will be some short-term impact… It’ll surely cause some short-term disruption to travel.”

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Colin Scarola, a vice president of equity research at CFRA, wrote in a Dec. 2 note on the airline sector that while details of the variant are still emerging, trends in U.S. air travel over recent months with the Delta variant may give some insight into what could happen to travel under the Omicron variant.

“This recent history tells us that most people have already accepted the material risk of infection with a Covid-19 variant when fully vaccinated. But knowing that risk of severe illness remains very low, they’ve been comfortable flying on airplanes,” he wrote.

Compounding concerns about the 2022 earnings outlook are higher costs for companies, with Federal Reserve Chair Jerome Powell last week signaling that inflation risks are rising and numerous companies citing rising costs during the third-quarter earnings season.

Even before the Omicron news, Tuz said investors were reading “more and more about inflation and wages and other inputs,” and that was expected to continue into 2022.

“I don’t know if the ability to pass along these higher costs is going to exist as much,” he said.

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(Reporting by Caroline Valetkevitch; Editing by Alden Bentley and Nick Zieminski)

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Bank investment chiefs signal China and emerging market caution

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December 6, 2021

LONDON (Reuters) -Market volatility and uncertainty over China’s indebted property sector is making bank investment chiefs cautious about its assets, amid more general nervousness about broader emerging markets.

“I would take a wait-and-see approach on emerging markets,” Credit Suisse global chief investment officer Michael Strobaek told the Reuters annual Investment Outlook Summit.

“I would take a day-by-day, week-by-week approach to China, to see what’s unfolding on the default side and the policy side,” he said, referring to problems in the country’s giant corporate debt sector.

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“Only if I see real deep opportunities, I’d go back in.”

Willem Sels, Global CIO, Private Banking & Wealth Management, HSBC, said clients needed to take a longer term view on emerging markets after many were hurt by recent volatility.

“We have a neutral view on China, we try to diversify,” he said.

“We try to get the confidence of investing in China. We try to align ourselves with what is clear in terms of government policy, and that’s the net zero transmission.”

Investors can still “find some winners” in China by digging down into areas like green tech and 5G-related businesses where the government was showing significant support, said Mark Haefele, CIO at UBS Global Wealth Management.

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(Reporting by Tommy Wilkes, Sujata Rao and Dhara Ranasinghe; Editing by Alexander Smith)

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IMF says euro zone should keep supporting economy, high inflation is temporary

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December 6, 2021

BRUSSELS (Reuters) – Euro zone governments should continue to spend to support the COVID-19 economic recovery, though in an increasingly focused way, and consolidate public finances only when it is firmly under way, the International Monetary Fund said on Monday.

In a regular report on the euro zone economy presented to the group’s finance ministers, the IMF noted, however, that while consolidation itself could wait, a credible way of how it would be done in the future should be announced already now.

“Policies should remain accommodative but become increasingly targeted, with a focus on mitigating potential rises in inequality and poverty,” the IMF said.

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“Fiscal policy space should be rebuilt once the expansion is firmly underway, but credible medium-term consolidation plans should be announced now,” it said.

The Fund also noted that the rise in inflation, which hit a record high of 4.9% on a year-on-year basis in November, was temporary and, therefore, not a big threat because it did not translate into a spike in wages, called a second-round effect.

“Recent inflation readings have surprised on the upside, but much of the increase still appears transitory, with large second-round effects unlikely,” the report said, adding that the European Central Bank’s monetary policy should therefore continue to be accommodative.

“Structural reforms and high-impact investment, including in climate-friendly infrastructure and digitalization, remain crucial to enhancing resilience and boosting potential growth,” the IMF said.

(Reporting by Jan Strupczewski; Editing by Paul Simao)

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