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Stocks rise as Fed tapers without the tantrum

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November 4, 2021

By Wayne Cole

SYDNEY (Reuters) – Share markets firmed on Thursday after the U.S. Federal Reserve engineered an orderly start to unwinding its massive stimulus programme, though doubts about the inflation outlook did push up longer-dated bond yields.

Anxious eyes now turn to the Bank of England which may kick off a rate hike cycle later in the day with uncertain implications for debt markets globally.

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For now, equity investors were content that the Fed was in no rush to remove the policy punch bowl and Nasdaq futures added 0.3% to another record high. If sustained, it would be the ninth straight session of gains.

S&P 500 futures edged up 0.1%, while Japan’s Nikkei climbed 1.1% to its highest in a month.

MSCI’s broadest index of Asia-Pacific shares outside Japan crept up 0.3%. The index has been burdened by a spike in new coronavirus cases in China, which threatens to curb consumer spending in an already slowing economy.

Strong readings on U.S. services and employment underpinned the better mood.

As expected, the Fed announced it would trim its bond buying by $15 billion a week from this month, while leaving open the option to quicken or slow the pace as needed.

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Fed Chair Jerome Powell did sound slightly less sure inflationary forces would prove to be fleeting, enough to hit longer-term bonds and bear steepen the yield curve.[US/]

“Overall, we didn’t get anything that should imply higher market pricing of hikes than what we have now,” said Jan Nevruzi an analyst at NatWest Markets.

Fed futures imply a first hike to 0.25% by June with another to 0.5% by the end of 2022..

“While not an ultra-dovish meeting, the result was still a far cry from some of the more stunning hawkish surprises seen recently from the likes of the Bank of Canada,” added Nevruzi.

The Canadian and Australian central banks have caused turmoil in their bond markets in the last couple of weeks by abruptly changing tack on policy.

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Poland’s central bank surprised with an aggressive hike overnight, heightening tensions for the BoE’s meeting where the decision could be nail-bitingly close.

The uncertainty kept sterling on edge at $1.3685, having been as low as $1.3605 overnight.

The dollar softened a little to 93.846 as speculators booked profits on long positions, though the uptrend of the past five months was still in place. It held broadly steady on the yen at 114.07.

The euro bounced modestly to $1.1615, but remains hampered by expectations the European Central Bank will trail the Fed in tightening by some margin.

In commodities, the rise in bond yields saw gold dither around $1,776 an ounce. [GOL/]

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Oil prices slid as U.S. inventories grew and Iran announced the resumption of talks on a nuclear accord. Pressure is also mounting for OPEC+ to expand production at a meeting later on Thursday, though signs are the group will stick with its current plans. [O/R]

Brent stood at $81.99 a barrel, after falling more than 4% overnight, while U.S. crude lost another 49 cents to $80.37.

(Editing by Gerry Doyle)

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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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