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Analysis-As Fed kicks off taper, some investors seek to dial down risk

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November 4, 2021

By Gertrude Chavez-Dreyfuss and Saqib Iqbal Ahmed

NEW YORK (Reuters) – The Fed’s well-telegraphed taper announcement has done little to soothe the nerves of some investors, who remain on edge about stubbornly persistent inflation and are looking to trim risk as they prepare for rockier times.

The Federal Reserve on Wednesday said it will begin paring back its monthly bond purchases this month with plans to end them in 2022, marking the beginning of its tightening cycle. But it stuck to its long-held view that high inflation would prove “transitory” and likely not require a fast rise in interest rates, prompting investors to call it a “dovish taper”.

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Market reaction immediately after the announcement was muted, with the dollar falling while U.S. stocks gained. Investors said that may not be sustained long-term.

(For graphic on Breakeven inflation rates – https://fingfx.thomsonreuters.com/gfx/mkt/dwpkregodvm/Pasted%20image%201635981069299.png)

“As inflation persists in a very strong way … people will become a little more nervous. That’s when you’ll see investors maybe dialing back on their risk exposures,” said Lon Erickson, portfolio manager at Thornburg Investment Management, Santa Fe, New Mexico, who said this could set in during the first half of 2022.

Erickson favors shorter-duration assets in the fixed income space to protect from looming volatility as inflation continues to surge.

The central bank’s easy money policies have been a source of significant support for financial markets, with the S&P 500 more than doubling since its March 2020 low during the onset of the pandemic. However, that has raised concerns about stretched valuations and a piling into comparatively risky assets, such as stocks.

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“It’s a dangerous game when financial conditions are this loose, the economy is doing this well and inflationary pressures are this high, to be running monetary policy for a crisis-like environment,” said Troy Gayeski, chief market strategist for FS Investments. He advises investors seek products with inflation protection and avoid investments like long-duration U.S. Treasuries which see their value erode with inflation. “But it could be setting us up for a really tough 2022.”

Chris Zaccarelli, chief investment officer at Independent Advisor Alliance in Charlotte, North Carolina said that given the uncertainty on inflation and interest rates over the next 12 months, he believes it is prudent to still maintain equity exposure, but reallocate his portfolios toward companies with strong balance sheets and robust pricing power and away from those that are more speculative in nature.

Cliff Hodge, chief investment officer, at Cornerstone Wealth, said in a “dovish taper” environment, he’s looking at lower volatility and higher-quality types of assets.

Todd Sandoz, co-head of global equities, Barclays, said that for equity markets, the key question will be how earnings growth balances against increases in nominal rates.

“Where equities would really underperform is if inflation expectations and nominal rate increases…dramatically outpace earnings growth. That’s where you get a very bad scenario for equities.”

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The benchmark 10-year yield climbed to a session high of 1.602% on Wednesday, but was below recent peaks of 1.7% in late-October.

The Treasury market has churned in recent weeks as investors sharply increased expectations that inflation would force the Fed to raise rates sooner and faster than projected. Short-term rates have risen and the yield curve flattened, before partially receding.

Investors, however, have generally praised the Fed for well-telegraphing the taper. That is in contrast to 2013, when bond yields rocketed during the so-called “taper tantrum” after then-Fed chief Ben Bernanke unexpectedly told lawmakers the central bank could slow its pace of asset purchases that had been propping up markets.

Futures on the federal funds rate, which track short-term rate expectations, were little moved on Wednesday, continuing to price in two rate hikes next year.

Despite the pending tightening, some investors still see a positive investment environment.

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Jack Ablin, chief investment officer at Cresset Wealth Advisors in Palm Beach, Florida, who is comfortable owning equities despite some reservations about lofty valuations, said Wednesday’s meeting and Fed Chair Jerome Powell’s comments were reassuring.

“I do think the economy is strong enough to withstand a tighter Fed,” Ablin said.

(Reporting by Gertrude Chavez-Dreyfuss and Saqib Iqbal Ahmed; additional reporting and editing by Megan Davies and Sam Holmes)

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Yen shines, Aussie sags as Powell turns hawk despite Omicron uncertainty

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December 1, 2021

By Kevin Buckland

(Reuters) – The safe-haven yen held steady on Wednesday, while the risk-sensitive Australian dollar languished near a one-year low after Federal Reserve Chair Jerome Powell signalled a faster taper of stimulus despite the risks around the Omicron COVID-19 variant.

Investors fear that hasty monetary tightening could choke off the nascent economic recovery, with little still known about Omicron’s potential to evade current vaccine protection or how deadly it might be.

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“Investors are staying cautious,” said Shusuke Yamada, chief Japan FX strategist at Bank of America-Merrill Lynch.

“It’s very difficult to make a judgement about the impact of Omicron when we don’t have a lot of information.”

Global markets fell sharply on Tuesday after the head of drugmaker Moderna said existing COVID-19 vaccines would be less effective against the new variant, although BioNTech’s chief executive struck a cautiously positive note, saying the vaccine it makes with Pfizer would likely offer strong protection against severe disease from Omicron.

The Aussie weakened 0.12% to $0.71245 after dipping as low as $0.7063 of Tuesday for the first time since Nov. 3, 2020. The New Zealand dollar was largely flat at $0.68195 after also touching the lowest since early November of last year at $0.6773 in the previous session.

The greenback ticked 0.09% higher to 113.26 yen, but still within sight of an overnight low of 112.535, a level not seen since Oct. 11.

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Powell said in testimony to Congress on Tuesday that Fed officials will discuss at their Dec. 14-15 policy meeting whether to end bond purchases a few months earlier than had been anticipated. The Fed chief finally did an about face on a long-held contention that inflation would be “transitory.”

Powell expressed confidence that the impact from Omicron will be far less than in the spring of 2020, when the pandemic erupted.

In response, traders wound up interest rate hike expectations, with money markets now almost fully priced for tightening at the June meeting.

Powell’s testimony continues later Wednesday.

“Powell’s unexpectedly hawkish tone overnight, essentially asserting that inflation risk has primacy over growth/Omicron risks, should leave the (dollar index) forging ahead,” Westpac strategists wrote in a client note.

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The index, which measures the dollar against six major peers, traded at 95.921 after sliding to 95.544 on Tuesday for the first time since Nov. 18, weighed down largely by an unwinding of bearish bets on the euro, the most heavily weighted component in the basket.

Westpac recommends buying dips in the index down to the mid-95 level.

The single currency slipped 0.04% to $1.1331, down from a two-week high of $1.1387 overnight.

Sterling traded not far from an 11-month low of $1.31945 reached overnight, last changing hands at $1.32955.

(Reporting by Kevin Buckland; Editing by Shri Navaratnam)

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OPEC+ begins two days of talks amid oil rout

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December 1, 2021

LONDON (Reuters) – OPEC and its allies begin two days of meetings on Wednesday to decide whether to release more oil into the market or restrain supply amid an oil price rout and fears the Omicron coronavirus variant could weaken global energy demand.

Oil prices fell to near $70 a barrel on Tuesday from as high as $86 in October, posting their biggest monthly decline since the outset of the pandemic, as the new variant raised fears of a supply glut.

For November, Brent fell by 16.4%, while WTI fell 20.8%, the biggest monthly fall since March 2020.

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“The threat to oil demand is genuine,” said Louise Dickson, senior oil markets analyst at Rystad Energy. “Another wave of lockdowns could result in up to 3 million bpd (barrels per day) of oil demand lost in the first quarter of 2022.”

Also pressuring prices, Federal Reserve Chair Jerome Powell said the U.S. central bank likely will discuss speeding its reduction of bond purchases amid a strong economy and expectations that a surge in inflation will persist.

The Organization of the Petroleum Exporting Countries (OPEC) will meet on Wednesday after 1300 GMT, followed by a meeting on Thursday of OPEC+, which groups OPEC with allies including Russia.

Several OPEC+ ministers, including from Russia and Saudi Arabia, have said there was no need for a knee-jerk reaction from the group.

But some analysts have suggested OPEC+ might put plans to add 400,000 barrels per day (bpd) to supply in January on hold.

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The group was already weighing the effects of last week’s announcement by the United States and other countries to release emergency crude reserves to temper energy prices.

OPEC+ has been gradually winding down record supply cuts of 10 million bpd implemented last year and currently has some 3.8 million bpd of reductions still in place.

The increase in OPEC’s oil output in November has again undershot the rise planned under a deal with allies, a Reuters survey found.

(Reporting by OPEC team, writing by Dmitry Zhdannikov, editing by Richard Pullin)

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New York accuses Amazon of backsliding over worker safety, seeks monitor

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December 1, 2021

By Jonathan Stempel

NEW YORK (Reuters) -New York state’s attorney general on Tuesday asked a state judge to appoint a monitor to oversee worker safety at an Amazon.com Inc fulfillment center in New York City, citing the retailer’s alleged rollbacks of COVID-19 safety measures that were “already inadequate.”

Letitia James, the attorney general, also wants a court order requiring the rehiring of Christian Smalls, who Amazon fired for allegedly violating a paid quarantine by leading a March 2020 protest over conditions at the Staten Island facility.

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James, a Democrat running to become New York governor, sued https://www.reuters.com/article/us-amazon-com-complaint/new-york-attorney-general-sues-amazon-over-covid-19-shortfalls-idUSKBN2AH0C2 Amazon in February in a New York state court in Manhattan over its safety protocols for thousands of workers at the Staten Island facility and a distribution center in the New York City borough of Queens.

She said Amazon is valuing profit over safety and “acting as if the pandemic is over” by rolling back safety protocols even as the Omicron variant https://www.reuters.com/business/healthcare-pharmaceuticals/omicron-variant-could-outcompete-delta-south-african-disease-expert-says-2021-11-30 of the COVID-19 virus threatens to increase transmission rates.

The alleged rollbacks include making the Staten Island facility “mask-optional” for vaccinated workers while not requiring masks for unvaccinated workers, and failing to enforce social distancing.

In her motion for a preliminary injunction, James said the proposed monitor would oversee upgraded cleaning, hygiene and social distancing procedures.

“While case rates, hospitalizations, and deaths rise, Amazon rescinds protections and packs in more workers for its holiday rush,” James said in her motion. “Amazon’s ongoing – and worsening – failure to protect workers must be halted.”

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Amazon said in a statement it has taken a “comprehensive approach” to COVID-19 safety.

“It’s disappointing that the Attorney General is seeking to politicize the pandemic by asking for ’emergency’ relief now despite having filed this lawsuit nine months ago,” Amazon said.

The Seattle-based company is appealing a judge’s refusal in October to dismiss James’ lawsuit.

Amazon on Nov. 15 reached a separate settlement with California https://www.reuters.com/legal/government/amazon-settles-california-claims-it-concealed-covid-19-cases-workers-2021-11-15 over claims it violated a state “right-to-know” law by concealing from warehouse workers and local health agencies the numbers of workers being infected with COVID-19.

(Reporting by Jonathan Stempel in New York; Editing by Matthew Lewis and Stephen Coates)

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