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Bond Yields, Omicron Surges and Ukraine Talks – What’s Moving Markets

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By Geoffrey Smith — Rising bond yields continue to put stocks under pressure after a labor market report that showed inflation pressures still bubbling. China’s zero-tolerance Covid-19 policy comes under fresh strain amid evidence of community spread in a key port city. The U.S. and Russia talk down chances of easy progress as negotiations begin on de-escalating the situation in Ukraine, and oil prices stabilize after disruptions in Kazakhstan and Libya ease. Here’s what you need to know in financial markets on Monday, 10th January.

1. Yields rise after payrolls; Goldman forecasts

Bond yields continued their upward march after the U.S. jobs report on Friday again highlighted the tightness of the labour market, with a sharper-than-expected rise in wage costs and a bigger-than-expected drop in the unemployment rate.

Analysts at Goldman Saches now predict 4 interest rate hikes from the Federal Reserve this year, and there was no implicit contradiction from Richmond Federal Reserve president Tom Barkin in an interview published by The Wall Street Journal on Monday, saying that a rate hike as early as March is “conceivable.” Goldman also reportedly expects the Fed to start selling down its bond holdings from July.

The interest rate-sensitive 2-Year Treasury yield was holding near a two-year high at 0.87%, while the 10-Year benchmark yield inched higher to 1.78%. European bond yields flattened out after rising to their highest in a couple of years last week.

2. Omicron roundup: U.K. wave starts to peak; Australia’s zero-tolerance policy in tatters, China’s under strain

The changing nature of the pandemic was evident in fresh data from around the world. Optimists will be cheered by signs out of the U.K., the first advanced economy to record an Omicron-variant wave, suggesting that new infections have peaked in the capital London without overwhelming the healthcare system.

Pessimists, however, will point to surging case numbers from the U.S. to India and Australia, along with a parallel rise in absenteeism by front-line workers across the service sector, especially in healthcare.

Omicron has effectively wrecked Australia’s zero-Covid policy that had held for two years until last week. However, China is still sticking to that line, with a mass testing campaign in the key port city of Tianjin, after two cases of locally-transmitted Covid-19 were discovered last week.

3. Stocks set to open mostly lower. Pot stock earnings due

U.S. stocks are set to open mostly lower, with technology again underperforming against a backdrop of higher bond yields. Higher interest rates raise the opportunity costs of bets on companies with only long-term profit prospects, and the turn in long-term rates has cruelly exposed the sky-high valuations of many such companies.

By 6:15 AM ET, Dow Jones futures were flat, while S&P 500 futures were down 0.1% and Nasdaq 100 futures were down 0.3%.

Trading is expected to be largely subdued ahead of consumer price inflation data later in the week. Attention may focus on a JPMorgan (NYSE:JPM) retail conference ahead of the traditional start of earnings season on Friday, when Wall Street’s blue chips start to report. Cannabis company Tilray (NASDAQ:TLRY) heads up a thin earnings schedule on Monday. Other stocks in focus will include Lululemon Athletica (NASDAQ:LULU), after the yogawear maker issued a profit warning.

4. Russia-U.S. talk Ukraine after Kazakh protests are squashed

The U.S. and Russia kicked off talks aimed at de-escalating the tension around Ukraine, but both sides warned that progress would be difficult.

Russia is seeking assurances that Ukraine will never be admitted to NATO, while the U.S. maintains that Ukraine should be as free as any other country to choose its political alignment. Over 100,000 Russian troops remain massed on the border between Russia and Ukraine.  Neither the European Union nor Ukraine itself are party to the talks, in contrast to negotiations that happened after the first Russian invasion of Ukraine in 2014 and the subsequent annexation of Crimea.

The talks come a week after Russian-led troops largely restored order in the former Soviet Republic of Kazakhstan, bolstering Russian power in central Asia.

5. Oil prices ease as output disruptions are overcome

Oil prices stabilized as shortfalls in exports from Kazakhstan and Libya last week began to ease. The Chevron-led venture that operates Tengiz, a 600,000 barrel-a-day field in Kazakhstan, said on Sunday that the field is gradually returning to normal production levels after protests disrupted output last week.

Meanwhile in Libya, work on an export pipeline that had shaved 200,000 b/d of output from its exports last week is now complete, allowing the country to produce a total of 900,000 b/d. Tensions related to the country’s smouldering civil war are still ensuring that output remains well below the country’s potential.

By 6:25 AM ET, U.S. crude futures were down 0.3% at $78.69 a barrel, while Brent crude was down 0.1% at $81.64 a barrel.

Bond Yields, Omicron Surges and Ukraine Talks – What’s Moving Markets

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