MARKET WRAPS
Watch For:
Germany foreign trade price indexes; France consumer spending, PPI, provisional CPI, GDP detailed figures; Italy foreign trade non-EU, industrial turnover; trading updates from EDP Renovaveis, Ferrovial, Atos, Intesa Sanpaolo, Bayer, Commerzbank, Banco Santander, St. James's Place, Serco, Ocado, Intertek, abrdn, Croda International, Sibanye-Stillwater, Serco, Volvo
Opening Call:
Shares seem set to inch higher in Europe on Tuesday, mirroring U.S. gains. In Asia, stock benchmarks rose; Treasury yields were mostly flat; the dollar advanced slightly; while oil climbed and gold retreated.
Equities:
European stocks could edge up on Tuesday, tracking the rebound on Wall Street overnight.
Federated Hermes said that while recent inflation surprises have unsettled markets, selloffs have been relatively short-lived.
"Last week, some of the data spooked people and yields moved up again. But here we are on Monday morning and actually that's sort of all forgotten about," it said. "People are slightly hardened to it and understand that rates might go a little bit higher...but the market is not looking at next month's inflation data, it's looking at six months or nine months or even 12 months."
Stock-market investors have been navigating "crosscurrents" from interest rates, Citi said, with the Federal Reserve continuing to hike its benchmark rate in an effort to bring down still high inflation. Investors have worried that the Fed's rate hikes, if too aggressive, could trigger a recession.
"A higher-for-longer Fed funds regime now implies risk of more significant macro pressure on fundamentals," Citi said, referring to the Fed's benchmark rate.
Economists at JPMorgan Chase & Co. are warning about the rising risk of "a more wrathful Old-Testament style" reaction to rate hikes from developed-market central banks, following a "gentle and forgiving path" to rein in inflation.
Investors will also watch data this week on U.S. manufacturing and services and European inflation.
Forex:
The dollar slightly gained in Asia, although its strength may be limited by technical factors.
JPMorgan says the dollar has decoupled from rates in recent months. Tightening labor markets, firm inflation and a repricing of central banks is making 2023 feel like 2022, JPMorgan says, but there are differences -- global growth momentum is still positive and central-bank increases are slower.
That is why the dollar is 5% below its peak even though U.S. terminal rates are reaching new highs, it said.
"To revert more fully to 2022 style USD strength, we need to see another vol shock or a re-escalation of geopolitical risks. Historically, when growth outside the U.S. is getting upgraded, the dollar still weakens even if U.S. rates rise, but in smaller magnitudes and with lower hit rates. We think it is prudent to keep overall USD exposure light pre-FOMC."
The key question for foreign exchange is less what the Fed does in response to stronger U.S. data and more how foreign central banks respond, Morgan Stanley said. "Where we end up in the 'dollar smile' depends on how foreign central bankers weigh the balance of overtightening policy and currency weakness."
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Sterling should benefit if remarks from Bank of England Governor Andrew Bailey and BOE chief economist Huw Pill later in the week support the market's recent upward revision to U.K. interest-rate rise expectations, Monex Europe said. Bailey speaks at the Cost of Living Crisis Conference in London on Wednesday, while Pill delivers his views on the 2023 economic outlook on Thursday.
"With expectations for two more [rate] hikes now priced in, markets will be looking for confirmation on this new more hawkish outlook," Monex said. "If this materializes it would likely provide support for sterling at around current levels."
Bonds:
Treasury yields were barely changed, as investors braced for higher rates now and a potential recession in the near future.
Bond investors continued to assess signs that U.S. inflation isn't coming down as quickly as hoped, although buyers returned to the intermediate and longer-term parts of the Treasury market -- leaving the policy-sensitive 2-year yield near its highest level since 2007 and the benchmark 10-year yield moving further away from 4%.
Stubborn inflation is reducing the chances the Federal Reserve will stop raising interest rates anytime soon, and this has been pushing up Treasury yields.
Markets are pricing in a 75.3% probability that the Fed will raise interest rates by another 25 basis points to a range of 4.75% to 5% on March 22, according to the CME FedWatch tool. The chances of a 50 basis point hike are seen at 24.7%, up from 18% a week ago.
The central bank is mostly expected to take its fed-funds rate target to a cycle peak of between 5.25% and 5.5%, or higher, by September, according to 30-day fed funds futures.
"Looking ahead, one of the greatest macro uncertainties of the coming quarters will be the impact a reopened China will have on the global economy," BMO Capital Markets said.
Energy:
Crude oil prices gained in Asia.
Inflation concerns could weigh on prices, as well as the prospects of a dimmer global economic outlook, said CMC Markets.
However, Russia is halting oil exports to Poland, which should limit losses, it added.
Hot inflation and other economic data have led traders to shift expectations toward more aggressive rate hikes by the Federal Reserve than previously expected. That has stoked fears of an economic downturn, while also lifting the U.S. dollar. A rising dollar can be a headwind for commodities priced in the unit, making them more expensive to users of other currencies.
"Stubborn inflation data has returned the fears of a hawkish [Federal Reserve], further complicating oil trade which is already under pressure from excess inventory," said Velandera Energy Partners.
Metals:
Gold prices slipped. While the precious metal came under pressure after the release of stronger-than-expected U.S. PCE inflation data on Friday, gold remains supported due to a weaker U.S. dollar, ANZ said.
Inflation should be great for precious metals prices, said Adrian Ash, director of BullionVault. Gold has often been used as a hedge against inflation.
However, inflation has apparently so far been supportive of gold prices only if it is slowing down, he said. What had been the "New Year 2023's stone-cold bullish case for gold and silver has now melted on hotter-than-expected inflation data."
Gold prices earlier in February, he said, had been underpinned by expectations that the U.S. Federal Reserve and other central banks would stop raising interest rates and to start cutting their interest rates this year.
But the rising cost of living has "zapped the chances of a reversal in central-bank interest rates," he said.
"We have seen quite a shift in market direction in favor of the dollar and yields, with most foreign currencies, gold, and U.S. equities falling out of favor," Fawad Razaqzada, a market analyst at City Index and FOREX.com, told MarketWatch on Monday.
"Those moves were as a result of the market changing its expectations for interest rates outlook swiftly higher."
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Copper prices were steady, but could be weighed down by concerns over China demand.
Little evidence of a Chinese demand boom outside the travel sector has started to put pressure on industrial metals, said TD Securities.
However, supply risks related to China's power woes appear to be helping prices of industrial metals find a floor, it added.
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Chinese iron ore futures fell in early Asian trade amid steel-output concerns.
China has ordered production cuts at the Tangshan steel-making hub, ANZ said.
The authorities have opted to reduce the industry's impact on air quality, given a forecast of heavy air pollution, it said.
This move comes after iron-ore inventories increased, with total stockpiles held at ports rising 1.2% last week to the highest level since September, it added.
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02-28-23 0016ET
