MARKET WRAPS
Watch For:
E.U. ECB Survey of Monetary Analysts results published; Germany industrial production index; U.K. BRC-KPMG Retail Sales Monitor; trading update from AngloGold Ashanti
Opening Call:
A mixed open is seen for stocks in Europe. In Asia, stock benchmarks were broadly higher; treasury yields were mostly lower; the dollar weakened; while oil and gold advanced.
Equities:
European shares could open mixed early Monday even as risk appetite returns on the back of Friday's upbeat U.S. jobs report.
Investors appeared to take the jobs report as positive news that no recession is imminent.
"The payrolls number does justify a bit of a rally," said Steve Sosnick, chief strategist at Interactive Brokers.
"If it doesn't take recession off the table, it certainly pushes it back."
"If you're a bull, you can look at the jobs data and say the economy is pretty strong," which should support consumer spending, said Ann Miletti, head of active equity at Allspring Global Investments.
"I'm a little bit more in that cautious camp," as areas of the economy such as manufacturing have shown signs of slowing, she said.
Investors have been left to grapple with mixed signals, as corporate earnings and the economy have held up but extreme volatility in regional bank stocks sparked worries about financial contagion.
"It's too soon to say that that's over with," Miletti said of the recent regional-banking trouble. "I think we will probably see a recession," maybe in the fourth quarter or early part next year, she said.
"Jobs are still hanging in there after many months of impressive strength," BlackRock said.
"We will see over the coming weeks whether the markets feel comforted by that, or whether they want to continue to climb the wall of worry alongside the other risks to the economy and investment landscape," it added.
Forex:
The dollar weakened in Asia amid divergent signals.
A stronger-than-expected U.S. nonfarm payrolls report along with gains in regional bank stocks on Friday have improved risk sentiment but also led to the market pushing back the first Fed rate cut to September, said RBC Capital Markets.
If Treasury yields can rise further from here, this could help support USD in the near-term, it said.
Deutsche Bank noted that while a strong labor market may seem positive for the dollar, it was not quite the case.
Other countries are also seeing resilience in their labor markets, including Canada, Australia and New Zealand, which could keep other central banks "cautiously hawkish," it said.
Moreover, "other Central Banks are not facing the same banking sector constraints as the Fed."
The banking troubles "make for a mildly bearish medium-term USD story at least versus the majors," it added.
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The Bank of England looks set to end its interest-rate rise cycle earlier than the market expects and this could weigh on sterling, UniCredit Research said.
The BOE should deliver a widely-expected 25 basis points rate rise to 4.50% on May 11 but that should be the last hike, it said.
The U.K. forward overnight index swap curve was, however, pricing in a peak rate of 5.00%, it said.
"Accordingly, the BOE's scenario we expect might raise the repricing risk for sterling by limiting any rally well above 1.25-1.26 against the USD and providing EUR/GBP with more support toward the 0.90 area."
"If we are right in thinking that the U.S., the U.K. and the eurozone will all fall into recession this year, then a surge in demand for the safer dollar may mean the pound temporarily drops back to around $1.12 by the end of the year before rebounding in 2024," Capital Economics said.
Bonds:
Treasurys yields were broadly lower early Monday after yields gained Friday following the payrolls report, which showed the U.S. added 253,000 jobs in April-well above the 180,000 that economists had forecast.
The unemployment rate fell to 3.4%, matching the lowest reading since 1969. Job growth figures for February and March were revised lower.
"The jobs report was uncomfortably strong for policy makers who are trying to tame inflation," said Matt Peron, director of research at Janus Henderson Investors.
"Our concern is that policy rates will have to remain high, which could pressure earnings and equity multiples," he said.
Friday's data largely reinforced the market's expectations for a pause by the Fed in June, though fed-funds futures traders added a slight 3.9% chance of another quarter-point rate hike.
Meanwhile, traders held on to a 38% chance of a rate cut in July and mostly priced in a total of three quarter-of-a-percentage-point cuts by December.
Energy:
Oil futures rose early Monday.
Tightness in the oil market appears to be driven by signs of demand recovery in China, ANZ Research analysts said.
A pick-up in domestic travel in China was now likely to spread to the jet-fuel market as international travel gets easier following adjustments to visas and Covid-19 testing measures, the analysts said.
Overall, China's domestic travel should provide nearly a third of global growth in jet fuel demand in 2023, the analysts added.
"If Chinese crude oil imports, which nearly reached their June 2020 record level in March, surprise to the upside in April too, this could put the market in a more optimistic mood," said Barbara Lambrecht, commodity analyst at Commerzbank.
Metals:
Gold futures gained in Asia in a likely technical rebound after falling sharply on Friday.
However, the precious metal may remain under pressure after Friday's stronger-than-expected U.S. nonfarm payrolls report sparked fresh doubt that the Fed will pause its rate increases, analysts said.
It wasn't just the U.S., as Canada also posted robust job growth in April and that is delaying calls for an imminent economic slowdown, Oanda said.
"The precious metal should remain supported as long as markets refuse to abandon hopes for Fed rate cuts later in 2023, while fears over further U.S. financial turmoil continue casting a pall over risk sentiment," Han Tan, chief market analyst at Exinity Group said.
Tan said gold "may yet harbor enough reasons to attempt a new record high," despite the post-nonfarm-payroll pullback in prices, but he noted that because previous spikes above $2,070 were "swiftly unraveled, such price action suggests that bullion isn't likely to hold after reaching a newfound peak."
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The lithium market may have reached a turning point, "for now at least," Morgan Stanley analysts said.
After a five-month selloff, some prices are bouncing as inventories fall, supply growth disappoints and sentiment improves, they said.
"The China ex-works carbonate price bottomed at $21/kg (ex-VAT), close to what we believe to be the cost support level from China's high-cost and low-grade lepidolite supply," they said. That price is now back around $27.50 a kilogram.
"Unlike for nickel and cobalt, we still model a full-year lithium market deficit for 2023 (on very conservative China pure BEV sales growth of +13% yoy), and we expect the recently oversupplied lithium market to become tighter again for the remainder of 2023," the analysts added.
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Copper edged up in Asia after recent losses, with sentiment weighed by China's slower-than-expected economic rebound and concerns over the global economy.
"The market has become increasingly frustrated with the slow rebound in economic activity in China. This has seen investors reduce their net bullish positions on LME copper to a six-week low," ANZ analysts said.
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Chinese iron-ore futures were higher, breaking a three-session losing streak as investors take a breather from shorting amid negative factors.
"The turmoil of overseas banks has not yet ended, curbing the premium of commodity risk appetite," analysts from China Futures said.
Steel and property markets have also been weak recently, dragging the iron ore prices down, the analysts said.
However, they expect higher demand for iron ore as steel mills may need to replenish stocks.
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05-08-23 0014ET
