MARKET WRAPS
Watch For:
EU quarterly balance of payments; U.K. World Economic Forum's global risks report; Italy retail sales; trading updates from Sainsbury, JD Sports Fashion, Bang & Olufsen, Barratt Developments
Opening Call:
Shares may open higher in Europe on Wednesday, even as investors parse remarks from Fed officials indicating a higher-for-longer interest-rate outlook. In Asia, stock benchmarks gained; Treasury yields were mixed; the dollar strengthened while oil and gold fell.
Equities:
European stocks are poised to open higher on Wednesday, tracking gains by U.S. stocks overnight, despite cautious sentiment about the months ahead as the impact of tighter monetary policy on company earnings and economic growth takes time to be felt.
Federal Reserve Chairman Powell didn't broach interest-rate policy or the outlook for economy. He was "essentially silent" on the topics in his Tuesday remarks, said Bill Adams, Comerica Bank's chief economist.
"His choice might reflect this awareness the economy is changing rapidly, " which makes it tough to nail down what's next for interest rates, Adams said.
Sharing a similar view, SPI Asset Management said, "The critical question on everyone's mind right now is: When are we going to see the Fed's tightening peak?"
"We keep seeing the Fed come out and make these really hawkish comments, but the market isn't really pricing that in."
Andrew Hollenhorst, chief US economist at Citi, said Fed officials wouldn't be pinned down on whether the pace of interest rates should rise by 25 basis points or 50 basis points at the Fed's next policy meeting, which concludes Feb. 1.
"However, the reality is that markets will not treat pace and destination as uncorrelated: a slowdown to 25bp in February will serve to increase market perceptions that a pause is imminent, perhaps at a rate below 5%," he said.
"This is a really complicated environment to dissect right now," said John Porter, chief investment officer and head of equity at Newton Investment Management. "I'm cautious about the outlook over the next six months."
Forex:
The dollar strengthened in Asia, with Thursday's U.S. consumer-price index report the next near-term focus for dollar traders.
BNP Paribas thinks the dollar has peaked and that a multiyear bearish trend has begun.
"Global investors and corporates are overweight the USD. The USD bull cycle has run for more than a decade, leaving valuations extraordinarily expensive from a structural perspective. We therefore believe the next big move (10%+) from here in the USD will be down, not up," it said.
But BNP Paribas also projects risk-off markets in early 2023, and with the dollar's short-term fair value cheap by the bank's reckoning, and positioning in USD now short, "we see room for safe-haven demand to boost USD early this year."
But any dollar gains are likely to be short-lived and shallow and are an opportunity to build a larger structural short, it added.
Read: U.S. dollar on the verge of first 'death cross' since 2020 as rally unravels
Bonds:
Treasury yields were mixed early Wednesday, as traders weighed comments by Fed officials and awaited a key inflation reading due tomorrow.
Powell's remarks were a non-event, Oanda said, with no additional hawkish talk.
Expectations are growing for disinflation trends to continue and "optimism is growing that Europe won't have that bad of a rough patch as China reopening gains momentum and as we did not see the worst case scenarios play out for natural gas prices," it added.
"With a key rate in the 4.75-5.25% range now priced in and a total of 50bp (basis points) of rate cuts in the second half of 2023, the risk is tilted more to the upside," UniCredit Bank said.
"The most recent comments by San Francisco Fed President Mary Daly and Atlanta Fed President Raphael Bostic point to a key rate a little above 5% and leave no doubt that FOMC members are currently not thinking about rate cuts in 2023."
Meanwhile, euro investment-grade corporate bonds are expected to benefit from lower volatility in 2023, Mizuho said.
Companies have sufficient cash balances and relatively strong balance sheets to meet interest payments, Mizuho said.
"Investment-grade corporate hybrids are also a sensible way to access higher yield," Mizuho added.
Energy:
Crude-oil futures declined in Asia, as investors continued to monitor China's reopening and look for signs of a potential global recession.
"We are confident that oil prices will climb again once the current wave of Covid infections has peaked in China and economic activity picks up," Commerzbank said.
Still, SPI Asset Management cautioned that oil traders are "unlikely to see the explosive economic reopening that oil bulls had hoped for, with the market ignoring case counts in favor of local Chinese activity data."
Oil prices "should rise tangentially to the increasing mainland mobility pulse," it said.
While recession fears don't appear to be a major factor holding crude back, SPI said "the warmer European weather likely obscures the more pronounced positive shift from China's borders reopening."
The "unseasonable warm spell affects not just Europe, but also the U.S. January warmth is set to have twice the impact of the December cold spell depressing demand for all winter fuels significantly lower," it added.
Metals:
Gold prices fell in Asia, as investors continued to weigh the prospects for a soft landing for the U.S. economy.
The price of the metal has held steady as traders become more optimistic that the Fed won't continue raising rates rapidly, Oanda said.
Fed Chair Powell's recent appearance at a Riksbank event turned out to be a non-event as he didn't focus on monetary policy, which means that gold's next move could wait until the next inflation report, it added.
"Whether slightly higher or slightly lower, the fact is that gold displayed considerable resilience," said Peter Grant, vice president and the senior metals strategist at Zaner Metals LLC and Tornado Precious Metals Solutions.
"Recent incoming fundamental data have suggested that the pace of inflation is slowing," he said.
"While growth is slowing as well, soft-landing scenarios seem to be gaining traction."
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Copper prices edged higher on positive market sentiment.
Risk sentiment has improved over China's reopening, ANZ said.
ANZ noted media reports that the PBOC and the banking regulator had urged the country's lenders to offer powerful financial support for China's economy.
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Chinese iron-ore futures rose as optimism that China's current Covid-19 wave was close to peaking bolstered market sentiment.
Iron ore is "on a remarkable run," having climbed by more than 50% since the start on November, Morgan Stanley said.
"This rally appears mostly forward looking on China reopening optimism, as underlying supply-demand fundamentals haven't significantly tightened up."
"We see further upside in iron ore prices and pencil in an average price of $140 [a metric ton] for 2Q23, though acknowledge the possibility of short-lived pull-backs," it said.
The establishment of a centralized iron-ore buying agency in China could result in lower peaks in iron-ore prices, lessening what has been intense bidding wars in the market at a time when China is also moving past a peak in steel production, Morgan Stanley said.
"While this vehicle has gone somewhat under the radar for investors, it matters, as it will impact the power balance in the iron ore market, and we'd argue this could be the biggest market shake up since the end of the annual contract system back in 2010," they said.
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01-11-23 0020ET
