MARKET WRAPS

Stocks:

European stocks hovered around the flatline on Monday in a subdued session as U.S. markets are closed for Presidents Day.

Global geopolitical tensions were running high, and with investors looking ahead to the Federal Reserve minutes on Wednesday and core PCE inflation data on Friday, any gains were modest.

European markets have started the year off strong, as has its U.S. equivalent, although in the last couple of weeks the momentum for U.S. markets has started to stall, CMC Markets said.

Stocks to Watch

Hermes can expect another year of strong growth ahead, Bryan Garnier said.

The French luxury-fashion firm outgunned rivals at the end of the year, maintaining sales growth thanks mostly to higher volumes, BG noted.

With momentum continuing into the new year and pricing offering a further boost, Hermes's organic sales should grow by a further 16% or so in 2023, according to BG's estimates.

Earnings should meanwhile rise on a new record margin, at some 41.3% versus the 40.5% it booked for 2022, it said.

BG lifted its target price on the Paris-listed stock to EUR1650 from EUR1520, keeping a buy rating.

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Renault's operational turnaround means its margins and cash generation are more protected against weakening consumer-discretionary spending than its mass-market peers, Berenberg said.

The French car maker is likely to benefit in 2023 from an improvement in production volumes and from sales-mix effects due to the timing and scale of its product launches, it added.

While car makers focused on volumes are more exposed to consumer-spending weakness than premium manufacturers, Renault's self-help potential should allow its margin to move into line with its peer group, Berenberg said.

The investment bank raised its target price to EUR49 from EUR43.

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Eurozone Inflation

Wage growth in the eurozone has accelerated, fueling fears among ECB officials over second-round effects that could further boost inflation.

However, there is currently little evidence of a wage-price spiral, Pantheon Macroeconomics said.

"Wage growth of 4% to 5% is high, but with inflation still above 8%, it's inconclusive evidence on its own... We can't talk about a wage price spiral just because nominal wages jump in response to rising inflation."

Such a spiral could kick in if wage growth remained high even if inflation fell back toward 2% to 3%, but this isn't likely to happen as leading indicators see wage growth falling to 2% in 2H, Pantheon added.

European Central Bank

Markets' expectations of ECB peak rates retreated from last week's high amid mixed comments from ECB speakers, analysts said.

"ECB's [Isabel] Schnabel said markets might underestimate inflation risks, but later [Francois] Villeroy [de Galhau] appeared more dovish, noting that rates have 'clearly passed the neutral rate' and emphasizing that ECB is not on a pre-committed path," Danske Bank said.

Markets currently price the peak ECB deposit rate at 3.60% in September, down about 3.75% on Friday, according to Refinitiv data.

Bank of England

The BOE's next move will likely depend on the next round of labor-market and inflation data after recent statistics didn't offer much certainty as to the near-term policy path, Barclays said.

February's data so far showed a gradually loosening labour market, strong wage growth but with early signs of waning momentum, and softening, but still high, inflation, it added.

Focus will turn this week to February PMIs, which are expected to move broadly sideways at levels consistent with a small contraction in GDP in the first quarter, Barclays said.

A final 25 basis point hike in March remains most likely, but this will depend on the latest data, it added.

Forex:

The U.K. government's attempts to make progress on post-Brexit Northern Ireland trade rules is unlikely to support to sterling as monetary policy remains the key driver, ING said.

Rishi Sunak is reportedly pressing to seal a deal with the EU on the Northern Ireland protocol early this week.

Eurosceptics in the ruling Conservative Party, including former prime minister Boris Johnson, will try to thwart any progress and Sunak will be reluctant to rely on opposition Labour votes to secure support in parliament, ING said.

"Instead, it will probably continue to be monetary policy that drives FX trends."

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The dollar has risen following recent stronger-than-expected U.S. economic data and it could rebound further in the near term, MUFG said.

"Market participants' concerns over a sharper slowdown/recession for the U.S. economy have eased in the near-term following the release of much stronger activity data revealing the ongoing resilience of the U.S. labor market and U.S. consumer at the start of the new year."

The DXY dollar index could rise toward 105.00, then chart resistance at 105.63 and 106.60, MUFG said, although it still expects the dollar will weaken further in the year ahead.

Read Fed Minutes, PCE Data Likely to Determine Dollar Moves

Bonds:

Eurozone government bond yields eased from Friday's year-to-date highs as markets repriced bets on peak ECB deposit rates lower, analysts said.

After ECB's Villeroy de Galhau has capped ECB-forwards and the data should limit the downside for yields, "Bunds look set to trade the range for now," Commerzbank said.

Comments by Villeroy that the ECB is "entering a new phase, a more open, less rapid and longer one," should foster expectations for a plateau in ECB rates, Commerzbank added.

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The sensitivity of spreads on Italian government bonds to hawkishness seems to have fallen in the face of positive economic news, even as the ECB's quantitative tightening might still pose challenges, HSBC said.

"In February, the sell-off in Bunds as hawkish rate expectations were re-priced, did not result in spread widening."

This possibly indicates that BTP spreads might be looking beyond the peak in ECB interest rate rises and anticipating a cutting cycle starting in 2024, HSBC said.

It remains true, though, that the increase of free float in BTPs, once the ECB starts QT in March, could prove a challenge for the private market, it added.

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The cost of insuring against European high-yield bond defaults fell in early trade as market sentiment and consumer confidence improved.

"Euro area consumer confidence has now recorded four consecutive months of improvement aided by moderation in concerns over unemployment, and an easing in inflation expectations," RBC Capital Markets said.

Energy:

Oil prices rose more than 1% as traders refocused on demand in China and Europe.

Still, oil has slipped in recent weeks on concerns about signs of weak U.S. demand and interest rate rises.

Those concerns have undermined hopes that Chinese demand would rebound and evidence that Europe's economy is proving more resilient than expected.

"The Fed is the wild card. If they become hell-bent on slowing the U.S. economy through higher and higher interest rates resulting in a strong USD, the oil price rally could be pushed out to a 2024 story," SPI Asset Management said.

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Metals:

Base metals and gold prices were mostly firmer in early London trade, with investors looking to this week's Fed minutes and the PCE print to see if inflation pressures are still accelerating, following recent hawkish comments from some Fed officials.

"The macro mood turned more bearish late last week as the U.S. dollar rose to 6-week highs, crude oil dropped back below $84 a barrel, and Chinese risk sentiment worsened," Peak Trading Research said.

Aluminum

Supply constraints and a boost in demand from China's reopening from Covid-19 lockdowns will likely support aluminum prices in 2023, according to Fitch.

The research agency said in a note that it is maintaining its forecast of $2,600 a metric ton for 2023, with the price currently at $2,422.50 a ton.

Fitch doesn't expect prices to rally to 2022 highs, but that good demand within China should help to push them up this year.

Supply strains from Europe and China are likely to provide support, with further potential upside if harsher sanctions are placed on Russia, it said.

Consumption should rise by 4.7% this year to 67.7 million tons, outstripped by production at 68.3 million tons.

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02-20-23 0634ET