MARKET WRAPS
Stocks:
Europe's main stock markets notched modest advances on Monday following Wall Street's latest rally, but gains were capped, as investors looked to a packed week ahead, with some key U.S. economic data and big earnings.
According to a WSJ article , Federal Reserve officials are preparing to slow interest-rate increases for the second straight meeting and debate how much higher to raise them after gaining more confidence inflation will ease further this year. They could begin deliberating at the Jan. 31-Feb. 1 gathering how much more softening in labor demand, spending and inflation they would need to see before pausing rate rises this spring.
Financial markets appear to have "a rising conviction" that central banks are on the cusp of a significant pivot on monetary policy sometime later this year, CMC Markets said, "a view that appears to be getting additional traction now that a number of Fed policymakers appear comfortable with the idea of another step down in the central banks rate hiking cycle to 25bps next week."
Stocks to Watch
Remy Cointreau looks set to benefit from China's reopening and those gains aren't reflected in its share price, Citi said, raising the stock to buy from neutral and lifting their target price to EUR200 from EUR178.
The French distiller also faces near-term uncertainty in the U.S., but focusing only on U.S. headwinds risks missing a bigger prize in the higher-margin Asia business, the bank said.
Citi upgraded its organic operating profit growth forecast on the maker of Remy Martin cognac for fiscal 2024 to 12% and said improving mobility in China suggests sales and profit estimates could be revised upward.
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Pernod Ricard can look forward to higher sales and share price as China relaxes its strict pandemic measures, Citi said.
The French distiller should get a top-line boost both within China and in its travel-retail business following the end of the country's Zero Covid policy, the bank said.
Other upside includes a likely supportive 1H print next month, along with U.S. share gains following recent acquisitions, helping offset wider sluggishness in the U.S. market, Citi said.
"The risk/reward is increasingly attractive."
Citi raised its target price on the maker of Absolut vodka and Jameson whiskey to EUR220, keeping a buy rating on the stock.
Economic Insight
Based on the most likely outcome for inflation, the European Central Bank is making a mistake by sticking to the currently indicated path of interest-rate increases, UniCredit said.
UniCredit said it suspects the ECB is driven by a heavily skewed incentive function aimed first and foremost at cementing its credibility following the inflation shock.
ECB's policy is set to dampen European growth relative to what it otherwise would have been during 2023 to 2025, UniCredit added.
"But none of this will be conclusively clear until well into 2024, unfortunately."
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Landesbank Baden-Wuerttemberg expects the ECB to raise its interest rates by 50 basis points at each of its next two meetings in February and March, and see at least one further small interest-rate rise of 25bps in the second quarter.
It raised its forecast for the peak level of the ECB's deposit rate by 25bps to 3.25% and doesn't expect any rate cut this year.
" We still think it unlikely that the ECB will turn its monetary policy around and lower key interest rates before the end of this year," Landesbank said.
"We thus believe an increasingly widespread market speculation that this could happen is premature."
U.S. Markets:
Stock futures wobbled, the dollar slipped and Treasury yields fell as investors awaited a busy week of earnings and bet that the Fed will dial back aggressive interest-rate increases.
The yield on 10-year Treasury notes fell slightly to 3.480% from 3.483% Friday. The yield on the interest rate-sensitive two-year note edged down to 4.164% from 4.181%.
Up ahead, Synchrony Financial and Baker Hughes are due to report earnings before the bell. Zions Bancorp., Brown & Brown and Crane are expected to file after the close.
It's a quiet start to the week for economic data, with just the leading economic indicators for December due today.
Forex:
The euro rose after ECB member Klaas Knot said the bank is set to raise interest rates by 50 basis points at upcoming meetings.
Knot told Dutch broadcaster WNL on Sunday a 50bp rate rise was likely in February and March with further hikes expected in the months thereafter.
The attention now turns to a speech from ECB's Lagarde in Germany at 1745 GMT.
"We doubt that her speech late this afternoon will offer anything new but the EUR might further hold gains if hawkish tones prevail again," Unicredit Research said.
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Sterling may fall slightly versus the euro in the near term as the ECB takes a more restrictive policy stance than the BOE but gains are likely later this year, UBS Global Wealth Management said.
"The ECB's optimistic medium-term growth outlook is looking increasingly undeliverable, which may force them to reduce their hawkish tone, while a more supportive environment for risk assets should support the pound."
UBS expects EUR/GBP to rise to 0.88 in the first quarter of 2023 before falling to 0.85 by the fourth quarter.
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The dollar was 0.2% lower as positive risk appetite helped drive investors away from safe haven assets, ING said.
"Risk assets are largely holding onto their 2023 gains, buoyed by the view that recessions may be mild and that slowing price pressures could allow the Federal Reserve to respond if need be."
U.S. data this week including economic growth figures on Thursday should keep the dollar on the "soft side" although the currency has fallen materially already and short-sellers may prove reluctant to build bets against the dollar ahead of the Fed's Feb. 1 meeting, ING said.
Bonds:
The 10-year German Bund yield has room to rise in the short term but it is expected to end the year below the current market level, according to Landesbank Baden-Wuerttemberg.
LBBW confirmed its 10-year Bund yield forecast of 2.30% for both March 31 and June 30, but raised the year-end forecast to 2.00% from 1.85%.
The forecasts for the 10-year Bund yield for March and June were above the current market level, but the revised year-end target is below that.
"The prospect of a sharp rise in the supply of Bunds this year was crucial to this adjustment," LBBW said.
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The year-to-date tightening of 10-year Italian BTP-German Bund yield spreads to as low as 170 basis points from 215bps before a rewidening on Friday probably reflects very strong appetite for investors for carry, UniCredit Research said.
"Expectations that monetary policy rates are close to peaking and that easing may start as soon as early 2024 have also provided some support, although we note that the tightening of BTP spreads has been more pronounced than changes in money market forwards can justify."
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Irish government bonds yields were unfazed by Fitch Ratings' affirmation of its 'AA-' rating with a stable outlook, despite some market expectations of a revision of the outlook to positive.
Fitch said Ireland's exceptional revenue performance and withdrawal of Covid-19 support will lead to a general government surplus of around 1% of GDP this year, while the debt/GDP ratio fell by an estimated 9 percentage points in 2022 to 46.5%, below the 'AA' median of 48.5%.
Risks to medium-term growth stem from potential shifts in international policies on corporate taxation and lingering uncertainty around the impact of Brexit, Fitch said.
Energy:
Oil prices edged down in holiday-thinned trading as investors awaited clues on China's reopening.
China's Lunar New Year holiday has reduced trading volumes as Chinese traders are absent. Plus, investors are largely waiting for the week-long holiday to finish before making big bets on oil as the holiday could spur a surge in Covid-19 cases.
"There is still a high level of concern about China's consumption post-Lunar New Year that could be holding the proceedings back," SPI Asset Management said.
Metals:
Base metals were mixed and gold was weaker in early trading in lighter-than-usual trading volumes.
Last week, "copper recorded its fifth consecutive weekly gain amid ongoing signs of tightness," ANZ Research said. Tight LME stocks and a boost in Chinese demand after the Lunar New Year should support prices for LME base metals.
Meanwhile, hawkish comments from some Fed officials and mixed economic data has kept gold steady, ANZ said.
Copper/Iron Ore Outlook
The most likely driver of copper prices in the short term will be China's post-lockdown bounce, given the country buys roughly 45% of the global supply, Liberum said. "Everything ex-China looks quiet/boring."
Liberum reckons the single most useful China-centric copper signal for investors is China's domestic physical and merchant premia--effectively what buyers there pay on top of the local spot price for immediate delivery of the metal. At the moment, it is very low, around $30 a metric ton.
"If this lifts, a bullish fundamental price driver is emerging [not just the current speculative one]," Liberum said.
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Iron-ore's bull market has been driven by sentiment and optimism, rather than a physical tightening of supply and demand, Morgan Stanley said. But a tighter market is expected in the months ahead, which should justify the recent rally and extend it into 2Q.
"We are increasingly asked about the sustainability of the current iron-ore rally. Our short answer is that recent momentum can only be maintained beyond the Lunar New Year break if supply-demand fundamentals catch up with recent price action, something we still expect to happen."
Morgan Stanley has tipped an average 2Q price of $140/metric ton.
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01-23-23 0626ET
