MARKET WRAPS
Watch For:
EU retail trade; OECD economic survey of the EU and euro area; Germany manufacturing orders, manufacturing turnover; UK narrow money and reserve balances, S&P Global/CIPS UK construction PMI, Bank of England Gov. Andrew Bailey appears before Treasury Committee; trading updates from Tod's, Richemont, Dechra Pharmaceuticals, Ashmore Group, Darktrace
Opening Call:
Shares may be off to a shaky start in Europe on Wednesday amid anxiety over the Chinese economy and global growth. In Asia, stock benchmarks were mixed; Treasury yields were also mixed; the dollar was barely changed; oil edged up after Saudi Arabia and Russia extended production cuts, while gold was flat.
Equities:
European stocks could lose ground on Wednesday, as an extension of oil-production cuts by two of the world's largest crude exporters hardened fears the Chinese economy has hit a rough patch that could slow global growth.
Oil prices closed at the highest level since November on Tuesday, after Saudi Arabia and Russia opted to extend oil supply production cuts through the end of 2023.
Some analysts warned that attempts by Riyadh and Moscow to tighten the market-and bolster their national budgets-signal there is limited upside for Chinese demand and little appetite from Beijing for the type of infrastructure investments required to juice it.
The investor question after the oil supply cut news is how higher energy costs filter into prices and the Federal Reserve's efforts to tamp down on increases, Capitol Securities Management said.
The result could be a bump back to higher inflation--albeit nothing like the year-over-year highs reached last year, it added.
Federal Reserve governor Christopher Waller, a key proponent inside the central bank on pushing interest rates higher, said Tuesday the Fed can afford to see what happens next. "There is nothing that is saying we need to do anything imminent, anytime soon, so we can just sit there [and] wait for the data," Waller said in a CNBC interview.
The next Fed meeting on interest rates is scheduled for Sept. 19-20.
Investors are also focusing on U.S. services-sector activity data for August, due later in the day.
Forex:
The dollar was little changed, supported by gains in U.S. Treasury yields overnight and receding fears about a possible U.S. recession.
Weak economic data out of China and a round of disappointing readings from the eurozone helped support the dollar, with the U.S. economy so far remaining resilient.
"The outperformance of the U.S. dollar is coming against a backdrop of rising optimism about the prospects for the U.S. economy, which prompted Goldman Sachs to say that the prospect of a recession in the U.S. has dropped to a 15% probability in its opinion," said CMC Markets UK.
Also aiding the dollar, the resilient U.S. picture "doesn't speak to the prospect of imminent rate cuts, unlike the situation in Europe where we've seen another set of disappointing PMIs, this time from the services sector as Spain and Italy follow German and France into contraction territory," it said.
Bonds:
Treasury yields were mixed on Wednesday, following earlier strong gains, as revived inflation angst trumped concerns about a slowing global economy.
Higher oil prices are adding to anxiety that inflationary pressures will be revived and force the Federal Reserve to keep interest rates higher for longer.
"The recent run-up in oil prices is already setting us up for some hotter August CPI prints, so any further gains there are going to be a fresh hurdle for central banks in their quest to get inflation back to target," said Deutsche Bank.
"That concern was evident among sovereign bonds, which sold off mainly thanks to higher inflation expectations," it said.
Markets are pricing in a 93% probability that the Fed will leave interest rates unchanged at a range of 5.25%-5.5% on Sept. 20, according to the CME FedWatch Tool. The chance of a 25-basis-point rate hike to a range of 5.5%-5.75% at the subsequent meeting in November is priced at 41.7%.
Energy:
Oil inched higher in Asia, continuing gains after Saudi Arabia and Russia said overnight that they would extend production cuts.
The market likely faces "sizable drawdowns in inventories" due to the output restrictions, ANZ said.
It also cited EIA data showing U.S. oil inventories falling while demand topped prepandemic levels in May and June.
The extension of the output reductions is "very bullish' and means that oil supplies will continue to tighten into the end of the year," The Price Futures Group said.
The Organization of the Petroleum Exporting Countries and their allies, together known as OPEC+, didn't want to "keep the drama up month after month, having the market speculate on whether they would keep production cuts in place," it said. Three three-month extension is "really sending a message that they have gained control over the market."
While the production cuts are causing oil and fuel prices to rise immediately, this may actually curb core inflation by limiting consumers' ability to buy products beyond fuel and other staples, said Aptus Capital Advisors.
"Clearly, rising energy costs put upward pressure on CPI. But to the extent that rising energy costs serve as a headwind to broader economic growth, they can create some small downward pressure on core CPI," it said.
Metals:
Gold was flat in Asia after tumbling overnight as the bond market selloff resumed.
Bond yields move inversely to prices of both bonds and the precious metal. Oanda said that in the longer run, gold could benefit after the dollar, which also tends to have an inverse correlation with the metal, reaches a set peak.
Expectations of the Fed's rate path will also be a factor on the direction of the non-interest bearing metal.
Oanda noted that though the central bank may be done raising rates it definitely isn't mulling rate cuts soon.
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Copper prices were lower as weak economic data weighed on sentiment.
A private reading of China's services PMI showed activity slowing in August, while Europe's composite purchasing managers index undershot expectations in August, ANZ said.
However, China's latest property easing measures could elevate copper consumption in the construction and home appliance sectors, Tonguan Jinyuan Futures said.
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Iron ore edged higher as home sales picked up in China's major cities after the latest property-easing measures.
Home sales in Shanghai and Beijing more than doubled over the weekend following last week's cut to the down-payment ratio for first-time home buyers and the adjustment to interest rates on existing mortgages, ANZ said.
Meanwhile, sentiment was lifted after iron-ore giant Vale said the outlook for China's property sector is "more encouraging" despite uncertainties, it added.
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09-06-23 0016ET
