MARKET PACKAGING
Watch for:
Non-monetary policy meeting of the Governing Council of the EU ECB; UK PPI Monthly Auto Production Data; Germany Ifo Business Climate Index; France Pole emploi unemployment; commercial updates from Alstom, ASML Holding, Tullow Oil, Tod’s, Fresnillo, easyJet, Lonza Group, Givaudan
Opening call:
Stocks in Europe could open trades on a weak Wall Street lead; Asian equity benchmarks broadly higher with some markets still closed for the Lunar New Year; Treasury yields gain; the dollar has weakened; oil went up and gold fell.
Actions:
European equities could be mixed into Wednesday’s open as investors continue to focus on corporate earnings and economic data.
“The biggest thing this week would be earnings,” said John Roe, head of multi-asset funds at Legal & General Investment Management.
So far, this earnings season hasn’t seen any major downgrades to company prospects or consensus forecasts for next year, Roe said.
“Everyone was concerned that it might be an earnings season where we reduce revisions, so when you get a season where nothing happens, you also have the idea that that pushes the timing of a recession in the US,” he said.
“The market is looking for confirmation that this early year rally is sustainable. Every number counts,” said Antonio Cavarero, investment manager at Generali Insurance Asset Management.
“The economy could still avoid a recession,” said Bill Adams, chief economist at Comerica Bank in Dallas, Texas.
“The first half of the winter has passed without energy shortages, China’s economy is reopening and accelerating, and mortgage rates have retreated somewhat from last fall’s highs. But the many economic and financial indicators economists dots use to predict the turn of the business cycle suggest that a recession is more likely in the near term.”
Forex:
The dollar was weaker early Wednesday. FX markets are in a pending state as the Fed enters a blackout period ahead of the next FOMC meeting, Silicon Valley Bank’s Ivan Asensio said.
“This week is more about earnings releases,” scanning them for clues about a potential recession, he said.
During recent recessions the dollar has tended to sell off before a recession, recover during a recession and then sell off again, he said.
As for the dollar now, he said that “we’ve milked the benefit of rate hikes and spreads” and now it’s a question of seeing what the rate hikes have done and how deep the slowdowns or a recession can be.
Bonds:
US Treasury yields were higher early Wednesday. Yields have fluctuated in a narrow range in recent weeks as investors try to guess how much more tightening the Fed has in the pipeline.
“No FOMC member has explicitly stated that they expect a break after the February meeting. But markets are now pricing in a 20 basis point tightening in March; therefore, a fifth of investors choose to ignore public statements from policy makers.” , said Ian Shepherdson, chief economist at Pantheon Macroeconomics.
“This has been a losing proposition over the past year, but what is happening now, in our view, is that investors have gone from latching onto every word of Fed officials to instead trusting the evidence in front of their own eyes.”
“Notably, three good direct CPI reports, slowing wage growth, consecutive bad reports on retail sales and manufacturing output, sudden drop in the ISM services index and the NFIB-level index recession have convinced many investors that the Fed can’t keep raising rates until core inflation is almost back to 2%.We agree,” Shepherdson said.
However, Prudent Management’s Daniel Berkowitz said that “the Fed has yet to change course and, in our view, a target rate above 5% in the first half of 2023 remains likely.”
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UK gilts are favorably priced at current high-yield levels and corporate bond yields are close to a decade high, making them attractive to buy, says Daniela Russell, head of UK rate strategy at HSBC .
“In gilts, we see value in long-term forwards, with the secular reallocation into fixed income at attractive levels,” he said.
While Russell expects more volatility in 30-year asset swap spreads, the products are likely to get richer in the near term.
Power:
Oil futures gained early Wednesday as expectations of a recovery in demand for crude oil from China continue to provide support.
“With the latest PMI numbers in Europe and the UK showing signs of weakness despite lower energy prices, some doubts are creeping into any sort of recovery in economic activity,” said Michael Hewson, chief analyst at market by CMC Markets UK.
On February 5, the European Union will impose a ban on imports of refined petroleum products from Russia, and a cap on Russian petroleum products will also come into force.
“A key question is whether these measures are already lowering or will further reduce Russian oil production,” said Stephen Innes, managing partner at SPI Asset Management.
Uncertainty about Chinese demand and a lack of clarity about the impact of sanctions on Russian crude supplies could remain the key issues in the OPEC+ alliance’s focus, ANZ analysts said.
The OPEC+ Joint Ministerial Monitoring Committee (JMMC), which reviews the oil market, is scheduled to meet on February 1.
The JMMC should “endorse the producer group’s current output policy and hope that Chinese demand offsets concerns about inflation and the global economic slowdown,” the Kansas City energy at StoneX said.
Metals:
Gold prices fell in Asia, trimming Tuesday’s gains that were boosted by expectations of minor interest rate hikes in the United States.
“A weaker dollar and weak US economic data could further sweeten the appetite for gold in the coming days,” said FXTM’s Lukman Otunuga.
“With the US dollar struggling, inflation rates worldwide falling and the Fed more likely to tone down its hawkish rhetoric than increase it, gold has enjoyed a strong recovery over the past three months,” he said. said Raffi Boyadjian. , chief investment analyst at XM.
“As long as inflation continues to fall and doesn’t prove sticky, gold’s upward trend should continue.”
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Copper prices rose in Asia, buoyed by supply shortage issues amid Chinese demand hopes, analysts said.
Social unrest has hampered production in Peru in recent weeks, analysts at ANZ Research said, noting that MMG said its Las Bambas copper complex was mining at a slower pace amid block.
The industrial metal has posted strong gains this year as China’s reopening has raised expectations of a sharp rebound in demand, analysts added.
Base metals should enjoy another edge as Chinese authorities “become more pragmatic” in managing the world’s second-largest economy, though the next step forward could come closer to the summer, analysts said. Bank of America.
China’s focus on growth has helped give some metals their highest prices since January, braving a gloomy macroeconomic environment, they added.
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While some analysts and investors expect Chinese iron ore demand to rise substantially following the Lunar New Year lull, UBS analysts remained cautious.
They expect “demand impetus to reopening will be modest due to continued weakness in Chinese ownership (more than 25% of demand) and iron ore prices to decline as inventories increase.”
Steel ingredient iron ore recently traded above $120/tonne — a “high” level, UBS analysts said — although market activity is currently subdued due to the holiday in China.
Demand looks sluggish, with Chinese pig iron production declining again in the first 10 days of January and Chinese rebar spreads still tight, they added.
TODAY’S TOP HEADLINES
NYSE Glitch causes hundreds of stocks to misprice
A glitch on the New York Stock Exchange on Tuesday briefly caused wild price swings and a temporary halt in trading in shares of major companies like Exxon Mobil Corp., McDonald’s Corp. and Walmart Inc.
Hundreds of stocks mispriced as a result of the crash, the largest crash to hit a U.S. stock in several years, according to a spreadsheet of affected stocks released by the NYSE.
Janet Yellen expects EV subsidy rules to spur new trade deals
Treasury Secretary Janet Yellen said Japan and the European Union will need to negotiate new trade deals with the United States to meet mining supply requirements for a revised tax subsidy on electric vehicles.
Under the Inflation Reduction Act of 2022, the US has renewed a tax credit for consumers who buy electric vehicles in hopes of reducing US dependence on China. To qualify for the full $7,500 tax credit, among other requirements, 40 percent of the value of the minerals in an EV battery must come from a country that has a free trade agreement with the United States. This amount is expected to rise to 80%. after 2026.
Treasury Secretary Janet Yellen takes steps to ease debt ceiling woes
The Treasury Department will stop investing entirely in a government investment vehicle for federal employees as the United States grapples with the debt ceiling, Secretary Janet Yellen said Tuesday in a letter to congressional leaders.
The department will withhold the money from the Thrift Savings Fund’s government bond investment fund, known as the “G Fund,” Ms. Yellen said. The G Fund allows government employees to save in interest-bearing US securities as part of their retirement savings.
International Paper strikes a deal to divest its Russian pulp business
International Paper Co. said it has inked an agreement to divest from a lucrative Russian pulp business, the latest US company to leave Russia since Moscow invaded Ukraine.
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January 25, 2023 00:16 AM ET (05:16 GMT)
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