MARKET WRAPS
Watch For:
Flash PMI for Eurozone, U.K. France, Germany; U.K. public sector finances, Treasury Committee appointment hearing with Randall Kroszner; Germany GfK consumer climate survey; France monthly business survey (goods-producing industries); trading updates from SAS, SEB, Remy Cointreau, Bouygues, Associated British Foods, X5 Retail Group
Opening Call:
Shares in Europe may open slightly higher; Asian stock benchmarks were higher in holiday-thinned trade with several markets still closed for the Lunar New Year; Treasury yields and oil prices were mixed; the dollar weakened; while gold gained.
Equities:
European stocks could maintain their uptrend and open slightly higher, as investors bet on a slower pace of interest rate increases.
"After a [bad] 2022 in which the rising interest rate environment sucked much of the life from growth stocks, there has been some bargain hunting from investors who wonder whether there has been an overshoot of depressed valuations," said Richard Hunter, head of markets at Interactive Investor.
With the U.S. Fed now in its blackout period, ahead of its next decision on interest rates, due Feb. 1, traders will likely shift their focus on the continuing earnings season.
"The strength of the global economy is a big question this week and next as industrials and technology companies gear up to report earnings. With greater exposure to international markets, their performance will be a good guidepost for how the global economy is doing compared to the U.S.," said Mark Hackett, chief of investment research at Nationwide.
"We can expect to still see healthy earnings from these companies, despite recent layoffs," he said.
Forex:
The dollar was weaker early Tuesday, but analysts expect it to get stronger as markets try to pinpoint how fast inflation will fall and how high U.S. interest rates will go.
"The market pricing 2.25% YoY headline inflation by June is possible, but we think unlikely in our modal scenarios for both core and non-core components," Bank of America economists said.
A prolonged fight against price increases would likely keep U.S. rates higher than in other developed economies, strengthening the dollar.
Meanwhile, optimism in the euro could have further to run in the near-term but this won't last as the market faces the possible next phase of Europe's energy crisis, Rabobank said.
"Energy remains a significant risk to the European economic outlook," it said.
A relatively warm winter in Europe, high levels of gas storage and the ability of firms to cut back on demand have eased the energy crisis recently and supported the euro but the EU will soon have to start preparing for next winter, it added.
Rabobank maintains its one-month EUR/USD forecast of 1.09 but sees room for it fall to 1.06 in three months from 1.0855 currently.
Bonds:
U.S. government bond yields were mixed, as investors continue to monitor corporate quarterly earnings for signs of fallout from the Federal Reserve's rapid pace of rate hikes last year.
"As central banks prepare to stop or pause hiking by the summer, the financial conditions loop becomes less of a driving force as the market flips from obsessing about inflation risk to obsessing about growth/recession risk," said Stephen Innes, managing partner at SPI Asset Management.
"So we could see an extended period where bond/equity correlations turn negative again. In other words, investors who are worried about growing recession risk may see bonds as a good hedge for risky assets once again (at least in the short run)," he said.
"Another dynamic comes from perceptions of weakening growth and easing monetary policy relative to the run of Fed Speak. While U.S. growth data are admittedly weak, much of it has come from 'soft data', with hard activity data holding up much better."
"And while there have been several Fed speakers voicing a preference for another downshift, hawk Waller, most notably, in the pace of hikes, the market is translating this into a lower terminal rate again," Innes added.
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According to ING, European corporate bonds could face increased volatility in the coming weeks as bond supply reduces during the blackout period--the time before earnings announcements when there are restrictions on corporates' securities transactions.
"The bigger threat for credit in the coming weeks looks to be a squeeze rather than a correction--as supply dries up going into the blackout period," it said.
Energy:
Oil futures were mixed early Tuesday.
While market worries over potential profit-taking pressure and a possible global recession are mounting, analysts at Guotai Junan Futures reckoned there's further upside room.
They point to increasing optimism over China's demand rebound strength, especially after the country's better-than-expected 4Q GDP data.
Oil bulls have been "drawing strength from rising demand hopes as China's economy re-opens, while a softer dollar seems to be supporting upside gains," FXTM said.
U.S. benchmark oil prices may push higher "not only because of China's improving outlook, but expectations around the [Federal Reserve] toning down its pace of rate hikes."
"The dynamics remain in favor of bulls, with $85 acting as the next key level of interest," it added.
Meanwhile, China's reopening is the "game changer for oil markets, and oil prices will likely fly, especially if international travel continues to open up," SPI Asset Management said.
Traders may "have yet to fully price [in] the Chinese consumer boost at the pump or the expected downturn in Russian production," it added.
Metals:
Gold futures gained in Asia, but analysts cautioned profit-taking risk was rising.
Everbright Futures analysts reckoned the latest bullish run for gold is getting overheated, especially given uncertainty over the Fed's upcoming rate decisions and macroeconomic conditions worldwide.
"We don't advise chasing the upturn," the analysts said.
After impressive recoveries in the past 2 1/2 months, "traders are wondering whether it still make sense to keep on buying gold and silver when the Fed is still raising interest rates," said Fawad Razaqzada, market analyst at City Index and FOREX.com.
"A lot of this is down to a perception" of what the Federal Reserve will do, he said in a daily note.
"If the Fed doesn't conform to expectations, then the gold price could be in for a sharp shock," Kinesis Money said.
Chintan Karnani, director of research at Insignia Consultants, pointed out that gold has "repeated failed attempts to break past $1,950."
It's "too early to say that gold and silver have formed a short term top. It is just a wait and watch," said Karnani.
"But gold will not see any large scale new investors flocking to invest in gold till there is a convincing break of $2,000."
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Copper prices were higher early Tuesday, following broad gains in the commodities market.
The metal has been tracking up significantly in recent weeks on an expected demand rebound from China's reopening.
Yongan Futures analysts pointed out that the latest rally has likely priced in most of the demand boost from China's economic recovery.
At the current elevated price levels, profit-taking pressure looks high, especially given expected supply additions from new producer capacity ramp-up, the analysts added.
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The outlook for iron ore continues to be buoyed by optimism about China's economic recovery, according to Citi analysts.
"Iron ore currently has upside risk from the China reopening theme, given its inelastic demand and supply which leaves it able to trade more financially, rather than physically (as its physical market remains weak at present)," the analysts said.
TODAY'S TOP HEADLINES
Infrastructure Bucks Secondary Market Trend With 2022 Growth
The market for secondhand stakes in private infrastructure funds held up well in 2022 even as the broader secondary market contracted.
Secondary deal volume involving infrastructure assets hit roughly $7.7 billion last year, compared with $7.6 billion in 2021, according to data compiled by the secondary advisory arm of investment bank Evercore Inc.
Eurozone Consumer Confidence Extends Upward Trend to January
Confidence among consumers in the eurozone rose in January for a fourth consecutive month, reaching its highest level since February, as the economic outlook for the region improves amid falling energy prices and easing concerns over a deep recession.
The European Commission said Monday that its measure of consumer confidence increased to minus 20.9 in January from minus 22.2 in December, broadly matching the minus 20.0 consensus forecast from economists polled by The Wall Street Journal.
Striking Workers at Machinery Maker CNH Approve New Contract
Union workers at two plants for CNH Industrial NV ratified a new contract with the farm and construction equipment maker, ending a strike that began in early May.
About 1,100 members of the United Auto Workers union at plants in Racine, Wis., and Burlington, Iowa, will start returning to work Jan. 30, the company said. The workers walked off their jobs May 2, after rejecting an offer from the company that union leaders said provided insufficient wage increases and higher employee expenses for health insurance coverage.
Turkey's Erdogan Threatens to Block Sweden's NATO Entrance Over Quran Burning
ISTANBUL-Turkey's President Recep Tayyip Erdogan on Monday issued a new threat to block Sweden's entrance to the North Atlantic Treaty Organization after a far-right politician publicly burned a copy of the Quran in Stockholm over the weekend.
"If you speak about freedoms and rights, then first things first, you should show respect to the religious belief of Muslims and Turkish people," Mr. Erdogan said in televised remarks after a cabinet meeting. "If you do not show such respect, then you cannot see any kind of support from us on NATO."
Burkina Faso Tells French Troops to Leave
(MORE TO FOLLOW) Dow Jones Newswires
01-24-23 0015ET
