MARKET WRAPS
Watch For:
EU ECOFIN meeting of EU finance ministers; UK monthly unemployment figures, Financial policy committee meeting, attended by Bank of England Gov.; Italy Industrial Production; France OECD Harmonized Unemployment Rates; trading updates from Old Mutual, A.P. Moller-Maersk, Bollore, Volkswagen, Generali, Mercedes-Benz, Naturgy Energy, Roche Holding, Commerzbank
Opening Call:
Stock futures point to a higher open in Europe on Tuesday. In Asia, stock benchmarks fell; Treasury yields broadly rose; the dollar strengthened; while oil and gold declined.
Equities:
European shares may rise at the open on Tuesday, as investors look to a silver lining in the banking tumult that the rescue plan may shift-at least temporarily-the calculus on the path of the Fed's interest-rate increases.
Investors are reassessing the outlook for interest rates after the collapse of Silicon Valley Bank in California and New York's Signature Bank, which left regional bank shares under heavy pressure.
Investors in interest-rate futures markets now see a greater than one-in-three chance that the Fed will hold rates steady at its meeting next week, according to CME Group.
Last week, they were positioning for the central bank to either raise rates by a quarter-percentage point, as it did last month, or by a half-point, as it did in December.
The Labor Department's inflation reading due later today will inform the Fed on price pressures in the economy as the central bank confronts bank failures.
The inflation rate has cooled from a recent peak last June, but has remained stubbornly high.
The consumer-price index, a closely watched measure of inflation, advanced 6.4% in January from a year earlier, just edging down from December's 6.5% increase.
"The Fed still has more work to do" to bring inflation back to near its 2% target, said Michael Gapen, chief U.S. economist for Bank of America.
"If the Fed is successful at corralling the recent market volatility and ringfencing the traditional banking sector, then it should be able to continue its gradual pace of rate hikes until monetary policy is sufficiently restrictive."
Forex:
The dollar gained in Asia amid higher Treasury yields, which enhanced the appeal of USD-denominated fixed-income assets.
The greenback may also be supported by potential safe-haven demand, analysts said.
The markets' nervousness is still high amid uncertainties and fears about the extent of U.S. banking sector problems, said Alvin T. Tan, head of Asia FX strategy at RBC Capital Markets.
"I would be cautious on chasing the U.S. dollar lower here, given its traditional safe-haven role," Tan said.
The failure of some US regional banks won't stop the FOMC from continuing with its rate hike cycle later this month, said CBA.
U.S. inflation is too high and the previous tentative downtrend in various measures of underlying inflation has largely been revised away or reversed, it said.
An upside surprise to CPI may encourage markets to revise higher their expectations for FOMC policy and offer support to the USD, it added.
Bonds:
Treasury yields broadly rose as investors wager that the economy has entered a new period of vulnerability that could halt the climb in interest rates.
"The Fed may now find itself between a rock and a hard place. It wants to tighten policy to keep a lid on inflation but will now face questions as to whether policy is already too tight, given this nasty wobble in the banking system and the pressure higher rates are already putting on many companies' cash flows," said Russ Mould, investment director at U.K.-based AJ Bell.
"If nothing else, this is a reminder that the Fed may not find it easy to extricate itself from more than a decade of record-low interest rates and $7 trillion of quantitative raising (around a quarter of U.S. GDP) without something breaking somewhere."
"Money was cheap and tossed around with abandon as a result of the zero cost associated with it. Now markets are going through a journey once more to discover what is the cost of money, some of that prior reckless abandon could lead to trouble," Mould said.
Markets are pricing in a 45% chance of no Fed rate hike on March 22 and a 55% probability that policy makers will raise rates by another 25 basis points to between 4.75% and 5%, according to the CME FedWatch tool.
The chances of a 50 basis point hike are now seen at zero after rising to more than 70% early last week.
Energy:
Oil futures moved lower in Asia amid risk-off sentiment.
The market has been unable to escape the broader risk-off move as market participants grapple with the spillover from Silicon Valley Bank's collapse, ING said.
"Energy traders were not expecting the collapse of the 16th-largest lender in America to trigger a major risk-aversion wave that would send Brent crude below the $80 a barrel level," Onada said.
"The chaos in the bond market is also weighing on commodities. Oil's roller-coaster ride won't be anytime soon as Tuesday's inflation report could upend the rally hitting Treasuries," he said.
Downside, however, may be limited by reports of strong buying from China, said ING, a move that ties in with a narrowing of the price spread between Brent and Dubai crude.
"This makes sense given the demand recovery that is expected not only from China but broader Asia following a relaxation in China's [zero-COVID] policy late last year," it said.
Metals:
Gold prices slipped early Tuesday in a likely technical correction following a recent rally spurred by concerns over the U.S. banking sector.
Although the U.S. CPI data due out later is critical for the precious metal, the latest market events appear more structurally supportive for gold prices, Citi Research analysts said.
The metal benefits from safe-haven inflows and recession "tail hedges", the analysts said, adding that Citi has raised its forecasts for gold prices by $75/oz to $1,875/oz for 2Q, by $50/oz to $1,900/oz for 3Q and by $50/oz to $1,950/oz for 4Q.
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Copper prices fell in Asia.
The base metals sector has been weighed by expectations of tighter monetary policy, said ANZ Research analysts.
The coming release of the U.S. CPI data could be a key focus for traders to determine the direction of the U.S. Federal Reserve's rate increases.
Traders are also increasingly weighing the possibility that the Fed could pause on rates due to the volatility in the banking sector.
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Chinese iron-ore futures edged higher amid signs of strong demand in China and elsewhere, analysts said.
Global iron ore shipments reached 31.45 million metric tons in the week ended March 10, up 1.9% from a week earlier, according to shipping data tracked by Shanghai Metals Market.
Data from SMM also showed iron ore arrivals at Chinese ports increased 16.9% to 23.7 million tons during the period.
This comes ahead of China's peak March-June construction period, ANZ Research analysts said in a research note.
TODAY'S TOP HEADLINES
Inflation Report Arrives as Fed Confronts Bank Failures
The Labor Department's inflation reading Tuesday will inform the Federal Reserve on price pressures in the economy as the central bank confronts bank failures.
The inflation rate has cooled from a recent peak last June, but has remained stubbornly high. The consumer-price index, a closely watched measure of inflation, advanced 6.4% in January from a year earlier, just edging down from December's 6.5% increase.
Collapse of Silicon Valley Bank, Signature Bank Calls Fed Interest Rate Path Into Question
There is a saying that the Federal Reserve raises interest rates until something breaks. A big surprise over the past year had been that nothing broke.
No more. A sharp selloff in regional bank stocks Monday following the collapse of Silicon Valley Bank and Signature Bank risks pushing the Fed uncomfortably close to the one place it wanted to avoid over the past year: resolving a financial-stability trauma at the same time it fights high inflation.
Banking industry jitters could mean more pain for stocks by dragging out Fed's battle with inflation
Aftershocks from the collapse of three American banks in less than a week could spell more pain for stocks in the weeks ahead by creating new obstacles for the Federal Reserve in its battle against inflation, market strategists said.
U.S. authorities, including the Fed, the Treasury and the Federal Deposit Insurance Corp., jointly announced Sunday night that Signature Bank had collapsed over the weekend, following the failure of Silicon Valley Bank on Friday and the closure of Silvergate Bank on Wednesday. The plan allowed depositors at SVB and Signature to access all of their money on Monday.
Fed Now Expected to Rein in Rate Hikes. Market Pricing Shows Shift Amid Banks Crisis.
Traders are rapidly shifting their expectations over the Federal Reserve's next move amid the crisis of confidence sweeping U.S. banks, with market pricing suggesting a significant chance the central bank makes no change to interest rates in March.
Boeing Expected to Sell About 80 Dreamliners in Saudi Airline Deal
Two Saudi Arabian airlines are nearing a deal to buy a total of about 80 Boeing Co. 787 Dreamliners with options for some 40 more, people familiar with the matter said, another significant order for the American aircraft manufacturer.
Riyadh Air, a new airline launched by the Saudi sovereign-wealth fund over the weekend, is expected to commit to purchasing 39 of the wide-body jets, while existing carrier Saudia is expected to buy the same number of jets, these people said.
Volkswagen Picks Canada for Site of First Battery Plant Outside Europe
BERLIN-Volkswagen AG chose a site in the Canadian province of Ontario for its first battery plant outside Europe, taking advantage of the country's rich raw materials-and possibly cashing in on U.S.-legislated incentives aimed at encouraging green-tech investments in North America.
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03-14-23 0116ET
