MARKET WRAPS
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EU harmonized CPI, construction output, euro area balance of payments, ECB governing council non-monetary policy meeting; Italy balance of payments; UK PPI, CPI, house price index; trading updates from L'Oreal, Tod's, Bayer, Deutsche Post, BMW, ASML, Heineken, Just Eat Takeaway.com, Antofagasta, British American Tobacco, Bunzl, ABN AMRO Bank, Airbus
Opening Call:
Shares may post mild gains in Europe on Wednesday, as investors wait for the earnings season to kick into high gear. In Asia, stock benchmarks were mixed; Treasury yields advanced; the dollar was firmer; while oil and gold slipped.
Equities:
European stocks could rise slightly on Wednesday, as investors wait for the earnings season to gather more steam, while also weighing the path of interest rates.
"If earnings continue to impress, too much of a good thing will ultimately prove to be inflationary and that will likely mean more Fed tightening," Oanda said.
"I could paint as good of a bullish scenario as I could a bearish one for the economy and markets," said Rick Friedman, portfolio strategist on GMO's asset allocation team. The severity of a possible recession and speed at which inflation abates remain unknowns, he said.
The stress seen in March was relatively isolated to banks with business-model issues, said Conor Muldoon, fundamental portfolio manager at Causeway Capital Management.
"When the Fed drains the water, you start to see all these problems you didn't see before," he said. "As the Fed continues to tighten, I expect more will be uncovered."
He said credit conditions will begin to crunch once unemployment and delinquencies tick up. The economy will likely feel the effects of that later this year when higher rates "really start to bite," he said.
Data out of China on Tuesday suggested an important growth driver of the global economy was improving, with GDP up 4.5% in the first quarter, boosted by increased consumption and retail sales, after authorities abruptly abandoned the stringent "zero-COVID" strategy.
However, pessimism remains. Fund managers struck the most downbeat mood so far this year, according to a Bank of America fund manager survey. Growth expectations are softening, even as the polled managers predict global inflation and short-term rates will ebb lower.
Forex:
The dollar gained strength in Asia amid falling volatility across asset classes.
Foreign-exchange volatility is declining amid a directionless market, RBC Capital Markets said.
Currency markets are largely becalmed with the dollar fading against most of its rivals as Treasury volatility continues its slide, Corpay said.
"The British pound is the only major currency lighting fireworks," Corpay said.
China's recovery could help support commodity exporters and currencies across Southeast Asia, but isn't likely to lift growth prospects in the advanced economies, it said.
Bonds:
Treasury yields rose, as traders continued to price in a Fed rate rise in May.
Traders expressed increasing conviction that evidence of easing inflation, but a resilient economy, will encourage the Fed to raise borrowing costs again next month.
Markets priced in an 86.6% probability that the Fed will raise interest rates by another 25 basis points to a range of 5% to 5.25% on May 3, according to the CME FedWatch tool. The central bank is mostly expected to take its fed-funds rate target back down to between 4.5% and 4.75% by December, according to 30-day Fed Funds futures.
"With the policy rate near the zone of 'sufficiently restrictive' and credit conditions continuing to tighten, there are emerging signs of disagreement among Fed officials about when to pause the tightening cycle," said Deutsche Bank.
The banking crisis is "largely in the rearview mirror," but still the bond market is "pricing in a much less aggressive Fed through the end of this hiking cycle," Prudent Management said.
"Even in today's less volatile interest rate climate, the 2-year yield is still currently sitting at 4.2%, which is well below a March peak of over 5.0%," it said. "The 2-year yield tends to be highly sensitive to investors' expectations for monetary policy." It warns, however, that market prices may be underestimating the Fed's terminal rate in 2023.
Energy:
Oil declined in Asia, as traders continued to mull the demand outlook.
More than half of the anticipated demand growth is set to come from China, where oil consumption is expected to recover noticeably following the government's departure from its strict zero-Covid policy, Commerzbank said.
Another important support factor is the normalization of international air traffic, it said. "As both of these areas benefit from catch-up effects, they are likely in our opinion to be relatively independent of economic development and as such should serve as a solid foundation for oil demand," it added.
Looking ahead, economic data will be in focus as a "strong economic recovery in China and the avoidance of hard landings in Europe and the U.S. are both priced into the market with WTI trading with an $80 handle, " said Sevens Report Research.
So, while the path toward new year-to-date highs in WTI is narrow, it is "possible," it said. "Growth data in the U.S. and Europe will need to be Goldilocks while better-than-expected data from China would be a welcomed surprise."
Metals:
Gold fell in Asia after settling higher overnight.
"The anti-fiat yellow metal benefited from a cautiously weaker U.S. dollar as traders continued to fine-tune their expectations of where the Federal Reserve might take interest rates later this year," said DailyFX. It added that the 2022 high at $2,070.42/oz would remain a key level to watch.
Renewed expectations around the Fed extending its rate hike cycle deeper into 2023 "hammered zero-yielding gold," FXTM said. "This could be another volatile week for the precious metal due to more speeches from Fed officials."
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Copper fell on possible position adjustment, but losses are likely to be limited by signs of demand.
China's economic rebound is still expected to support solid demand for copper this year, RBC Dominion Securities said.
RBC recently raised its 2023 copper-price forecast to $4.00/pound from $3.75/pound previously, as China's recovery and tight metal markets outweigh factors, such as slowing growth in other countries and improving production in Peru and Chile.
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Chinese iron-ore futures were lower after the country's state planning body said it will tighten supervision of the commodity, including "strictly cracking down" on price speculation.
A spokeswoman for the National Development and Reform Commission said the commission expects iron ore supply to rise and prices to fall in the future.
Prices had risen 2.1% on Tuesday after China's better-than-expected GDP growth data.
TODAY'S TOP HEADLINES
Europe Takes Aim at Taxpayer-Funded Bank Bailouts
European authorities want to make it harder for countries to use taxpayer money to rescue failing banks, while also better protecting depositors, after existing rules proved to have too many loopholes.
The plan, laid out Tuesday, was under development before bank troubles in the U.S. and Switzerland in March, but officials cited the turmoil as a further reason to act. It comes as countries like the U.S. and the U.K. also rethink how to shield citizens and their deposits against collapses. Both countries are exploring overhauls of deposit insurance.
Credit Suisse Failed to Probe Nazi Past, Senate Committee Says
Credit Suisse Group AG failed to fully investigate recent allegations that it supplied bank accounts to Nazi party members before and after World War II, and pushed aside an outside lawyer it had charged with overseeing an internal probe into the matter, according to a Senate committee investigation.
The Senate investigation was prompted by the Simon Wiesenthal Center, which in 2020 said it believed that there were accounts at Credit Suisse holding money looted from Jewish victims, based on a list it had of 12,000 Nazi party members and a Nazi-affiliated labor union in Argentina.
Putin, Zelensky Make Rival Visits to Troops in Ukraine
Russian President Vladimir Putin and his Ukrainian counterpart, Volodymyr Zelensky, both visited troops in Ukraine within a day of each other this week as the leaders try to shore up morale ahead of an expected offensive by Kyiv to wrest territory from Moscow's grip.
Mr. Putin made a rare visit to his troops by traveling Monday to Ukraine's Kherson and Luhansk regions, both of which are partly occupied by Russian forces, and was briefed by senior officers about the situation on the front line, the Kremlin said Tuesday.
Kidney-Care Specialist Diaverum Expected to Be Sold in $2 Billion Deal
A Mubadala Investment Co.-backed healthcare company is nearing a deal to acquire kidney-care provider Diaverum for more than $2 billion including debt, according to people familiar with the matter, extending the Abu Dhabi sovereign-wealth fund's bet on healthcare.
M42, a newly launched healthcare operator owned by Mubadala and a partner company, G42, is planning to acquire Diaverum from U.K.-based buyout firm Bridgepoint Group PLC. A deal is expected to be announced later this week, assuming talks don't break down, the people said.
Russian Foreign Minister Seeks Deeper Ties in Latin America
BRASÍLIA-Russia has embarked on an effort to shore up support in Latin America for its war in Ukraine, with foreign minister Sergei Lavrov visiting Brazil before arriving in Venezuela on Tuesday afternoon as part of a four-country tour.
The mission has prompted rebukes from the U.S. and Europe after Brazilian President Luiz Inácio Lula da Silva said that Washington and its allies were prolonging the conflict by supplying Ukraine with arms.
Twitter Chief Elon Musk Tries to Reassure Advertisers
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04-19-23 0015ET
