MARKET WRAPS

Watch For:

EU eurogroup meeting of eurozone finance ministers, winter interim economic forecast; trading updates from Galp, Lagardere, Evraz

Opening Call:

Shares may head lower in Europe amid fears of higher U.S. inflation. In Asia, stock benchmarks declined; Treasury yields advanced broadly; the dollar strengthened; while oil and gold declined.

Equities:

European stocks could drift lower, as investors weigh the outlook for interest rates ahead of U.S. CPI data.

Investor optimism around the Federal Reserve nearing the end of its rate hiking cycle helped push stocks higher to kick off the year, but bullishness has since eased with corporate earnings sagging and Fed officials warning that rates could stay high for some time.

"Sentiment has soured a bit," Invesco said. "The market was confident that we would be looking at interest-rate cuts later this year, but the strong jobs data has thrown a spanner in the works."

"We would expect two more hikes and then likely a pause. We don't foresee a cut this year," said BNP Paribas Asset Management. It said "a cut would be a signal of a deeper recession" than what it is currently envisioning based on the "healthy consumer" and the recent path of disinflation.

Others warned that still high wage growth and stubborn services sector inflation could create problems when the CPI report for January is released on Tuesday.

"The market is nervous about confirmation from the CPI report that more work needs to be done before the Fed can ease off the gas pedal," said Globalt Investments.

Forex:

The dollar gained strength in Asia, as the market's mood turned slightly sour on increased interest-rate hike expectations ahead of key U.S. inflation data due out Tuesday.

The CPI data may spark some dollar strength in coming sessions, especially if the reading surprises on the upside, MUFG Bank said.

ANZ Bank said the key question on everybody's lips is: how much further has the Fed's tightening cycle got to go?

"That could help the USD, but other factors that helped the USD along last year (like geopolitics and the Fed hiking aggressively as others lagged) aren't present now, so we won't overplay higher bond yields (they are even higher here!)," ANZ said.

CapEcon thinks the inflation data will only add to evidence of U.S. disinflationary pressures, and the firm doubts the dollar will receive much more of a boost from higher rate expectations.

Instead, the catalyst for the dollar breaking higher will be a souring of risk appetite as investors discount recessions in the U.S. and other advanced economies, which CapEcon thinks will drive a dollar rally over the coming months.

Bonds:

Treasury yields mostly rose, bolstered by economic and labor resilience increasing the prospect of higher borrowing costs for longer.

Inflation data due Tuesday is expected to give clues of how much of the Fed's job remains to be done.

"All eyes will be on January CPI data Tuesday morning...any surprises will definitely move markets," Ally Invest said.

"Improved consumer sentiment will likely reignite conversations about a softish landing," said LPL Financial.

"The Fed still has work to do in squelching inflation, the economy is steadily slowing, yet conditions are stable enough for the economy to eke out growth this year."

Energy:

Oil fell in Asia in a likely technical correction after prices posted a gain of more than 8% last week.

Also, this weakness in oil prices probably reflects the market realizing that Russia's latest plan to reduce oil production is already mostly priced in, said ING.

It is more likely that Russia is simply struggling to find buyers for its oil, especially after the EU ban on Russian refined products went into effect earlier this month, ING added.

CIBC Private Wealth US said most analysts have "already penciled in" Russian production falling by 700,000 to 900,000 barrels per day in 2023.

"The key for crude to break out of its current trading range is Chinese demand recovery," it said.

Goldman Sachs said it sees "the China comeback as the most persistent driver of the outlook" for oil.

The 1.1 million barrel per day rise in China demand this year "should push oil markets back into deficit in June, expose structural underinvestment, boost prices, and lead OPEC to reverse its November 2022 production cut" in the second half of 2023, it said.

Metals:

Gold edged lower amid fears of higher U.S. inflation data.

Upside risks to this inflation reading could complicate how high Fed tightening bets go, which may keep the precious metal vulnerable, said Oanda.

If the U.S. bond market selloff persists, USD could rally, which should bring down gold prices, it added.

Libertas Wealth Management Group expects gold to "consolidate around these levels, after which higher prices will resume toward the end of February and into March."

Taking a look at the bigger picture, however, ICICI Bank pointed out that gold prices have held onto a gain year to date.

It said it sees some "degree of consolidation" for gold in the first half of this year, as U.S. yields remained elevated on the back of policy guidance that the Federal Open Market Committee will likely provide.

Even so, it maintains expectations the FOMC will move to a "pause mode" for interest rates after the May policy meeting and embark on possible rate cuts in the first quarter of 2024.

That will "work to push U.S. real yields lower, "driving a pronounced structural uptrend in gold prices" in the second half of this year, it said.

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Copper was trading steadily, but may be weighed by rising inventories.

LME warehouses are increasingly filled with Russian metal, as some market participants seem to have decided to refrain from trading and consuming the metal, TD Securities said.

Evidence suggesting the lack of a boom in metals demand driven by China's reopening has also started to weigh on prices, it added.

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Chinese iron-ore futures were lower after a moderate rebound last week, as the market waited for more news to trigger trading.

For the short-seller, "although the profits of the steel mills are low, there are no large-scale losses yet," said Nanhua Futures, adding that there is also no evidence showing demand for the commodity is particularly bad.

Buyers on the other hand, hesitate to chase the rally after prices rebounded last week, it said.


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02-13-23 0015ET