MARKET WRAPS
Watch For:
EU harmonized CPI, construction output; Italy foreign trade EU; UK monthly CPI; trading updates from Richemont, EQT, Burberry, Antofagasta, Pearson, Just Eat, Currys
Opening Call:
Shares could open mixed in Europe on Wednesday. In Asia, stock benchmarks were mixed; Treasury yields fell; the dollar advanced; oil gained, while gold weakened.
Equities:
European stocks seem set for a mixed start on Wednesday, following Wall Street drops overnight amid downbeat economic and corporate news.
Fourth-quarter earnings season is under way and probably won't bring much good news, said LPL Financial. "Lackluster global growth, ongoing profit margin pressures from inflation, and negative currency impacts are likely to translate into a year-over-year decline in S&P 500 index earnings for the quarter.
"As always, guidance matters more as market participants look forward. The key question coming into this earnings season is whether the pessimism surrounding 2023 earnings has gone too far."
It is too soon to try gleaning much from the initial wave of results, Bokeh Capital Partners said. "We haven't gotten a clear direction yet in your handful of earnings. But it's skewing to there being more meets and beats than there are misses. I think that shows us companies are able to mange expectations."
Some investors aren't convinced a deep recession is imminent. "The likelihood of a recession is lower than people are expecting," said Credit Suisse, noting that inflation is slowing, earnings are beating, wages are rising and consumer spending remains strong.
Although earnings season has just started, more than 70% of the companies that have reported have beat projections, according to analysis through Friday by Credit Suisse.
Forex:
The dollar rose in Asia after the Bank of Japan kept its cap on the 10-year Japanese government bond yield at 0.50%, confounding market speculation for a higher cap.
Maintaining the current yield cap likely means a wider gap between U.S. and Japanese government bond yields.
The Bank of Japan kept its interest-rate targets unchanged despite strong pressure from investors on the bank's new 0.5% cap for the 10-year JGB. The central bank also reiterated that it "will continue with large-scale JGB purchases."
Bonds:
Treasury yields weakened, following overnight gains, amid signs of slowing economic activity and doubts about the future of monetary policy.
Investors are likely to monitor inflation, retail sales and industrial production gauges due Wednesday, and also appear to be digesting and positioning around the weak U.S. Empire manufacturing survey.
"To be fair, it is a notoriously volatile series and the winter storms that hit the region over the holidays may also be distorting the gauge of business, in the manufacturing sector. That said, the Empire struck out with the lowest print since May 2020 - stoking concerns that the looming slowdown will be of greater significance than the soft-landing optimism implies, " BMO Capital Markets said.
Meanwhile, building optimism about the European economy was reflected in comments from European Central Bank governing council member Mario Centeno, who told a panel in Davos that: "The economy has been surprising us quarter after quarter...The fourth quarter in Europe will be most likely still positive. Maybe we'll be surprised also in the first half of the year."
Energy:
Oil prices advanced in Asia, extending overnight gains after ending above $80.00 a barrel for the first time in more than two weeks.
Sentiment was likely being helped by Chinese economic data released Tuesday, which included industrial output and GDP growth.
The figures broadly beat low market expectations, and sent a clear message to traders that the country's economy has likely already passed a turning point in the fourth quarter of 2022 and will strengthen from the first quarter of 2023 onward, said SPI Asset Management.
"The return of China's consumption engines is enormous for the oil market outlook; while the industrial engine is revving up [and] guzzling down oil products, consumers will soon catch up at the petrol pump."
Meanwhile, geopolitical tensions continue to flare up between Russia and the European Union, said AvaTrade.
At Davos, Russia is the target among policy makers once again, as are more sanctions on the country, AvaTrade said. "This is basically an event which threatens the supply curve, which could push...[oil] prices higher."
An EU ban on Russian oil product exports is set to kick in Feb. 5.
Because demand has been soft for the last six months, supply constraints have been less of an issue but if demand rebounds, then sanctions on Russia could "potentially start to play a larger role in price action once again," SIA Wealth Management said.
Metals:
Gold slipped in Asia as investors took a breather after prices last week touched their highest levels since April.
The precious metal appears to be consolidating below eight-month highs as the dollar musters up a small rebound, Oanda said.
"The Fed's tightening path remains a clear driver for the precious metal but the bond market could get shaken up by the BOJ," it added.
Traders are focused on Chinese gold demand for the new year, and on any potential surprises from Davos, said Insignia Consultants.
Meanwhile, Commerzbank cautioned against betting that the rally in gold will "simply continue," arguing that there is still a "discrepancy" between the market's interest-rate expectations and the Federal Reserve's projections and messaging, which could make gold vulnerable to a pullback.
"If the market changes its view and moves more into line with the Fed, the gold price risks facing serious setback potential."
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Copper fell in a likely technical correction after a recent rally.
Gains in the metal have been supported by a weaker dollar, but the market remains cautious of ongoing headwinds, said ANZ.
The Lunar New Year holidays could keep copper demand subdued, while premiums for copper cathode in China are low and stockpiles are rising, ANZ added.
TODAY'S TOP HEADLINES
Despite Pressure, Bank of Japan Keeps Interest-Rate Targets Unchanged
TOKYO-The Bank of Japan kept its interest-rate targets unchanged Wednesday despite strong pressure from investors on the bank's new 0.5% cap for the 10-year government bond yield.
The Japanese central bank decided to leave short-term interest rates at minus 0.1% and its target for the 10-year Japanese government bond yield at around zero. The bank reiterated that it intends to cap that yield at 0.5%.
Fed needs to avoid the mistake of declaring victory over inflation too soon, Barkin says
The Federal Reserve must avoid the mistake of declaring victory over inflation too soon, said Richmond Fed President Tom Barkin on Tuesday.
In an interview on the Fox Business Network, Barkin said "the thing I learned" is one can't declare victory too early.
Whirlpool Strikes Deals to Divest Much of European, African Businesses
Whirlpool Corp., whose European operations have been challenged by Russia's invasion of Ukraine, said Tuesday it is turning over much of its appliance business in the region to a new entity controlled by a Turkish appliance maker.
The new company, which will be majority-owned by Turkey-based Arcelik AS, is expected to have a combined $6.5 billion in sales, Whirlpool said. The Benton Harbor, Mich.-based appliance maker will own 25% of the new entity after the transaction is completed, which the company said is expected to happen by the end of the year.
Deutsche Bank Names New Compliance Chief as Part of Reshuffle
Deutsche Bank AG tapped a veteran of Barclays PLC and American Express Co. to be its new chief compliance officer and reshuffled other positions as the German lender works to revamp its compliance programs in the wake of several regulatory investigations in recent years over its business conduct and compliance controls.
Laura Padovani will join Deutsche Bank on April 1 as its group chief compliance officer and head of compliance, according to a memo seen by The Wall Street Journal. Ms. Padovani spent seven years at Barclays, most recently as its compliance chief, and 20 years at American Express. She will be part of Deutsche Bank's executive committee and will be based in London with a presence in the Frankfurt office, the announcement said.
Supreme Court Hears Bid by Turkey's Halkbank to Avoid Charges
WASHINGTON-The Supreme Court on Tuesday weighed whether to shield Turkey's Halkbank from charges that it helped Iran evade sanctions by laundering billions of dollars, a high-profile case that stoked tensions between the U.S. and Turkey.
The case, Turkiye Halk Bankasi A.S. v. United States, is expected to clarify whether U.S. prosecutors can criminally charge corporations owned by foreign states. Halkbank says it has sovereign immunity because it is majority-owned by the Turkish government.
Microsoft Plans to Announce Layoffs as Early as Wednesday Morning
Microsoft Corp. is planning to announce more layoffs as soon as Wednesday morning, according to a person familiar with the matter.
Last year, Microsoft had more than one round of layoffs but didn't announce how many positions it cut. The round that started in July affected less than 1% of the company's total workforce of more than 200,000 people, the company said at the time.
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Expected Major Events for Wednesday
00:01/UK: Dec Scottish Retail Sales Monitor
07:00/EU: Dec New Passenger Car Registrations in Europe statistics (EU27 + EFTA3)
07:00/UK: Dec UK monthly inflation figures
08:00/SVK: Dec Harmonized CPI
08:00/SPN: Nov Industrial Orders & Turnover
09:00/ITA: Nov Foreign Trade EU
09:00/FRA: Jan IEA Oil Market Report
09:30/UK: Oct Card Spending statistics
09:30/UK: Nov UK House Price Index
10:00/EU: Nov Construction output
10:00/CYP: Dec Harmonised CPI
10:00/MLT: Dec Harmonised CPI
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01-18-23 0022ET
