MARKET WRAPS
Watch For:
ECB survey of monetary analysts results, labor cost index; Germany Ifo business climate index, Bundesbank monthly report; trading update from Sodexo
Opening Call:
Shares in Europe are poised for opening gains on Monday. In Asia, stock benchmarks retreated; Treasury yields were mixed; the dollar slipped; oil and gold gained.
Equities:
European shares could rise on Monday as investors continue to digest last week's rate increases by major central banks.
U.S. stocks fell Friday, with investors forced to wrestle anew with the prospect of higher-for-longer interest rates and the potential for recession.
Markets are behaving as if the worst of the inflation scare is in the rearview mirror, with recession fears now looming on the horizon, said Jim Baird, chief investment officer of Plante Moran Financial Advisors.
Markets are "probably headed back to a period where bad news is bad news not because rates will be driving concerns for investors, but because earnings growth will falter," Baird said.
No one can say with complete certainty that a recession will occur in 2023, but it seems there's no question corporate earnings will come under pressure, and that will be a key driver for markets, he said.
"If in 2022 the story was inflation and rates, for 2023 it's going to be earnings and recession risk," he added.
Forex:
The dollar lost ground in Asia Monday, as the expectation of central banks reducing the pace of monetary tightening boosted confidence and risk appetite.
The dollar looks set to trade broadly lower in 2023 but it is unlikely to see a full reversal of this year's strength, Unicredit Research said.
U.S. interest rate expectations are moving lower as inflation eases and the economy faces a recession but rate differentials between the U.S. and the rest of the world should stay in the dollar's favor, it said.
"Major central banks are also expected to follow the Federal Reserve in terms of their easing cycles, offering a cushion to the USD, which also remains the favored safe-haven unit as global risk aversion spikes and stock markets plunges."
Bonds:
Treasury yields were mixed after advancing on Friday.
Long-term Treasury yields bounced back on Friday, as their European counterparts sharply advanced on central banks' promise to keep pushing borrowing costs up to crush inflation.
"Financial markets aren't quite ready to settle down for a winter's nap -- although the prospect for lower volumes and dwindling conviction have increased in the wake of this week's series of central bank hikes and array of economic data," said BMO Capital Markets.
"As a theme, we're anticipating that investors will increasingly look to developments in the other major global economies as a barometer for the appropriateness of dip-buying in the Treasury market," it said.
This year "was a unique moment for the Fed as it pushed back against being the de facto central bank to the world and took a more focused (read hawkish) approach with the sole purpose of re-establishing forward price stability for the U.S. economy. The year ahead will certainly test this stance."
Energy:
Oil prices rose in Asia amid a mixed outlook.
Despite unconfirmed reports on rising number of Covid cases and fatalities in China, the demand outlook for oil could brighten as Beijing's official messaging is returning to a focus on economic growth as a priority for 2023, Saxo Capital Markets said.
The focus of the oil market has increasingly shifted to demand, where downward revisions have become the norm, said Peter McNally, global sector lead for industrial metals and energy at Third Bridge.
"There is hope that a reopening in China spurs oil demand, but in the short term, it could prove counterproductive as Covid cases are on the rise again."
The U.S. was also starting to replenish its strategic petroleum reserves after draining it for months, Saxo Capital Markets noted.
Metals:
Gold prices advanced Monday after volatile trade last week.
Oanda said a wave of risk aversion toward the end of last week boosted the U.S. dollar and Treasury yields, which weighed on the price of the precious metal.
Gold could slide further, falling next toward the $1,760/oz level, it said.
However, Adrian Ash, director of research at BullionVault said he believed gold's value as a portfolio diversifier was likely to gain attention around the new year.
"Both because of seasonal rebalancing and also because January brings Chinese New Year, now the heaviest single gold-buying festival worldwide."
Those two factors mean that "gold typically sees a strong rise in January."
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Copper prices rose, extending its recent rally on optimism over China's reopening and economic rebound.
However, ANZ Research analysts cautioned that industrial activities are contracting in both developed markets and China in the near term, on winter low seasonality and rising macroeconomic pressure. They point to weaker spot premiums for copper as a sign of current demand weakness.
Some copper inventories have also risen slightly in China, suggesting potential demand downturn, Yongan Futures analysts said.
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Chinese iron-ore futures were lower, as recent volatility in the steel-making raw material continued after a rally earlier in the month.
Galaxy Futures analysts reckoned the commodity may remain under profit-taking pressure in the near term, as elevated price levels factor in most of the optimism surrounding China's reopening.
Much of the recent price gains have been driven by more upbeat sentiment but improvement in demand in the physical market could take longer than the market expected, they said.
TODAY'S TOP HEADLINES
The stock market is sliding because investors now fear recession more than inflation
A stock-market paradox, in which bad news about the economy is seen as good news for equities, may have run its course. If so, investors should expect bad news to be bad news for stocks heading into the new year - and there may be plenty of it.
But first, why would good news be bad news? Investors have spent 2022 largely focused on the Federal Reserve and its rapid series of large rate hikes aimed at bringing inflation to heel. Economic news pointing to slower growth and less fuel for inflation could serve to lift stocks on the idea that the Fed could begin to slow the pace or even begin entertaining future rate cuts.
Individual Investors Hang On in Wild Year for Stocks While Pros Sell
During the wildest year for global markets since 2008, individual investors have been doubling down on stocks. Many professionals, on the other hand, appear to have bailed out.
U.S. equity mutual and exchange-traded funds, which are popular among individual investors, have attracted more than $100 billion in net inflows this year, one of the highest amounts on record in EPFR data going back to 2000.
Qatar Warns Brussels Bribery Allegations Could Hurt Energy Talks With Europe
Qatar warned Sunday that an investigation by authorities in Brussels into its role in an alleged influence and bribery scheme could adversely affect energy talks with Europe and condemned a decision by the European Parliament to suspend dealings with the Persian Gulf kingdom.
The European Parliament's move "will negatively effect regional and global security cooperation, as well as ongoing discussions around global energy poverty and security," a statement by a Qatari diplomat to the European Union said Sunday, noting that Qatar is an important supplier of liquefied natural gas to Belgium.
Battle for Bakhmut Is Critical Test of Russia's Prospects in Ukraine
BAKHMUT, Ukraine-Russian shells slammed closer and closer as Ludmyla Bondarenko and Zoya Shilkova, clad in fur coats atop layers of clothing, sat on a bench outside their apartment block, chatting and getting some fresh air on a frigid afternoon in what remains of this eastern Ukrainian city.
At an intersection nearby, Ukrainian troops used a crane to emplace concrete slabs, fortifying the neighborhood. Three freshly arrived tanks roared by, blue-and-yellow flags fluttering from their turrets. A distant staccato of machine-gun fire could be heard amid the thumps of artillery.
Tunisian Opposition Calls for President to Step Down After Low Voter Turnout
The leader of Tunisia's opposition alliance called for President Kais Saied to step down on Sunday after only a fraction of eligible voters turned out for parliamentary elections.
More than 160 seats were up for vote. Yet once polls closed on Saturday night, only 8.8% of eligible voters, or roughly 803,000 people, had participated, according to the government. Tunisia has a population of roughly 12 million people, with about 9 million eligible voters.
Defense Contractor L3Harris Plans to Buy Aerojet Rocketdyne for $4.7 Billion
Defense firm L3Harris Technologies Inc. on Sunday said it agreed to buy Aerojet Rocketdyne Holdings Inc. in a $4.7 billion deal that would cement L3Harris's role as one of six prime defense contractors for the Pentagon.
Aerojet is a major maker of engines used in missiles, such as the Javelin deployed in Ukraine. Its products also help power National Aeronautics and Space Administration rockets and U.S. military hypersonic systems designed to deter China's military expansion.
Elon Musk Polls Twitter Users, Asking Whether He Should Step Down
Elon Musk asked Twitter users to vote Sunday on whether he should step down as head of the social-media platform and pledged to abide by the results, the latest twist in what has been a tumultuous period for the company since his takeover in October.
"Should I step down as head of Twitter? I will abide by the results of this poll," Mr. Musk said in the tweet, posted to his own account. He gave users two options for a response: "Yes" or "No," according to the tweet.
Sam Bankman-Fried Is Expected to Consent to Extradition From Bahamas
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12-19-22 0017ET
