MARKET WRAPS
Watch For:
ECB Meeting Minutes; Eurozone, Germany, France, UK, Italy Services PMI; EU PPI; UK Official Reserves; Italy Unemployment; OECD CPI; Jerome Powell Congressional Testimony; updates from Merck KGaA, Thales, Bollore, ProSiebenSat.1 Media, SAP, Naturgy Energy, Mondi, Taylor Wimpey, Rentokil Initial, Meggitt, Admiral, Schroders, Alliance Trust, London Stock Exchange, ITV, CRH, Mail.ru, Sibanye-Stillwater, Entain, Darktrace, Ryanair, Novo Nordisk
Opening Call:
European shares may struggle for direction early Thursday as investors digest comments from Jerome Powell and monitor the latest Russia-Ukraine headlines. In Asia, stocks rebounded, following Wall Street's lead; oil's relentless rally continued, with Brent above $117; and the dollar, Treasury yields and gold all edged higher.
Equities:
European stock futures were near-flat early Thursday, with investors weighing the Federal Reserve's plans on interest rates and the latest updates from Ukraine.
In Asia, the major stock indexes tracked solid gains on Wall Street, with the U.S. advance gathering steam after Jerome Powell outlined plans to begin dialing back the central bank's easy-money stance to fight inflation, while playing down the prospect of a larger-than-usual increase of benchmark rates in March.
Powell testified that it would be appropriate for the central bank to raise its benchmark interest rate, currently in a range between 0% and 0.25%, at its meeting in two weeks. Powell said he supported a 25 basis point increase, rather than a larger 50 basis point increase, and would propose such a move when the Fed convenes its two-day meeting mid March.
Powell's testimony "did clarify his and the Fed's approach to withdrawing stimulus in 2022 amid increased uncertainty from the Russia-Ukraine conflict," said Bill Adams, chief economist at Comerica Bank, adding that Powell sees the maximum employment part of his mandate as largely fulfilled.
"With inflation at a multidecade high, the Fed is anxious to get off of a crisis footing," Adams said, while also looking to "cool demand enough to get inflation under control, but not choke off the recovery."
Overnight, Russian forces continued to pound Kharkiv, Ukraine's second-largest city, as the Kyiv offensive stalls. The two cities remain under Ukrainian control, as Ukraine officials put the invasion's civilian death toll at 2,000 and Moscow acknowledges nearly 500 soldiers have been killed.
Economic Insight:
PGIM Fixed Income considers an interest-rate rise by the European Central Bank this year would be unlikely, with the crisis in Ukraine reducing eurozone growth to 3.7% from 4.2% in 2022, "delaying but not definitely derailing the recovery."
Recent events also offer the ECB an opportunity to regain control of the inflation narrative, with higher-than-expected inflation outturns clearly due to an external shock out of the ECB's control, said PGIM FI.
"All else equal, sustained higher energy prices will slow the pace of monetary policy normalization in the eurozone, with a 2022 rate hike now unlikely." At the March meeting, PGIM FI expects the ECB to stick to a gradual tapering in asset purchases as at the December meeting.
The Fed:
Jerome Powell provided little push back on current market rate expectations, which have plummeted since Russia's invasion, said Capital Economics. With oil soaring, "consumer price inflation will remain elevated for longer than previously expected, but the Fed also needs to be mindful of the potential negative impact on the real economy."
Powell expressed support for a milder 25 basis point rate increase this month. "Quantitative tightening could help to shore up yields at the long end of the curve," said Capital Economics, which expects the Fed to initially shrink its balance sheet by $100 billion a month.
---
Deutsche Bank continues to think the Fed "doesn't want to be an additional source of volatility and uncertainty amid ongoing geopolitical events, making a more cautious initial step appropriate." The bank anticipates the Fed will raise rates by 25 basis points in March, in line with Powell's remarks today, but it maintains its expectations for 175 bps of total tightening this year.
"While our baseline is that these increases will come in 25bp increments at each meeting, we see significant risks that the Fed will move by larger steps in the coming months if geopolitical risks recede and inflation does not dissipate as quickly as expected."
Deutsche Bank noted Powell said persistently elevated inflation could necessitate raising the Fed funds rate by more than 25 bps at one or more meetings.
---
OANDA said the Fed will move forward with rate hikes and balance-sheet runoff, but officials there are getting concerned about the risks to the outlook.
"Powell acknowledged that the Ukraine war's impact on the U.S. economy is highly uncertain. It is possible that the war in Ukraine could lead to intensifying inflationary pressures that could lead to much more aggressive Fed tightening if growth does not fall off a cliff. Powell's position with the labor market being extremely tight and inflation 'well above' target has not changed," OANDA said.
"Risk appetite will struggle to fully return until a true end in the war in Ukraine is in sight."
Forex:
The euro remained under pressure against the dollar in Asia on worries that the Russia-Ukraine conflict will hold back European growth and Rabobank said these losses could steepen.
The conflict suggests higher-for-longer inflation and the potential for slower economic growth in the eurozone as energy prices push higher, said Rabobank forex strategist Jane Foley.
"Given that the headlines have made clear that Russian attacks in key Ukrainian cities have intensified, it must be assumed that safe haven demand will remain strong." That raises the prospect of a deeper downward move in EUR/USD, Foley said.
The dollar was higher against a basket of currencies with the mood in markets remaining fragile.
Other News:
Bitcoin may struggle to sustain its upward momentum, said OANDA.
"Bitcoin has had a nice run but exhaustion in this rally will likely settle in as surging energy costs will likely impact some mining abroad, Ukraine war uncertainty still has the potential to trigger major de-risking moments, and risk appetite needs to be healthy to break above this year's trading range."
For now, however, bitcoin looks "pretty attractive" as investors diversify away from fiat currencies and search for alternatives to equities amid economic growth concerns, while corporate America is expected to embrace blockchain opportunities.
Bonds:
The 10-year Treasury yield was steady early Thursday after it posted its biggest one-day gain in almost two years Wednesday, following Jerome Powell endorsment of a quarter-percentage point rate hike on March 16.
"It was evident from Powell's comments that the Fed does not want to be an additional source of volatility and uncertainty amid ongoing geopolitical events, making a more cautious initial step appropriate," said Deutsche Bank.
Other News:
Capital Economics expects a higher risk of Russian companies defaulting on their debt. "Administrative measures by the Russian government could prevent companies from repaying debts."
Russian companies' access to foreign-exchange markets has already been crimped by mandatory conversion orders, said Capital Economics. In addition, Western governments might decide to halt energy imports from Russia in a further escalation of sanctions, which would hit corporates' foreign-currency incomes hard, raising default risks.
Energy:
The relentless rally in oil sent prices surging again in Asia, with Brent above $117.
The possibility that Western nations' strict sanctions against Russia may swing global crude market into a deficit has been the primary factor supporting crude oil, said TD Securities.
Any additional sanctions or unanticipated supply interruption may cause oil prices to surge further in the near-term, as this would augment the significant worry of a large deficit, and there are few alternatives. Under these conditions, it wouldn't be surprising for key benchmark crude to jump to around $145/bbl, TD Securities added.
Many crude buyers have rejected buying Russian crude "as currently it is almost impossible to get insurance for cargoes sailing from Russia or to find banks willing to finance these operations," said Nicolas Daher, lead energy analyst at the Economist Intelligence Unit.
"Russian volumes are very hard to replace and buyers are competing for a reduced supply, pushing prices up."
Metals:
Gold futures edged higher after they logged their first loss in three sessions Wednesday, as talks between Russia and Ukraine were poised to resume, helping to momentarily quell haven demand.
OANDA said bullion will remain very sensitive to news on the war and should undergo a strong move higher as geopolitical tensions and growth concerns won't be going away anytime soon. Demand for safe havens will probably remain elevated as the war is only in its early stages, OANDA reckons.
Nickel and aluminum extended their gains due to supply disruptions.
The conflict is disrupting large volumes of aluminum and nickel that are regularly shipped from St. Petersburg to European ports, said ANZ. It estimates the supply of aluminum stored in warehouses approved by the London Metal Exchange has already been halved in the past year due to higher energy and production costs.
Other News:
Citi said aluminum, copper and coal prices are likely to outperform in China's commodities sector, driven by rising buyer willingness to stock up in advance, given ongoing geopolitical uncertainties.
Citi said its recent meetings with over 50 clients suggest that "investors are increasingly willing to price in supply risks for commodities in light of geopolitical developments." This optimism is further supported by rebounding demand in overseas markets as economies increasingly open up, Citi added.
TODAY'S TOP HEADLINES
(MORE TO FOLLOW) Dow Jones Newswires
03-03-22 0044ET
