MARKET WRAPS
Watch For:
Eurozone Harmonised CPI, ECB Meeting Minutes; Germany PPI; France Business Sentiment Index; updates from Associated British Foods, Entain, Deliveroo, Getlink
Opening Call:
Fresh monetary easing in China should help lift European shares early Thursday, although gains may be capped as Treasury yields move higher again. Elsewhere, the dollar, oil and gold all struggled for momentum, wavering between minor gains and losses.
Equities:
European stocks should extend their gains early Thursday, buoyed by further rate cuts in China and despite Nasdaq entering correction territory.
The People's Bank of China Thursday cut the one-year loan prime rate to 3.70%, 10 basis points lower than last month's 3.80% level. The five-year loan prime rate was lowered to 4.60%, from 4.65%. It is the first time in 21 months that China has cut the two rates in the same month.
The move was widely expected by analysts and traders after the central bank on Monday lowered rates on its one-year medium-term lending facility by 10 basis points to 2.85%. However, the PBOC action spurred gains in most Asian stock markets.
However, Nomura cautioned that the PBOC cuts may not be sufficient to address the real bottlenecks in the country's economy, such as rising costs of pandemic control and slowing export growth.
While the 10 basis-point cut to the one-year loan prime rate is in line with market expectations, the 5 basis-point cut to the five-year LPR is below expectations, Nomura added. Rates on existing mortgage loans were reset on Jan. 1 and won't be reset for another year.
"The size of the rate cut is simply too small to have a material impact, " Nomura said, adding the cuts were done mainly to "send a signal that the PBOC is stepping up its efforts to support the economy."
U.S. stocks gave up early gains and turned lower Wednesday, extending a recent stretch of losses that have pulled major indexes down to start the year. Nasdaq shed 1.1%, finishing the day 10.7% below its all-time closing high, set in November. A decline of greater than 10% is considered a correction for a stock index.
Recent volatility is "really all about inflation and how aggressive central banks are going to be to counteract it," said Brian O'Reilly, head of market strategy at Mediolanum Asset Management, adding that inflation could also curtail economic growth by knocking consumption. "Certainly, the market is nervous at the moment," he said.
Market Insight:
European stocks may be a good bet for investors who are looking to reduce their exposure to assets that are vulnerable to rising bond yields, said Bank of America. European stocks have "a low historical sensitivity to swings in bond yields. Tighter monetary policy and rising bond yields are shaping up to be key drivers for the equity market in 2022," BofA said.
---
The Bank of England is likely to deliver further interest rate rises, taking the benchmark rate to a peak of 1.5% by the second half of 2023, Nomura said.
"We expect the next move on 3 February as the Bank attempts to dampen the impact of rising current inflation on second-round effects--namely inflation expectations and crucially wages," Nomura economist George Buckley said. Evidence suggesting wages are running hotter than normal and exceptionally loose monetary policy should provide much of the justification for ongoing tightening, he added.
Nomura expects the BOE to lift the key rate by 25 basis points in February, another 25bp in May, a further 25bp in the second half and twice more in 2023.
Forex:
The dollar continued to soften in early Asian trading, extending Wednesday's modest losses.
Bank of America said persistent U.S. inflation and transitory eurozone inflation means a weaker EUR/USD despite recent strength.
"Our forecast is 1.10 by year-end, compared with a consensus of 1.15 and current spot of 1.14. With Fed already priced this year, eurozone inflation and ECB matter more. While we see persistent U.S. inflation, we expect eurozone inflation to be transitory and drop below the target this year. We assume that the ECB will stick to its new forward guidance and remain on hold in this case."
Rabobank said the dollar should appreciate in the first half of the year as the Federal Reserve starts raising interest rates, but it could be vulnerable to falls if inflation and higher rates hurt demand.
"High inflation levels will already be eating into higher incomes and U.S. mortgage rates have already started to trend higher on the back of higher bond yields," Rabobank forex strategist Jane Foley said.
That raises the risk of U.S. economic growth slowing relatively quickly in response to the Fed tightening policy, which could in turn hurt the dollar, she added. Rabobank still expects EUR/USD to fall to 1.10 by mid-year from 1.1349 currently but sees it recovering in the second half as attention shifts to the prospect of the European Central Bank tightening policy.
Bonds:
Treasury yields moved higher again early Thursday after they posted their biggest one-day drops in more than a month on Wednesday, as investors piled back into government debt.
"For yields to continue to surge, Wall Street is going to need added confirmation from the Fed that 5 rate hikes are on the table and that the balance sheet reduction could have $500 billion runoff this year," said Edward Moya, Senior Market Analyst at OANDA.
Saxo said the 10-year German Bund yield is expected to find resistance around 0.05%, before testing 0.1%.
Still, the direction of travel for the German benchmark bond yield has been set. "We expect Bund yields to continue to surge as Treasury yields rise, the ECB withdraws stimulus, and the new German government increases fiscal spending," said Althea Spinozzi, senior fixed-income strategist at Saxo.
Rising Bund yields will increase the volatility of those sovereigns with a high beta--or sensitivity to risk--such as Italian BTPs, Spinozzi added. The 10-year Bund yield was recently trading at -0.009%.
Energy:
Oil prices wavered in Asia after they closed at their highest in more than seven years Wednesday on persistent supply worries.
OANDA expects the oil market to remain tight for the foreseeable future as the demand outlook and tight supply situation improve. "It seems like the list of disruptions to supply keeps on growing."
"The pattern of recent weeks is being repeated, in other words: news about supply outages pushes prices up significantly, yet prices do not drop back to their previous level once the problems have been resolved," said Carsten Fritsch, analyst at Commerzbank, in a note.
As emissions become more expensive in Europe, the business case for investing in carbon capture and storage technologies is becoming stronger, said Gerben Hieminga and Samuel Abettan, economists at ING.
He said the current carbon price of over EUR80 per metric ton of CO2 support widespread adoption of the technique, particularly in carbon-intensive manufacturing clusters where governments and grid operators build the infrastructure to transport carbon.
Metals:
Gold futures edged lower in Asia, easing back from Wednesday's 2-month-high settlement.
ANZ said Wednesday's drop in the 10-year Treasury yield boosted investor demand for the nonyielding precious metal, while the first six months of a Fed tightening cycle are generally negative for the dollar, which could provide continued support gold.
Copper prices were also marginally weaker after ending Wednesday's session 1.7% higher on weak 2021 production figures from major miners like Antofagasta and BHP, said brokerage Marex.
Tight inventories of the industrial metal are also exerting upward pressure on prices, Marex said. These issues are likely to persist and support copper prices this year. However, it said the near-term supply and demand outlook appears balanced, which is helping ease price pressure.
Commonwealth Bank of Australia said whether or not iron ore prices stay stronger than expected for the next few weeks will depend in big part on whether supplies are disrupted by wet weather or the pandemic.
"Heavy rains in Brazil have adversely impacted Brazilian iron ore production already. Australian supply may face disruptions as Western Australia looks to reopen its borders on Feb. 5," CBA said.
TODAY'S TOP HEADLINES
China Central Bank Cuts Benchmark Lending Rates
China cut its benchmark lending rates for a second straight month, after the central bank lowered the borrowing costs on medium-term loans earlier this week, in a bid to support a slowing economy facing a fresh wave of coronavirus cases and reeling from a string of regulatory crackdowns.
The People's Bank of China said Thursday that it cut the one-year loan prime rate to 3.70%, 10 basis points lower than last month's 3.80% level. The five-year loan prime rate was lowered to 4.60%, from 4.65%. It is the first time in 21 months that China has cut the two rates in the same month.
Japan Exports Marked 10th Month of Growth in December
Japan's exports increased in December 2021 for the 10th consecutive month, driven by robust demand for steel, auto and semiconductor-related products in key overseas markets, Ministry of Finance data showed Thursday.
Exports rose 17.5% from a year earlier in December. That compared with November's 20.5% increase and was stronger than the 15.3% growth expected by economists surveyed by data provider FactSet.
Democrats Fail in Push to Change Senate Filibuster, Sinking Elections Bill
WASHINGTON-Democrats failed in their effort to change the Senate's filibuster procedures to muscle through blocked elections legislation, dealing a setback to President Biden and party leaders on what they have termed their top domestic policy priority.
With Democratic Sens. Joe Manchin of West Virginia and Kyrsten Sinema of Arizona siding with all Republicans in the evenly split Senate, 52 lawmakers opposed the rule change, while 48 were in favor, shy of the majority required.
(MORE TO FOLLOW) Dow Jones Newswires
01-20-22 0040ET
