MARKET WRAPS
Watch For:
EU Eurogroup meeting of eurozone finance ministers; U.K. Bank of England Governor Andrew Bailey appears before the Treasury Committee; Germany WPI; trading updates from Repsol, Rio Tinto, Ashmore Group, Vinci
Opening Call:
Stock futures point to a higher open in Europe to kick start the week. Asian stock benchmarks were broadly higher; the dollar weakened; oil slipped and gold gained.
Equities:
European stocks may open slightly higher, tracking Wall Street gains on Friday as investors weighed the first batch of earnings results from big banks.
Markets in the U.S. are closed Monday for the Martin Luther King Jr. Day holiday.
"The equity market is trying to grasp onto signs the Fed might decelerate and end their policy of outsized rate hikes," said Ross Mayfield, investment strategy analyst at Baird.
Some of the biggest U.S. banks kicked off the fourth-quarter earnings season on Friday with better-than-expected results.
"It's been a strong start to the year for bank stocks, supported by a combination of higher interest rates and the economic contraction being not as severe as expected," UBS said. "That's the Goldilocks scenario for banks."
"I think the base case for most of the market right now is that we're going to see a mild recession," Anthony Saglimbene, chief market strategist at Ameriprise Financial, said.
Earnings will continue to be a "big focus" for markets this month, Saglimbene said.
"Analysts took down estimates pretty aggressively in the fourth quarter, " he said. "So the bar is pretty low for companies. We'll see if they can hurdle past that."
Forex:
The dollar weakened on mild risk appetite.
Positive risk sentiment and increasing speculation of an impending Fed pause have driven USD steadily lower, RBC Capital Markets said.
The December U.S. inflation reading that was in line with expectations "has allowed the FX markets to revert back to the main event -- a potential sea-change in Bank of Japan policy and perhaps plenty of downside" in the dollar/yen currency pair, ING said.
"Dollar/yen remains the standout interest in the FX options market," it said.
"This huge interest in USD/JPY is understandable. The BOJ may be on the verge of its biggest policy change in decades. Even short-dated JPY Interest Rate Swaps have started to move and are at the highest levels (near 30bp) since 2008!," it said.
However, Société Générale cautioned that the BOJ meeting on Jan. 18 could quite likely result in inaction. "The details of the review into yield-curve control changes may, or may not, be released."
While the prospect of a shift in policy by the Bank of Japan is the primary driver of yen gains, there are other bullish factors to consider, Standard Bank said.
"Economic recovery in China should prop up sentiment in Asia and should give the yen further support," it said.
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The sterling could appreciate against the dollar this year but not beyond 1.25 and only due to the U.S. currency falling, Unicredit Research said.
"U.K. fundamentals remain very bleak and we expect the Bank of England to cut rates to 3.25% by the fourth quarter of 2024 after reaching a peak of 4.00% in the first quarter of 2023," it said.
The BOE's rate cuts will amount to 75 basis points compared to a likely 150bp for the Federal Reserve, allowing GBP/USD to rise further in 2024 to 1.28, it said.
However, Unicredit expects EUR/GBP to rise towards 0.91 by 2024.
Bonds:
U.S. bond markets are closed Monday for a holiday.
"The market's current Fed outlook is too dovish in our view. Fed members remain clear and resolute in their belief that inflation is too high and that it will not fall back without additional monetary policy action," said Oxford Economics.
"Our current base case is for a 25bps (basis points) hike at the February meeting before the Fed pauses, but the risks are weighted toward additional tightening," it said.
"That suggests the Treasury rally may be near-term overdone as the 10-year note runs into resistance at the 3.40% early December low yield."
Energy:
Oil prices fell in Asia, pulling back from Friday's gains that were driven by optimism over stronger demand from China as it reopens.
Trading volume has climbed on expectations of "record-breaking Chinese oil demand, as well as expectations that the Fed will only raise rates by a quarter point in February," giving signs of easing inflation in the CPI data, The Price Futures Group said.
Michael Tran, energy market strategist at RBC Capital Markets, said, "while early, there is already indication suggesting that the Chinese consumption machine" is ramping up.
"Given the focus on energy security, we anticipate that Chinese imports will continue to pick up, particularly as refinery runs ramp [up] and stockpiling crude remains a strategic priority," Tran said.
While there is a chance that oil's recent rally could deflate after the Lunar New Year holiday later this month amid expectations of another Covid-19 surge in China, the backdrop still appears very bullish for the commodity as "China mobility is turning, and onshore inventories have been drawn down," SPI Asset Management said.
Metals:
Gold prices edged higher in Asia, after marking their first settlement above $1,900 an ounce since April on Friday.
"Gold has easily cleared the $1,900 level, and hitting these big numbers helps attract investors to a trend," said Brien Lundin, editor of Gold Newsletter.
The dollar downtrend has been helping gold, and that seems "likely to continue," he said.
Lundin pointed out that fundamentally, "one can consider that there are two basic paths ahead for monetary policy: the Fed pauses and perhaps pivots, after having successfully driven inflation close to its target level, or the Fed does so without having gotten inflation down to near its 2% target."
"Either outcome would be bullish for gold, but the latter would be even more so since it would not be bullish for equities or bonds" -- and would attract much greater allocations from diversified portfolios, he said.
So, "from both fundamental and technical standpoints, it looks like this gold rally has some legs to it," said Lundin.
However, Commerzbank said the market would likely take a breather initially "until it becomes clearer whose prediction of the future course of U.S. monetary policy is more accurate: the market's or the Fed's."
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Copper futures rose, buoyed by optimism over China demand, analysts said.
The metal's rally since the start of 2023 has been driven by China's reopening and increased policy support to fuel the country's economic recovery in order to offset economic fallout from President Xi's abruptly abandoned zero-Covid policies, Saxo Bank said.
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Chinese iron-ore futures fell after China's National Development and Reform Commission on Sunday said it would crack down on price gouging and hoarding activities in order to keep iron-ore prices stable after its recent rise.
Demand for iron ore was likely to pick up only after the Lunar New Year holiday when steel mills begin to ramp up production, ANZ said.
TODAY'S TOP HEADLINES
China's PBOC Leaves Key Policy Rates Unchanged
China's central bank kept its key policy rates unchanged on Monday, which may suggest a hold on benchmark lending rates later this month.
The People's Bank of China injected 779 billion yuan ($116.22 billion) of liquidity into the banking system via its one-year medium-term lending facility at an interest rate of 2.75%.
IMF Warns Unraveling Economic Ties Could Shrink Global Output
Declining international cooperation and commerce could shrink the global economy, particularly harming low-income countries, the International Monetary Fund said in a new study.
The report cited several ways that government policies are driving a reversal of global economic integration, such as by restrictions on trade, immigration and cross-border capital flows. The authors labeled this process geoeconomic fragmentation and warned it could lower global gross domestic product by up to 7% over an unspecified "long-term" period.
Decline in China's New Home Prices Stabilized in December
The decline of new home prices in China's 70 major cities stabilized in December, as Beijing rolled out more supportive measures to counter the prolonged slump of the real-estate sector.
Average new-home prices in the 70 cities fell 0.25% in December from the prior month, on par with the decline recorded in November, according to calculations made by The Wall Street Journal based on data released Monday by the National Bureau of Statistics.
Four Signs Consumers Are Pessimistic About the Economy
Many consumers around the world see an economic downturn coming in the year ahead.
U.S. consumer sentiment reached an all-time low in June 2022 and remains 15% below where it was a year ago, according to the University of Michigan. Expectations also took historic dips over the past year and remain depressed in Europe and China, according to TradingEconomics data from the European Commission and National Bureau of Statistics of China.
Ukraine Searches for Survivors After Apartment-Block Strike
Ukraine's allies were gearing up for talks on whether to provide Kyiv with more sophisticated weapons to counter Russian forces in the coming months as Ukrainian officials said at least 29 people died over the weekend in one of the deadliest Russian missile attacks on civilians since the war began.
Valentyn Reznichenko, head of the eastern Dnipropetrovsk region, said that 73 people were also wounded after an apartment building in the regional capital of Dnipro was hit, and that some 30 remained in the hospital. As of Sunday morning, he said, 40 people were missing-many of them believed to be buried under the rubble. A 27-year-old woman was pulled alive from the wreckage Sunday afternoon and was hospitalized for treatment of hypothermia.
Iraqi Prime Minister Supports Indefinite U.S. Troop Presence
(MORE TO FOLLOW) Dow Jones Newswires
01-16-23 0014ET
