MARKET WRAPS

Watch For:

EU bank stress test launches late January, Business & consumer surveys; Germany GDP 1st release; Italy PPI, foreign trade non-EU; trading updates from Philips, Ryanair, Evraz, Smith & Nephew

Opening Call:

Shares in Europe may open lower at the start of a busy week headlined by a slew of central bank rate decisions. In Asia, stock benchmarks were mixed; Treasury yields broadly gained; the dollar and oil futures fell; while gold gained slightly.

Equities:

European shares look set to fall at Monday's open, as investors brace for corporate earnings and rate decisions by the Fed, the European Central Bank and the Bank of England.

Hopes that inflation has peaked, alongside some momentum in the stock market, have drawn many investors in to bet on some of the riskiest corners of the market.

"I'm actually quite optimistic about where things stand," said Dev Kantesaria, founder of Valley Forge Capital. "Inflation is improving across the board."

Mr. Kantesaria considers the path of interest rates to be paramount in terms of stock returns, despite the bevy of earnings results that have trickled out in recent weeks.

He is expecting the Federal Reserve to eventually have to cut interest rates, which he thinks will help the stock market.

However, Matt Rowe, senior portfolio manager at Nomura Private Capital, said that many investors entered the year bearish on stocks and may be chasing the market higher in recent weeks.

"I think most of it is based on positioning," Mr. Rowe said of the rally. "There's a lot of reasons to think this has gone too far, too fast."

Investors this week will also focus on the U.S. job reports, which will gauge U.S. wages, openings and overall labor market.

Read: The Fed and the stock market are set for a showdown this week. What's at stake.

Forex:

The dollar strengthened early Monday, with analysts expecting policy announcements from the Fed, ECB and BOE this week to be a turning point for the dollar.

Capital Economics said it thinks the headwind for the greenback has largely run its course.

"What's more, we expect continued weakness in US economic data to dent risk sentiment, tighten financial conditions and push the dollar higher over the coming months," it said.

However, Bank of America FX strategists said, "while inflation will likely fall through 2023, persistent country divergences should keep FX volatility high."

"We expect modest USD downside by the year-end, continuing into 2024. Still, while the recent USD weakness is directionally justified, we believe its size has been an overreaction. Certainly, the forces behind the strong USD rally last year seem to have turned; US inflation has likely peaked," they added.

Meanwhile, Danske Bank analysts expect the Bank of England to raise interest rates by 50 basis points to 4.0% this week and also warned of a grim economic outlook, likely causing the pound to fall against the euro.

"We expect EUR/GBP to move slightly lower upon announcement [of a 50bp rate rise], but reverse higher on the back of a dovish statement and press conference," they said.

Danske expects the decision would be a closer call between a 25bp and a 50bp rise than many anticipate. Rates should peak at 4.25% after a final 25bp rise in March, below the 4.40% the market currently prices, Danske added.

Bonds:

U.S. Treasury yields were mixed early Monday after, the 10-year Treasury notching its biggest weekly yield climb in a month on Friday.

Investors were likely to monitor the Fed's post-meeting communication for clues on how soon the central bank will stop tightening.

"A number of indicators are flashing red lights that a recession may be upon us," Bill Adams, chief economist at Comerica Bank, said.

"With cooler inflation and increased signs that the economy may have in fact turned, financial markets are pricing in a smaller quarter percentage point rate hike for the Fed's decision," he said, adding that the markets are now also "pricing in the possibility that the Fed holds rates unchanged at their following decision in March."

"Our economists remain hawkish relative to market pricing, expecting a terminal [fed funds] target range of 5.00-5.25%. and the first cut not until Mar-2024, for which forwards price 100 bp more cuts than our colleagues expect," BofA Global's rates team lead by Ralf Preusser said.

Energy:

Crude oil futures fell in Asia, as investors focus on the OPEC+ Joint Ministerial Monitoring Committee, which reviews the oil market, meeting on Feb. 1.

"OPEC remains a critical piece of the puzzle," said SPI Asset Management.

"Because of the voiced frustration with the Western energy policies, including the price cap on Russian oil, and the risk it creates precedents, it will most certainly limit the group's willingness to raise production and play ball with the West."

Oil agencies expect "solid global oil demand growth with a significant contribution from China, and subject to the burden of proof, many traders think it could push the market back into deficit from June onwards" and drive Brent back up to $105 a barrel by the fourth quarter of this year, SPI said.

"However, if the oil market turned out to be softer than most forecast, then OPEC should be able to put a floor under prices given its strong pricing power," it said.

"OPEC could keep its production lower for long beyond its June 4th meeting or implement further cuts."

Metals:

Gold prices edged higher in Asia, extending a broadly muted trading pattern in recent sessions.

"Gold has had a good run in the last few weeks benefitting from the downturn in the U.S. dollar," Colin Cieszynski, chief market strategist at SIA Wealth Management said.

Technically, gold was looking "a bit overbought and due for a pause in the short term," especially with the Federal Reserve policy decision due Wednesday, he said. The longer-term picture remains bullish, he said.

Galaxy Futures analysts also reckoned the precious metal was likely to continue oscillating at its current high levels for the near term, given a lack of substantial changes to the market's fundamentals.

But some have been warning of profit-taking risk and an end to gold's recent strong rally, as elevated prices and easing worries of a global slowdown weigh on buying interest.

Gold has yet to break the $2,000 level, and there will likely be "sharp corrections unless there is a convincing break" of that level, Chintan Karnani, director of research at Insignia Consultants, said.

"Gold traders will be looking for clues on interest rate pause in the FOMC so that they can force a break of $2,000."

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Chinese iron-ore futures rose on demand hopes as local markets reopened after the Lunar New Year holidays.

There have been expectations that China will increase buying after the Lunar New Year holidays, Saxo Bank said.

Also, Australia's biggest pure-play iron ore company, Fortescue Metals Group, expects stronger sales in 1H, it noted.

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Copper prices inched higher, extending a range-bound pattern over recent sessions.

Investors have been weighing a mixed bag of signals including worries of a potential global recession, uncertainties in the Fed's upcoming interest rate changes, and expectations of China's post-reopening demand recovery.

The metal's price may find some support in the near term, Yongan Futures analysts said.

They pointed out that China's domestic copper inventories have remained low during the past week, which could trigger buying interest as traders seek to build up supplies for an expected demand rebound in 1Q.


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01-30-23 0015ET