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Opening Call:
European shares may struggle for momentum early Thursday as investors weigh a slightly less hawkish Fed message against ongoing worries over inflation and global growth. Asian shares were mixed, following Wall Street's modest gains; the dollar dipped; Treasury yields were unchanged; and oil and gold prices advanced.
Equities:
European stocks are unlikely to make much headway Thursday as investors in the region get their first chance to react to the Federal Reserve minutes.
U.S. stocks closed higher as traders took away a message of flexibility from the minutes, with the central bank open to rethinking aggressive plans to raise rates to tame high inflation.
Minutes from the May meeting showed support for half-point moves by the Fed as it seeks to get its policy rate "expeditiously toward neutral," over the next couple of meetings and that high inflation remains a key focus.
"The one thing this Fed is very good at is being measured," said Eric Merlis, managing director of global markets at Citizens. "I chose to see this as a recognition that they're not going to go headlong along a path. They recognize things could change."
However, there was another disappointment for U.S. tech, with Nvidia stock falling after the chip maker provided a softer-than-expected outlook for its July quarter. The company cited the impact of both reduced business in Russia and Covid-related manufacturing shutdowns in China.
Read more here.
Economic Insight:
The culmination of inflation, driven by factors such as rising energy and food prices, ongoing supply chain disruptions, lockdowns in China and the cost of tackling climate change means that Europe's economy faces the most complex situation in the next 12 months that it has faced in decades, said Deutsche Bank CEO Christian Sewing.
He stressed that Europe needs to remove obstacles between countries to allow the free flow of investment and savings to ensure sufficient private financing is available to help the bloc reach its net zero objectives
"If we don't unlock the capital markets union now, the green deal cannot be financed," Sewing said.
Forex:
The dollar fell back slightly in Asia against a range of currencies as investors assessed the Fed's policy outlook following the release of the FOMC meeting minutes.
With inflation risks skewed to the upside, markets are pricing in the Fed's policy rate to finish the year at 2.75%, although only with a 58.9% probability, said Matt Simpson, senior market analyst at City Index.
"We're all questioning as to whether the Fed really can tame eye-watering levels of inflation without triggering a hard landing."
Silicon Valley Bank's Scott Petruska said "we're still bullish the dollar, over the long term all the factors supporting the dollar are still there," including expectations of the Fed hiking aggressively over the coming months, attractive yields and an economy that's fairly sound with a tight labor market.
Petruska said the currency's safe-haven status is crucial to its strength, faced with the Russian invasion of Ukraine and rising China-Taiwan tensions. But he cited a Bank of America survey showing fund managers are even more concerned about monetary policy and recession than geopolitical tensions.
Bonds:
Treasury yields were little changed in Asia, in a muted reaction to the Fed minutes.
"The Fed is moving slowly because when it talks tough, the market ramps up. Still, I don't think it dramatically changes the outlook and I don't see the Fed backing off," said Anthony Denier, CEO of Webull, a trading platform.
Dean Smith, chief strategist at FolioBeyond, said "market reaction to the Fed minutes is quite muted, as it is old news. Events have moved past the data available to the Fed at the time of the last meeting on May 3-4. That was a lifetime ago as it relates to the evolution of the highly volatile markets over the past several weeks."
The minutes showed some officials were worried about how the Treasury bond market, the backbone of the global credit system, might handle rate rises.
"Several participants who commented on issues related to financial stability noted that the tightening of monetary policy could interact with vulnerabilities related to the liquidity of markets for Treasury securities and to the private sector's intermediation capacity," the minutes said.
The document also noted that there was a lack of visibility into some aspects of commodities markets, which have been rattled by Russia's attack on Ukraine.
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Falling prices of investment-grade corporate debt means now could be an opportunity for investors, said Insight's Scott Ruesterholz. But he has advised potential investors to stick to U.S. firms as opposed to European ones.
"The ability of corporates to continue passing on higher input costs depends largely on the buying power of the consumer. The [U.S.] consumer is better placed than global peers to weather inflation," thanks to higher fiscal stimulus during the pandemic and because the war in Ukraine "has greater implications for European consumers."
Ruesterholz estimates that American consumers "could take on $400 billion of debt and still be less levered than the fourth-quarter of 2019."
Energy:
Oil futures extended Wednesday's gains after the latest EIA data showed a decline in U.S. crude and gasoline inventories ahead of the upcoming summer driving season over Memorial Day weekend.
"The tightening in the U.S. gasoline market will raise concerns over supply as we move into driving season. Tightness in the U.S. is pulling in gasoline from elsewhere, including Europe, which is also looking increasingly tight," said Warren Patterson, head of commodities strategy at ING.
CBA said Brent could track around $110 a barrel in the near term, adding that an EU ban on Russian oil imports would likely be the main driver. A deal may formalize in the coming week, though Hungary appears to be the main hold--out amongst EU members.
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At Davos, the IEA asked the question: How can governments shore up oil and gas supplies right now without putting the world on track to emit more carbon?
The head of the agency, Fatih Birol, set out several possible steps. More oil can be pumped from fields that are already in operation without investing in production capacity.
"U.S. shale oil and gas is easy to come into the market and come out of the market--you don't need big infrastructure. In the short term, we need to make the most of existing nuclear-power plants," Birol said.
Where Europe is building liquefied-natural gas terminals to unwind its dependence on Russian gas, it should equip them to be able to import hydrogen ammonia in the future, Birol added.
Read: Ukraine War Threatens Transition to Cleaner Energy, Leaders Warn at Davos
Metals:
Gold futures held minor gains in Asia, with prices partially supported by the Fed minutes which showed little appetite for more aggressive rate increases, said ANZ.
"The technical picture continues to remain supportive, and it seems only a marked dollar recovery will cap gold's rally," said OANDA.
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Base metals were mixed, with copper higher but zinc trailing slightly, and sentiment overall may be weighed by signs of weakening economic growth in China.
Chinese Premier Li Keqiang told officials Wednesday that the country is faring worse in some respects than 2020, said ANZ. This has spurred the market consensus forecast for China's 2022 GDP growth to fall to 4.5%, well below the official target of around 5.5%.
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Iron ore futures fell more than 3% in China with sentiment driven by declines in Hong Kong and Chinese equities.
However, investors continue to look to China's stimulus measures that could support demand for the steel-making raw material, said ANZ. The country's state media has lauded China's focus on economic growth in high-profile articles.
TODAY'S TOP HEADLINES
Fed Minutes Show Urgency for Raising Rates to Tame High Inflation
Federal Reserve officials thought they would need to raise interest rates by a half-percentage point at each of their next two meetings when they approved an increase at their gathering earlier this month.
Minutes from the Fed's May 3-4 meeting, released Wednesday, show that officials discussed the possibility that they would raise interest rates to levels high enough to slow economic growth deliberately as the central bank races to combat high inflation.
Russia Bondholders Say Debt Default Could Already Be Here
Russia could already be in default on some of its foreign currency debts, according to bondholders that claim they are still owed a small interest payment that Moscow didn't send to them earlier this spring.
A change in U.S. sanctions on Wednesday is expected to cut off Russia's ability to stay current on its dollar-denominated sovereign debt, which it has managed to continue servicing since the invasion of Ukraine began. Some investors, though, allege that Moscow has defaulted already by failing to pay about $1.9 million in interest and they have submitted notices of the possible default to bond custodian Euroclear earlier this month, according to records viewed by The Wall Street Journal.
Ukraine War Threatens Transition to Cleaner Energy, Leaders Warn at Davos
DAVOS, Switzerland-The worst energy crisis in a half-century is disrupting the West's transition to cleaner sources of energy by providing new momentum to invest in fossil fuels, business and government leaders said at this week's World Economic Forum.
Europe's scramble to wean itself off Russian energy following the country's attack on Ukraine will lead to new short-term investments in coal, oil and natural gas, energy and government officials said.
(MORE TO FOLLOW) Dow Jones Newswires
05-26-22 0026ET
