MARKET WRAPS
Watch For:
EU industrial production; Germany WPI, balance of payments; France CPI; Italy labor cost index; trading updates from Telecom Italia, Inditex, E.ON, BMW, Naturgy, Prudential, H&M, SSAB
Opening Call:
Shares are off to a steady start in Europe on Wednesday. In Asia, stock benchmarks advanced; Treasury yields were mixed; the dollar weakened; while oil gained and gold dropped.
Equities:
European stocks could tread water on Wednesday, with U.S. inflation data and financial stability concerns juxtaposed in the minds of investors.
For now, the mix of data and market conditions could be clearing the way for a smaller interest rate hike from the Federal Reserve next week than traders were recently expecting.
"We now expect the FOMC to pause at its March 21-22 meeting because we think Fed officials will worry that another interest rate hike could be counter-productive to policymakers' efforts to shore up the financial system," Goldman Sachs said.
"Whilst we agree more tightening is likely needed to address inflation if financial stability concerns abate, we think Fed officials are likely to prioritize financial stability for now."
The S&P 500 index remains within -- though now towards the bottom -- of the 3,800 to 4,200 range it has inhabited for four months or so, supported by hopes the banking angst will be ameliorated by a consequently less hawkish Federal Reserve.
There might be some hope the February data -- combined with the interest rate pressures on banks -- could convince the Fed to stop rate hikes altogether. Other market observers are split on the idea and say a 25 basis point increase could be the more likely result
Forex:
The dollar lost ground in Asia as risk appetite rebounded.
Both headline and core U.S. inflation readings matched expectations, and at least for now, the data having not surprised too much provides room for the Fed to conduct more cautious 25bp rate increases, said IG.
The anchoring of less-hawkish expectations has given a catalyst for risk sentiment to recover, it added.
Expectations of a less hawkish Fed entail a weakening dollar, HYCM said, adding that "there are so many moving parts at the moment."
It said mild inflation data and a bank crisis raise the prospect of a lower terminal rate than previously thought, undermining a key support for the dollar. "The falling yield should weaken the dollar and this should, medium-term, allow return to risk as markets expect lower interest rates and easier financial conditions for U.S. markets," it said.
The Fed remains likely to increase rates by 25 basis points in the next three meetings, with a terminal rate of 5.25%-5.5% to be reached in June, Bank of America said.
Bonds:
Treasury yields were mixed after February's consumer-price index showed little sign of progress on inflation.
"The situation remains quite fluid with optimism about recent financial market and policy developments offset by concerns about the 'unknown unknowns' as well as the risk of nonlinear financial market and economic developments," said EY-Parthenon, the global strategy consulting arm of Ernst & Young.
"Comparisons with the 2007-09 global financial crisis should be nuanced and discrete as the economic, policy and financial markets conditions are distinct," it said. "Even if the current episode of banking sector distress is rapidly resolved, the economy won't escape unscathed and smaller businesses may suffer the brunt of the impact via tighter credit conditions."
"Investors and numerous commentators have been quick to dismiss the possibility of the Fed further tightening monetary policy, but we believe a dual track policy approach is likely given the Fed's resolve to bring inflation down," it said.
Energy:
Oil rose in Asia amid positive sentiment spurred by Wall Street's rally overnight and a likely technical rebound after oil futures posted their lowest close of this year.
Chinese economic data, including industrial output figures, could provide some upside momentum to crude-oil prices, said CMC Markets.
"Looking ahead, the supply side of the current fundamental backdrop remains fairly steady; however, fading optimism surrounding China's economic recovery and still-elevated recession fears are leaving risks skewed to the downside," Sevens Report Research said.
Strong data is seen pushing the Federal Reserve to continue hiking interest rates, adding to recession fears that were heightened by the collapse of Silicon Valley Bank.
"The oil market is acting like a recession is inevitable or at the very least, we are seeing serious deleveraging of oil contracts. With more reports that signal more robust demand in China and with the dollar pulling back, one would think oil would be holding up against all this economic turmoil," said Price Futures Group.
Metals:
Gold was lower in Asia, following overnight gains in U.S. Treasury yields, which undermined the appeal of the non-interest-bearing precious metal.
The price of gold was lower as Treasury yields recovered after a largely in-line U.S. inflation report quelled notions that the Fed could pause rate increases, said Oanda.
Safe-haven demand for the yellow metal also cooled after U.S. authorities intervened Sunday to quell fears about regional bank viability.
Traders were also assessing the U.S. February CPI report which shows the inflation cooled modestly last month, in line with economists' expectations.
The inflation report potentially offers the Federal Reserve leeway to approve a smaller increase in interest rates next week as it also gauges the fallout from the failure of Silicon Valley Bank.
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Copper prices rose amid supply disruptions.
The impact of recent supply disruptions were revealed by Peru's sharp fall in exports, said ANZ. It notes Peru's January export volumes were 25% lower on year, while output fell 0.3%, citing data from the country's mining industry chamber and the energy and mines ministry.
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Chinese iron-ore futures were higher, with investors' confidence boosted by improving expectations on macroeconomics, Ruida Futures says.
However, Silicon Valley Bank's collapse has affected market sentiment, which may change the rising trend of iron-ore futures, it added.
Some Chinese steel makers are being slow in replenishing their iron-ore inventories due to robust prices for the steel ingredient, Macquarie said.
Even though steel margins are improving, some mills are "maintaining low stock levels due to 'unattractive' iron-ore prices," it said. Exports from Australia's big iron-ore producers, Rio Tinto and BHP, have softened recently because of port maintenance works, it added.
TODAY'S TOP HEADLINES
Fed to Consider Tougher Rules for Midsize Banks After SVB, Signature Failures
WASHINGTON-The Federal Reserve is rethinking a number of its own rules related to midsize banks following the collapse of two lenders, potentially extending restrictions that currently only apply to the biggest Wall Street firms.
A raft of tougher capital and liquidity requirements are under review, as well as steps to beef up annual "stress tests" that assess banks' ability to weather a hypothetical recession, according to a person familiar with the latest thinking among U.S. regulators.
Silicon Valley Bank Creditors Form Group in Advance of Possible Bankruptcy
Creditors of Silicon Valley Bank's parent company have formed a group in anticipation of a potential bankruptcy filing, through which they hope to profit from a sale of the collapsed firm's private-wealth and other units, according to people familiar with the matter.
The investor group, which is being advised by PJT Partners Inc., includes Centerbridge Partners LP, Davidson Kempner Capital Management LP and Pacific Investment Management Co., or Pimco, the people said. Most members bought parent SVB Financial Group's bonds coming into the weekend as they traded down to around 30 cents on the dollar, the people said. The group now holds a sizable chunk of SVB Financial's $3.4 billion face value of bonds.
Russian Jet Collides With U.S. Drone Over Black Sea
A Russian jet struck a U.S. spy drone over the Black Sea and knocked it out of the sky Tuesday, the Pentagon said, in one of the first direct military confrontations between the two nations' forces since the war in Ukraine began more than a year ago.
The collision demonstrated how closely the U.S. and Russia are operating on the margins of a conflict zone, even as they aim to avoid incidents that could inflame tensions between them and widen the war in Ukraine. While the U.S. has provided Kyiv more than $30 billion in military aid and equipment, as well as intelligence, it has said it wanted to avoid conflict with Russia. Tuesday's incident demonstrated the challenges of supporting the war while, as the U.S. warned Tuesday, avoiding potential "unintended escalation."
Prudential's 2022 Operating Profit Rose on Strategic Re-Positioning
Prudential PLC said operating profit rose in 2022, supported by a strategic repositioning to focus solely on Asia and Africa.
The company's annualized premium equivalent sales for the year rose 9% to $4.39 billion, it said Wednesday.
OpenAI Rolls Out Updated Version of Viral Chatbot ChatGPT
The company behind the viral chatbot ChatGPT launched a new version of its artificial intelligence technology on Tuesday, saying it was more powerful and predictable than previous versions and capable of analyzing images and handling much larger blocks of text.
The announcement from OpenAI-a startup backed by billions of dollars from Microsoft Corp.-is the latest in a string of generative AI announcements as companies try to get ahead in the race to build and use the buzzy new technology.
Write to singaporeeditors@dowjones.com
Expected Major Events for Wednesday
00:01/UK: Feb Scottish Retail Sales Monitor
06:00/FIN: Jan Retail sales
07:00/SWE: Feb CPI
07:00/GER: Feb WPI
07:00/NOR: Feb External trade in goods
07:45/FRA: Feb CPI
(MORE TO FOLLOW) Dow Jones Newswires
03-15-23 0115ET
