MARKET WRAPS
Stocks:
European shares advanced Tuesday, helped by banking gains after Jerome Powell said U.S. interest rates could be raised more aggressively.
"[It] will probably be more appropriate for the Fed to move faster, as inflation will certainly continue spiking toward fresh multi-decade highs given that the latest numbers don't even factor in the war-led surge in oil and commodity prices," said Swissquote.
A more aggressive rise in interest rates would be a boon for banks, which have seen their profits dampened by the past years' ultra-low rate environment.
Economic Insight:
Fitch has cut its forecast for 2022 world GDP growth by 0.7 percentage point to 3.5%, saying the outlook has deteriorated significantly as inflation challenges intensify and Russia's invasion of Ukraine threatens global energy supplies.
Russia supplies around 10% of the world's energy, including 17% of its natural gas and 12% of its oil. The jump in oil and gas prices will add to industry costs and reduce consumer real incomes. Fitch now expects U.S. CPI inflation to peak at 9% and average 7% for the year as a whole.
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The eurozone's manufacturing sector is likely to bear the brunt of the economic damage from Ukraine's war and could even contract in the months ahead, said Capital Economics.
Before the war, the outlook for eurozone's manufacturing activity was improving, but the conflict has created new headwinds: weaker export demand, renewed supply-chain disruptions, and higher energy prices.
"Bringing all of this together, it wouldn't be surprising if industrial production fell in the first half of the year," said Capital Economics. However, eurozone GDP is set to increase this year as increased demand for services is likely to outweigh the weakness in manufacturing, it said.
U.S. Markets:
Stock futures rose, continuing a rally from the year's lows despite the ongoing Russia invasion of Ukraine and an increasingly hawkish Fed.
Russia intensified air and sea attacks across Ukraine, as Joe Biden encouraged U.S. companies to harden their cyber defenses against Russia. Separately, Okta said it was investigating images purporting to show a hack of their internal system, though the hacking group is believed to be based in Brazil.
Strategists at Goldman Sachs said markets have rebounded but only commodities and the dollar are above their pre-invasion peak. They weren't entirely convinced, saying the relief rally is at odds with downside macro scenarios, and that there's little upside.
"With global central banks maintaining their hawkish stance and focus on inflation, the shorter duration, value pockets have led the rebound contributing to last week's outperformance of European equities," said London-based Goldman strategists led by Cecilia Mariotti.
There's more commentary coming from Federal Reserve officials later Tuesday, including New York Fed President John Williams.
Forex:
The dollar has gained around 0.3% following Powell's speech on Monday.
Danske Bank said it expects a 50 basis points rate rise in June but markets may expect this at the next meeting in May following Powell's remarks. "Irrespective of timing, the door is clearly wide open to accelerate the plan to tighten financial conditions."
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The yen is likely to weaken further against the dollar as the monetary policies of Japan and the U.S. will probably diverge more in favor of the greenback, according to UOB.
UOB said the stark monetary-policy divergence continues to warrant a higher USD/JPY in the medium to long term, as it raised its USD/JPY projections by 200 pips to 119 for the second quarter of 2022, 120 for the third quarter, 121 for the fourth quarter and 122 for the first quarter of 2023.
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Sterling may extend its gains versus the euro if Wednesday's U.K. inflation data exceed expectations, said Commerzbank.
If inflation continues to rise and the risk of a wage-price spiral increases, the Bank of England could raise interest rates more aggressively, Commerzbank said in a note.
"As a result, the inflation data due for publication tomorrow morning might well have the ability to move sterling considerably."
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Hungary's central bank is likely to raise interest rates further in a policy decision later Tuesday, boosting the forint, said ING.
ING expects the central bank to lift its benchmark rate by 100 basis points from its current level of 3.4%, and to raise its inflation outlook. "We expect a hawkish outcome of today's meeting, which we think should push Hungary's forint back below 370 per euro," said ING analysts.
The rate decision is expected at 1300 GMT.
Bonds:
Eurozone government bonds continued to sell off early Tuesday following Jerome Powell's comments on rate rises.
Commerzbank's rates strategists said that as higher inflation and more aggressive interest-rate-rise prospects are looming large, the path of least resistance remains toward higher yields.
Other News:
BlackRock Investment Institute expects more pain ahead for long-term government bonds even with the yield jump since the start of the year.
Investors will demand more compensation for the risk of holding government bonds due to higher inflation, BlackRock said, keeping to its view of underweight nominal government bonds on both tactical and strategic horizons.
"Inflation expectations could de-anchor and spiral upward as markets and consumers lose faith that central banks can keep a lid on prices," BlackRock said. Markets' hawkish re-pricing in short-term rates is overdone, BlackRock said.
It prefers short-maturity bonds over long-term ones.
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JPMorgan's strategists are going short in 10-year Portuguese government bonds versus Spanish peers, on a stretched valuation, supply pressure and an underweight intra-eurozone view.
Based on fundamentals, the fair value of 10-year Portuguese bonds should be around a few basis points pickup over Spanish peers in the current environment, the strategists said. They also expect Portugal to syndicate a new 10-year government bond in the near future, which should also add pressure on the 10-year sector of the Portuguese bond curve.
Commodities:
Oil prices were lower, erasing earlier gains as doubts lingered about the EU's willingness to ban Russian oil imports
Signs that the EU is getting close to banning Russian oil imports will--have supported prices. But continued signs of discord in the 27 member bloc remain. Both Germany and the Netherlands have said that the bloc can't cut itself off Russian supplies right now.
Meanwhile, Russian crude oil exports have not yet declined as cargoes booked before the war continue to be loaded, said Helge Andre Martinsen at DNB Markets. An EU ban on Russian oil would affect almost half of Russia's crude exports, he added.
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WTI crude prices have scope to continue their upward trajectory, according to technical analysis by DailyFX.
The front-month contract is rebounding from the key support level of $94.9 that it hit last week, and "the overall trend remains bullish-biased as prices formed consecutive higher highs and higher lows." DailyFX said the MACD [moving average convergence divergence] indicator "s about to form a bullish crossover, suggesting that buying pressure may be building."
DailyFX has put immediate support at around $105.80l and resistance at $119.25/bbl.
Other News:
It's becoming increasingly likely that the only way Russian aluminum producer Rusal will be able to source alumina is via purchases from Chinese entities, said Wood Mackenzie. Its remarks follow Australia's ban on alumina sales to Russia.
"One possible outcome could be Chinese buyers purchasing alumina and redirecting sales via eastern Russian ports," although "this poses a significant political challenge for China and its trading relationship with the rest of the world," Wood Mackenzie added.
DOW JONES NEWSPLUS
EMEA HEADLINES
EU Support Grows for Russia Oil Ban Over Ukraine War
Support for a European Union-wide ban on the purchase of Russian oil is growing inside the bloc, according to diplomats involved in the discussion, representing a significant shift in the continent's stance toward how to ratchet up economic pressure on Moscow.
Agreement on any EU ban of Russian crude is far from locked in yet, and a rapid decision to move ahead isn't likely, diplomats said.
Kingfisher FY22 Pretax Profit Above Views; Warns of Hit to 1Q, FY23 Performance
Kingfisher PLC on Tuesday reported a significant rise in pretax profit and revenue for fiscal 2022, which came in above market expectations, and said like-for-like sales declined in the first quarter of the current year among geopolitical uncertainty and inflation.
The home-improvement retailer posted a pretax profit of 1.01 billion pounds ($1.33 billion) compared with GBP756 million a year earlier. It had been expected to be GBP960.1 million, taken from FactSet and based on seven different forecasts.
Palfinger Says Ukraine War Will Hurt Revenue, Profits
Palfinger AG issued a profit warning late Monday, its second in two months, saying that the war in Ukraine will have a negative effect on its revenue and profitability.
The Austrian crane maker said the hit will be due to its business volume in Russia, and that the crisis further intensifies issues around the availability of trucks and components. As a consequence, Palfinger said it would decrease its production volume in the coming weeks.
Air Liquide Sets Out Targets Through 2025
Air Liquide SA has outlined plans to bolster sales growth and investments through 2025, while balancing the need to reduce carbon emissions.
The industrial-gases company said Tuesday that it expects an acceleration in sales growth between 5% to 6% on average a year, with investments reaching about 16 billion euros ($17.63 billion) through 2025.
Fortum to Sell Its 50% Stake in Norwegian District Heating Company for $1.1 Bln
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03-22-22 0643ET
