MARKET WRAPS

Stocks:

Stocks extended their rally in Europe, with the banking sector continuing to stabilize and as investors turned their attention to the Federal Reserve's decision on interest rates.

"Sentiment has turned more positive across European markets, with banks outperforming after the turmoil in recent sessions," Interactive Investor said.

Read Investors Go Bargain Hunting on UK Financials as Stocks Rebound

Eurizon said that despite tensions in the financial markets, economists' expectations point to another 25 basis point interest-rate rise by the Fed on Wednesday.

The market is more sceptical, however, with views divided between an interest-rate rise and a decision to keep the Fed funds rate unchanged.

"The spotlight will also be on the updated projections for Fed funds rates and on Jerome Powell's press conference, to garner elements [of] information on the future path of interest rates," Eurizon said.

Read Central Banks to Differentiate Between Price and Financial Stability Goals

Stocks to Watch

Supply-chain disruptions continue to affect the production efficiency of Europe's industrial sector, leaving companies with extended order backlogs, which should still help drive momentum, RBC Capital Markets said.

Backlogs will likely take until 2024 to normalize, which, for the likes of Siemens and ABB for example, appears set to remain supportive.

"We still see the sector as attractive, even though positive share price performance since October 2022 has reduced absolute upside," RBC said.

"While a significant liquidity crunch would definitely impact sector demand, generally low debt levels mean that the direct risks are limited in most cases."

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European insurers have limited exposure to banks' so-called additional tier one--or AT1--bonds which have been in focus after UBS's takeover of Credit Suisse, Berenberg said.

Swiss financial regulator Finma said the deal would trigger a write-down of Credit Suisse's AT1 debt with a nominal value of around CHF16 billion.

The insurance industry's average exposure to bank AT1s stands at 16 basis points of solvency own funds and Berenberg estimates only Sampo, ASR Nederland, Generali, Storebrand, Tryg and Scor have an exposure above 20 basis points.

"Our conclusion is that the European insurers' exposure is not material at the level of Credit Suisse's total bank debt, very small at the level of total bank sector AT1s and negligible at the level of Credit Suisse's AT1s," Berenberg said.

Read European Insurers' Share Underperformance Seems Overdone

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Fresenius has so far been given little credit for its steps toward simplifying its corporate structure and for its plans to turn around organic earnings growth and returns through non-core business disposals, Berenberg said.

The company is also targeting mid-single-digit organic growth and annual cost savings of EUR350 million by 2025. Those targets look achievable, Berenberg said.

"Equally, returning to a return on invested capital range of 6% to 8% in the near term does not look like a stretch if Fresenius can divest some of its non-core business lines and geographies."

U.S. Markets:

Stock futures edged higher with First Republic Bank stock rising 20% in premarket trading.

Shares of the regional lender lost nearly half their value and sank to a new low on Monday even as a report from The Wall Street Journal said talks to raise additional capital for First Republic were being led by JPMorgan Chase and other banks that already put $30 billion in deposits into the bank.

After Monday's close CNBC reported JPMorgan was advising First Republic on strategic alternatives that included a capital raise or sale. Also, investors were mulling reports that the U.S. Treasury is considering unlimited deposit guarantees if the current crisis hitting the banking sector continues.

Other Stocks to Watch

Nvidia kicked off its developer conference on Monday, and its CEO will be delivering the keynote address on Tuesday. He'll be sharing his "vision for the future of AI and how Nvidia is accelerating it with breakthrough technologies and solutions," the company said. The stock was up 0.5% in premarket trading.

Tesla was 1% higher in premarket trading. The company's debt was upgraded by Moody's to Baa3, its lowest level for investment grade, up one ratings notch from Ba1, the highest level of speculative grade, or so-called junk-rated debt.

Read Tesla outpaced European competitors in February, growing EU market share .

Nike and GameStop are scheduled to report quarterly earnings after the stock market closes on Tuesday.

Follow WSJ markets coverage here .

Forex:

The euro gained on improving sentiment towards European bank stocks, MUFG Bank said.

The turnaround in sentiment came after EU regulators welcomed actions by Swiss authorities to ensure financial stability and provided reassurances to bondholders in the UBS takeover of Credit Suisse, MUFG said.

"The adjustment higher in the euro against the dollar is also supported by yield spreads moving in favor of Europe over the U.S."

EUR/USD could strengthen further if the Fed delays further interest rate rises on Wednesday until the banking turmoil calms, MUFG said.

Read Investor Confidence Improves After EU Regulators Joint Statement on AT1 Bonds

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The dollar was a touch higher and has the potential to gain further ahead of the Fed policy decision, as investors conclude that a 25bp rate rise is more likely than rates being left steady, ING said.

"We wouldn't be surprised to see the dollar-which fell yesterday as risk sentiment rebounded-find some support into the FOMC announcement as markets turn more defensive and potentially factor in a greater risk of a hawkish scenario."

The Fed decision will be "a big risk event," with markets currently only pricing in around a 60% chance of a rate increase, ING said.

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The pound could fall as there's a strong case for the Bank of England to leave interest rates unchanged on Thursday, although any declines may be limited, MUFG Bank said.

"Even prior to the recent pick-up in fears over the health of the banking system, the BOE was already much more cautious than the European Central Bank and Federal Reserve over the need for further rate hikes," MUFG said.

Leaving rates on hold would pose "some downside risk" for the pound but its recent resilience to risk aversion suggests it could continue to perform better than expected in the near-term.

Read BOE Looks Likely to Raise Rates by 25Bps, But Rates Are Near Their Peak

Bonds:

Eurozone government bond yields fell in early trading, signalling continued investor caution in light of the banking turmoil, DZ Bank said.

Nonetheless, the relatively muted yield drops pointed to tentative stabilization, DZ Bank added.

"Regarding bond-market sentiment, nerves are still jangling on both sides of the Atlantic in response to the uncertainties racking the banking sector. Yet market actors appear cautiously optimistic that the current bout of turmoil is not going to escalate into a global financial crisis."

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The AT1 bond market poses a threat to improved investor sentiment in Europe, ING said.

"The market's focus in Europe appears to be on the vulnerability of Additional Tier 1 bondholders after the Credit Suisse acquisition deal by UBS saw AT1 bonds being wiped out. The AT1 bond market now poses a major threat to any extension of the recovery in investor sentiment in the region."

Energy:

Oil prices edged down as investors cautiously await this week's Fed decision.

Oil losses over recent days, while not driven by changes to supply or demand expectations, have been heightened as demand in China has been slow to recover, Natixis said.

"The oil market sell-off can be partially attributed to fundamentals disappointing relative to lofty expectations-as of yet, China hasn't overtightened the physical market, whilst Russian exports have remained robust," Natixis said.

Metals:

Base metals and gold were slightly weaker, with traders looking to the Fed decision and how this will shape monetary policy.

"Markets are in waiting mode ahead of tomorrow's Fed decision," Peak Trading Research said. "How Powell balances inflation pressures versus financial risks will be critical."

Copper

Tight supply and a hike in demand from the energy transition is likely to push copper prices higher, according to Goldman Sachs.

The bank said near term, it is targeting $10,500 a metric ton for LME copper, and in the longer term, $15,000 a ton.

"The forward outlook is extraordinarily positive," Goldman Sachs said.

Referring to the U.S. inflation reduction act, the bank said demand is likely to spike because of the drive to electrify. Near term, prices should rise on tight inventories, with the expected 125,000 tons of observable inventories by the second quarter the lowest level on record.

Goldman Sachs expects peak mine supply by 2024.

Nickel

The LME's nickel contract is no longer fit for what the industry requires, according to the CEO of commodity trading giant Trafigura.

He said the current contract isn't fit for purpose for the global nickel industry given the shift in demand from stainless steel to batteries for nickel.

The CEO said the nickel industry has changed significantly over the last five years, during which the battery market has replaced stainless steel as the largest driver of demand.

"You have to have a contract or contracts that reflect the underlying business and how it operates," Trafigura said, adding that the nickel crisis last year was partly influenced by this shift.

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