MARKET WRAPS
Stocks:
European stocks edged into the red on Tuesday as caution dominated ahead of some key earnings reports from Wall Street banks, while doubts remained over global growth prospects this year.
"...recession expectations - per se - are not bad news for the markets. Decline in profit expectations, as a result of recession, is. So, all eyes are on corporate earnings!" Swissquote Bank said.
In the U.K., the FTSE 100 weakened, with Ocado the leading faller, after the online supermarket said customers bought fewer items per order in the lead up to Christmas amid the cost of living crisis. Ocado shares fall more than 6%.
Stocks to Watch
China's reopening will set the tone for luxury's coming year, RBC Capital Markets said.
The European luxury-goods industry could book some 11% organic growth, assuming 20% growth in China as the country moves on from its era of tough pandemic restrictions, according to RBC's forecasts.
Recovery within the country should at first be the main driver of growth, with international travel adding to the rebound toward the end of the year and into the next. Luxury heavyweights like LVMH, Kering and Richemont look attractive in this light, RBC added.
Economic Insight
Global inflation is likely to have peaked but it remains to be seen whether the second-round effects will persist and thus contribute to keeping inflation at a sustained high level, above central bank targets, Degroof Petercam Asset Management said.
In the U.S., there is also the question of whether the cost of housing will remain high or whether it will normalize.
"The impact of central banks on wage dynamics is more direct, but we must be aware that it has a long lag time before it is reflected in the labor market and wages."
U.S. Markets:
It's Day Two of bank earnings, with Goldman Sachs and Morgan Stanley on tap to report results.
JPMorgan, Bank of America, Citigroup and Wells Fargo on Friday turned in mixed fourth-quarter results. The nation's largest banks are girding for a recession, even if they aren't feeling one yet.
"We'll be looking closely at the banks' dealmaking and outlooks, these things tend to be at the very spear tip of leading indicators," Kleinwort Hambros said.
For an overview of recent bank results, click here .
Meantime, stock futures were modestly lower coming out of the long weekend and bond yields gained.
Forex:
The near-term macro-economic backdrop remains supportive for the euro given an improved China demand outlook and falling European gas prices, ING said.
China's zero-Covid reversal will spark resurgent Chinese demand, boosting pro-cyclical currencies like the euro, ING added. It said European gas prices continue to fall, which remains a positive development for the eurozone trade balance and the euro.
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Upcoming U.S. economic data could suggest the Federal Reserve will slow the pace of interest rate rises further at its next meeting but that's unlikely to move the dollar materially, Commerzbank said.
Any data that signal a 25 basis points rate rise instead of a 50 basis-point increase at the Fed's Feb. 1 meeting will be "gratefully received by the market," Commerzbank said.
However, the market has already lowered its rate expectations, meaning most is already priced into the dollar so the data could have limited impact on the currency.
Key U.S. data this week include retail sales and producer prices on Wednesday.
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Sterling rose after data showed U.K. wage growth accelerated in the three months to November, supporting the case for the Bank of England to raise interest rates further.
Average weekly earnings excluding bonuses increased 6.4% in the three-month period compared with 6.1% growth from August to October. Economists polled by the WSJ expected 6.3% growth. The unemployment rate was unchanged at 3.7% versus forecasts of 3.8%.
The data "only add further weight to the case for the BOE to raise interest rates from 3.50% now, perhaps to 4.50% in the coming months," Capital Economics said.
Read UK Jobless Rate Stabilizes But Wage Growth Accelerates
Bonds:
The peak in developed market bond yields was established last year, thus curve steepening is the next big move, HSBC Research said.
The Federal Reserve may have become frustrated by lower yields and the loosening of financial conditions but this does not mean the market is wrong, HSBC added.
"We expect that, as forward markets establish a peak for policy rates, the backdrop will turn more benign for fixed income and curves will steepen."
Bank of Japan
Citi has a non-consensus call for the BOJ, expecting it to abolish its yield-curve control on Wednesday, amid large purchases of Japanese government bonds, distortions on the JGB curve and high inflation.
"If realized, the obvious risk for European rates is that of repatriation outflows as JGB yields become more attractive to JPY investors."
Citi added that foreign assets already look unappealing on a three-month FX-hedged basis for JPY-denominated investors.
"This suggests that whilst an abolition of YCC by the BOJ might drive a knee-jerk cheapening of European rates, the impact to be relatively small and short-lived."
Read Pressure Rises on Bank of Japan for Further Policy Shift
Energy:
Oil markets were mixed as investors weighed macroeconomic data from China against Wednesday's U.S. producer price index reading.
Lower economic growth and rising Covid-19 cases are worrying some investors, SPI Asset Management said.
However, the first half of 2023 is likely to see a rebound in activity, helping spur demand in Asia, with "high-frequency indicators of economic activity such as subway usage and domestic passenger flights picking up" in the near term.
The U.S. PPI print will be key in helping determine Fed policy and dollar strength.
Oil Outlook
UBS has lowered its oil price forecasts for 2023 citing weaker-than-expected demand and supply disruptions in the near term.
It cut its 2023 Brent forecast to $90 a barrel from $95 a barrel but stuck to its view that prices will sit at $85 a barrel, $80 a barrel and $75 a barrel in 2024, 2025 and 2026, respectively.
"The EU embargo on Russian oil and associated sanctions have been less restrictive than initially envisaged and Russian production has held up until now," UBS said.
Oil prices will continue to be volatile this year but Brent should trade in a narrower range than in 2022, which UBS puts at between $80 and $100 a barrel.
Read UBS Halves European Gas Price Forecasts on Warm Winter
Other News
Spain's prime minister is urging the construction of a new green-hydrogen pipeline under the Mediterranean Sea from the Spanish coast to France to ensure energy security in the European Union as the war in Ukraine continues.
"This is a very critical project," Pedro Sanchez told CNBC in an interview at the World Economic Forum in Davos, ahead of a bilateral summit between Spain and France in Barcelona this week.
"This will be the largest green-hydrogen interconnection project in the EU for the, I would say, next decade," he said. The pipeline is planned to connect Barcelona and Marseille.
Metals:
Base metals and gold were pushing lower on concerns over Chinese growth and its affect on demand.
DOW JONES NEWSPLUS
EMEA HEADLINES
UK Unemployment Rate Stabilized in Quarter to November as Wage Growth Intensified
The U.K.'s unemployment rate steadied in the three months to November and wage growth continued to accelerate, a sign the labor market remained tight despite softening demand for labor.
The U.K.'s unemployment rate was unchanged at 3.7% in the three months to November compared with the preceding three-month period, data from the Office for National Statistics showed Tuesday. Economists polled by The Wall Street Journal expected the jobless rate to increase to 3.8%.
Ocado 4Q Retail Revenue Rose; Backs FY 2022 Views -- Update
Ocado Group PLC backed its fiscal 2022 guidance on Tuesday supported by a robust fourth-quarter performance and said it has started the new fiscal year with a record Christmas performance.
The online grocer and retail-technology specialist said retail revenue came in at 549.4 million pounds ($670 million) for the 13 weeks ended 27 Nov., up 0.3% compared with the same quarter last year.
Diageo to Buy Premium Rum Brand Don Papa
Diageo PLC has agreed to buy Don Papa Rum, a high-end dark rum from the Philippines, in a deal worth up to about $473 million, as the liquor giant bids to move further upmarket.
The owner of Johnnie Walker whisky and Tanqueray gin will pay 260 million euros, equivalent to $281 million, upfront for Don Papa, with a further potential consideration of up to EUR177.5 million through to 2028 subject to performance.
German Inflation Moderated in December, But Remained High
Germany's annual inflation rate moderated in December, driven by lower energy costs, the Federal Statistical Office, or Destatis, said Tuesday, confirming its preliminary data published earlier in January.
The consumer price index moderated to 8.6% in December from 10% in November, measured according to national standards, Destatis said. The consumer price index, measured according to EU-harmonized standards, rose by 9.6% on the year in December, a slower pace compared with November's 11.3% increase.
Rio Tinto 2022 Iron Ore Shipments Flat, Costs Likely Higher Than Forecast
Rio Tinto PLC said iron-ore shipments from its Australian mining operations were flat in 2022, reaching the low end of the company's forecast range as projected, but estimated higher-than-anticipated production costs due to cost inflation.
The company, which is the world's top producer of iron ore alongside Brazil's Vale SA, said it shipped 87.3 million metric tons of iron ore from Australia's Pilbara region in the fourth quarter of the year, up 4% on the same period of 2021.
Renault Unit Sales Fell 9.4% in 2022 on Supply Issues
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01-17-23 0539ET
