MARKET WRAPS
Stocks:
European stocks edged higher in a muted opening session on Monday with U.S. markets closed for the Martin Luther King Day holiday.
Hopes over weaker inflation--helped by falling prices and lower energy costs--have continued to support the recent rally in Europe.
In the U.K., optimism surrounding China's reopening lifted commodity stocks, with stronger-than-expected consumer demand boosting the retail, travel and hospitality sectors.
"Investors appear to have fallen back in love with U.K. assets, after a difficult period when the FTSE 100 was the wallflower among global indices," Hargreaves Lansdown said.
Stocks to Watch
Near-term complexities aren't fully appreciated in current consensus on Airbus, Berenberg said, as it downgraded its rating on the stock to hold from buy and cut the target price to EUR120.
Airbus has a strong competitive positioning and its long term looks attractive, Berenberg said, noting recent market-share gains from Boeing. But inflation is likely to set costs soaring in 2023, pressuring margins and adding to continued supply constraints that will limit volumes.
"We see limited support from shareholder-friendly actions in 2023."
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Covestro shareholders may have to lower their dividend expectations this year after the company booked a preliminary net loss in 2022, Jefferies cautioned.
Covestro said on Friday that it expects to book a loss of EUR300 million, a surprise given consensus had seen a net profit of around EUR420 million. The company pointed to depreciation of noncurrent assets and adjustments to deferred tax assets behind the loss.
"The negative net income will be likely to restrict its ability in paying out dividend this year," Jefferies said.
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Credit Suisse is preparing to cut more than 10% of investment bankers in Europe this year, the Financial Times reported, citing unnamed sources.
After a first round of layoffs in December, consultations over the next round of redundancies started before Christmas, with a final decision expected next month, the FT said.
ECB Rate Expectations
Despite the downward trend, inflation is still above the European Central Bank's target level and fixed income markets are still pricing in continued interest rate rises for 2023, J.P.Morgan Asset Management said.
Although the current 2% ECB deposit rate is the highest in over a decade, the ECB is behind the curve compared to many other central banks, JPM said. Fixed income markets expect the ECB to catch up and raise interest rates by 150 basis points before rates ease back to 3%.
"However, terminal rates in the eurozone may not actually reach the market's current projections if energy prices and inflation continue to fall."
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Eurozone Economy
Recent data suggest the risk of a recession in the eurozone this winter has fallen, but economic momentum is likely to be sluggish in the near term, Pantheon Macroeconomics said.
Pantheon expects the eurozone economy to shrink by 0.1% in 4Q, less than the 0.3% fall previously expected, but still forecasts the region to fall into a mild recession as GDP is expected to decline by another 0.2% in 1Q.
Further ahead, China's reopening, new fiscal packages and the rapid fall in energy prices are likely to support the eurozone's economic growth from 2Q to 4Q, Pantheon said.
U.K. Economy
The U.K. economy is expected to perform better than forecast in the near term, Barclays said.
The U.K.'s GDP is expected to have expanded 0.1% on quarter in 4Q 2022, up from a previously expected 0.4% contraction, and will likely shrink by 0.2% in 1Q 2023, less than the 0.3% contraction previously anticipated.
The near-term revisions are based on the strength of the latest GDP releases for both October and November, Barclays said. However, the economy is now expected to experience a shallower recovery afterwards as the Bank of England is seen increasing interest rates by about 100 basis points more than previously assumed, Barclays added.
Forex:
The euro has stalled as it approached $1.09, but it remains on course to rise further due to a weakening dollar and optimism that the eurozone will avert an energy crisis due to this year's mild winter, Swissquote said.
"We are seeing a solid resistance in EUR/USD into the 1.09 level, but we will certainly not wait long before the pair takes over the 1.10 resistance. Every sunny day is a reason to accumulate euros because every ray of sunlight pushes the scenario of energy shortage away from the continent."
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The theme of dollar weakness should continue this week, with data likely to back up expectations that U.S. interest rates are nearing a peak, ING said.
"Retail sales, industrial production and existing home sales should all fall on the soft side," it said.
This shouldn't change market expectations of two small 25-basis-point rate rises in February in March which are expected to be reversed later this year, ING said.
Bonds:
Speeches by ECB officials and primary market activity are set to be the key drivers for eurozone government bond markets in the coming days amid a light data calendar, UniCredit Research said.
Government bond issuance has been well received and demand at both auctions and for syndicated transactions has been generally strong.
"This represents an encouraging beginning for 2023, which is expected to be a particularly intense year in terms of issuance activity."
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Morgan Stanley cut its forecasts for Treasury yields for the year based on sharp turns in the inflation narrative, the wall of cash with underweight investors, and the scope for "dovishness" from the Federal Reserve.
It now sees 10-year Treasury yields ending 2023 at 3.15%, 35 basis points below its previous forecast, and expect two-year yields at 3.20%, 30bps below its previous forecast. It also sees the five-year/30-year curve on a steeper path.
Morgan Stanley also said the market is increasingly contemplating whether the Bank of Japan will further expand the yield-curve control range or even completely remove the yield-curve control at the upcoming meeting in response to media headlines.
"Should the BOJ expand the YCC range or remove YCC, we see a risk that such a further adjustment could be interpreted as another step towards policy normalization, and thereby accelerate the pricing of the BoJ's rate hiking cycle."
However, it also expects the BOJ to "reject" any price action pushing for yet further adjustments.
Energy:
Crude futures dipped, with prices poised to halt a multi-day run of gains which was driven by signs that China's oil demand was picking up again after years of lockdown measures.
Beijing recently issuing a fresh batch of oil import quotas was "a signal that the world's largest importer is ramping up to meet higher demand," ANZ said.
Focus this week will fall on monthly reports from OPEC and the IEA on Tuesday and Wednesday, respectively.
Metals:
Base metals were mixed in Europe, with gold a touch lower, as investors weighed recession worries against more positive macroeconomic indicators.
Gold has made a solid start to the year and the yellow metal is likely to provide a strong hedge against economic slowdown, according to ANZ.
It said China's reopening sets the stage for resilience in the buying of physical gold, while investment demand should also provide support for prices should the global economy move into recession. Geopolitical risk, a pause in Fed interest rate hikes and a downside in the dollar were also likely to give prices support.
"We expect gold to remain in favor as inflation retreats and interest rates near their peak."
Aluminum Outlook
Goldman Sachs said it expects the aluminum market to transition toward a deficit of 1.6 million metric tons compared with 500,000 tons previously, pushing prices to average $3,125 a metric ton in 2023.
"This is being driven by tightening increments in the China market rooted in a significant upgrade to the demand trajectory and increased winter supply cuts," Goldman Sachs said, adding that green demand would also be a driver.
Scarcity concerns are also present with visible global inventories standing at just 1.4 million tons - the lowest since 2002.
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IMF Warns Unraveling Economic Ties Could Shrink Global Output
Declining international cooperation and commerce could shrink the global economy, particularly harming low-income countries, the International Monetary Fund said in a new study.
The report cited several ways that government policies are driving a reversal of global economic integration, such as by restrictions on trade, immigration and cross-border capital flows. The authors labeled this process geoeconomic fragmentation and warned it could lower global gross domestic product by up to 7% over an unspecified "long-term" period.
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British and European officials are increasingly hopeful they can heal some of the divisions over the U.K.'s split from the trading bloc, including a long-running dispute over Northern Ireland, as the war in Ukraine pushes both sides closer and opinion polls suggest British support for Brexit is waning.
U.K. Foreign Secretary James Cleverly and his European Union counterpart, European Commission Vice President Maros Sefcovic, will meet Monday and are expected to signal the start of final negotiations on a compromise agreement over the trading status of Northern Ireland, an issue that has created tensions between both sides and threats of a trade war.
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Then Europe made an odds-defying escape-at least for now.
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