MARKET WRAPS
Stocks:
European shares extended their rally on Friday as investors continued to mull evidence of cooling U.S. price pressures and its impact on the Federal Reserve's plans for interest-rate increases.
"In the near term, the softer energy profile, alongside improving U.S. inflation and wage trends, raises the prospect that the market might remain in a sweet spot where it can relax further about inflation and growth tail risks," SPI Asset Management said.
Stocks to Watch
Prevailing high inflation is likely to hurt European banks through additional costs, Fitch said.
"High inflation rate means increased bank costs that will offset any increase in revenue from higher interest income," Fitch said, adding that it will hurt bank clients and raise non-performing loans.
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Air France-KLM's earnings are expected to be supported by various factors, such as capacity discipline, business-travel recovery and increased Asia travel, UBS said. Finally, a fall in fuel price and cost control are also expected to contribute positively, especially to EPS in 2022 and 2023.
All these tailwinds are expected to lift 2023 consensus estimates on the airline, UBS said, raising its rating on the stock to buy from neutral.
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EDP-Energias de Portugal is well positioned to have a good start to the year, with consensus estimates in line with expectations and the stock fully valued, Deutsche Bank said.
The energy player suffered last year as a lack of rain hurt its hydro assets and it had to buy power at high prices on the open market to meet customer demand. Now, EDP can benefit from reservoir levels close to around 80% and at 10-year highs after northern Portugal registered heavy rainfalls at the end of 2022, Deutsche Bank said.
It has cut the stock to hold at a target price of EUR5.10, having previously rated it at buy saying it was undervalued.
Central Banks
The Fed and the European Central Bank are far from done with interest-rate rises, Pictet Asset Management said.
"So far, central bankers are managing to convince the markets they're taking inflation seriously," Pictet AM said. But any sort of lapse, where inflation starts to rise again because of a premature easing, would be seriously damaging to their credibility.
"This, in turn, raises the risk that central banks will go too far with tightening and drag their economies into recession--which would cause a different sort of damage to their credibility."
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After another larger-than-expected increase in the Riksbank's target measure of Swedish inflation, the central bank is highly likely to raise rates by 50 basis points to 3% in February, Capital Economics said.
"Beyond February the Riksbank is most likely to leave rates unchanged for an extended period."
CPIF inflation, which is the Riksbank's target rate and excludes the effects of mortgage payments, rose to 10.2% in December after a surprisingly large 29% rise in electricity prices. Meanwhile, core inflation as measured by CPIF excluding energy increased to 8.4% in December from 8% in November, which is its highest level since December 1991.
U.S. Markets:
Stock futures weakened while bond prices edged higher, with investors awaiting key earnings from some of the biggest U.S. banks.
JPMorgan Chase, Bank of America, Citigroup, Wells Fargo and BlackRock are scheduled to report quarterly earnings ahead of the opening bell. Bank results provide the most comprehensive view of the economy.
UnitedHealth and Delta Air Lines also will be posting quarterly numbers Friday.
Forex:
The dollar remained weak and close to seven-month lows against a basket of currencies as traders considered that the latest fall in U.S. inflation should enable the Fed to cut interest rates in the second half of the year, Commerzbank said.
"The market is likely to successfully ignore any future hawkish comments from Fed members."
A reversal in the Fed's communication--which has so far pointed to higher rates--could cause further dollar weakness.
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EUR/USD could extend gains after rising above the resistance at 1.0785, based on technical charts, UOB Global Economics & Markets Research said, with the upside break, together with an increase in momentum, suggesting the pair should continue to rise over the next one to two months.
If EUR/USD breaks and remains above the top of the weekly Ichimoku cloud, which is now at 1.0930, this would increase the likelihood of further EUR/USD gains in coming months, UOB said.
Read Euro Could Rise on More Favorable Rate Differentials
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Sterling rose after data showed the U.K. economy grew 0.1% month-on-month, with analysts in a WSJ survey expecting a 0.2% contraction.
Friday's data, combined with October's 0.5% growth, have "delayed fears that the U.K. has entered a recession as early as the fourth quarter," Monex Europe said.
Bonds:
A striking feature of the rates rally in the eurozone is the defiance of record government bond issuance, Citi said.
"In a way, this is not a surprise," as the market is well used to making space for front-loaded issuance, even if the magnitude is much higher this time.
"The sheer scale of supply and the fundamental change of quantitative easing to quantitative tightening means it requires close monitoring," Citi said.
Citi added that one of the questions for 2023 is whether the return of bond yields to positive territory, and to rise further, could pique interest of retail investors and help absorb some of the large net issuance due ahead.
Households' holdings of sovereign bonds increased slightly in Belgium and Italy in 2022, Citi said, referring to data from Belgian Debt Agency and the Italian treasury, while exclusive retail offering seems limited elsewhere.
Some issuers, like France and Finland, state they don't issue exclusive retail bonds but have made it easier for retail investors to buy sovereign bonds. "This is likely to be the key channel for retail demand ahead."
Bunds
German 10-year Bund yields are expected to return to 2.50%, driven by the ECB's policy tightening and the substantial increase in net government bond issuance in the eurozone, SEB said, adding that the ECB's balance sheet reduction could add to the impact of higher net issuance.
"Periphery spreads have tightened again in the past two weeks, but we see widening risks for the coming months, especially if the general risk sentiment deteriorates."
Energy:
Oil prices were little changed but set for weekly gains.
Fitch said signs of Chinese demand returning have lifted oil but weak economies and still high inflation should pose a near-term risk.
Metals:
Base metals are set for weekly gains on growing hopes for demand.
ANZ said that wile China's reopening has been a strong driver of gains for metals, signs the Fed will begin easing the pace of its interest hikes have added to hopes about metals demand.
"A slowdown in rate hikes by the Fed could also see economic growth across developed markets hold up better than previously expected."
Metals Outlook
Bet on ferrous and base metals this year rather than battery materials and thermal coal, Goldman Sachs said.
"While we continue to think 1Q23 will be a tough quarter for base metals and steel due to ongoing weak European and global demand, our expectation of a China reopening in 2Q, extreme lows in global base-metal inventories and ongoing supply side disruptions make us positive on a 2H commodity price recovery."
That recovery should be led by steel, mid- to high-grade iron ore and coking coal, as China's steel market recovers, as well as copper, aluminum and zinc, which should be supported by low stockpiles and supply challenges.
DOW JONES NEWSPLUS
EMEA HEADLINES
Eurozone Industrial Production Rebounded More Than Expected in November
Eurozone industrial production increased in November, partly offsetting October's fall, providing further evidence of a milder-than-expected economic slowdown in the region amid declining energy prices.
Industrial production--which comprises output from manufacturing, mines and utilities--rose 1% in November compared with the previous month after a revised 1.9% decline in October, according to data from the European Union statistics agency Eurostat released Friday.
Europe's Mild Winter Cushions Economic Blow of Ukraine War
Russia's economic war with the West looks set to claim a much smaller toll on Europe than the brutal recession many economists warned about just months ago, due to falling energy prices and government intervention to buttress the continent's economy.
A mild winter so far, efforts by businesses and households to cut energy consumption, successful moves by governments to find new natural-gas suppliers and hundreds of billions of euros in fiscal support mean Europe's recession is likely to be shallow and brief-if it happens at all-according to fresh data and estimates.
German Economy Slowed in 2022 as High Energy Prices Took Toll
The German economy lost momentum in 2022 as the country faced multidecade high inflation rates as energy prices soared, posing challenges for its key industrial sector.
The eurozone's largest economy expanded 1.9% in 2022 compared with a year earlier, according to preliminary data published Friday by Germany's statistics office Destatis. This marks a slowdown from the 2.6% expansion registered in 2021, when the economy rebounded from 2020's pandemic-driven contraction.
UK Economy Unexpectedly Expanded in November Despite Persisting Cost-Of-Living Pressures
The U.K. economy expanded marginally in November, boosted by the services sector despite high inflation and rising interest rates, but economists expect the country to face a recession at year-end.
The U.K.'s gross domestic product grew 0.1% in November compared with the previous month, slowing from a 0.5% expansion in October, data from the Office for National Statistics showed Friday.
Taylor Wimpey 2022 Operating Profit Met Views but Sales Rate Fell
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01-13-23 0613ET
