MARKET WRAPS
Watch For:
Empire State Manufacturing Survey for January; Canada Housing Starts for December; Canada CPI for December; earnings from Goldman Sachs, Morgan Stanley
Today's Headlines/Must Reads
- Apple Goes on the Offensive as iPhone Sales Slip in Its Biggest Overseas Market
- Profits Comeback Paired With Rate Cuts Make a Powerful Mix
- California's Long-Embattled Ports are Winning Back Imports
- Having Conquered Iowa, Trump Sets Sights on New Hampshire and Nikki Haley
Opening Call:
U.S. investors returned from the extended weekend in a cautious mood, with equity index futures softer as traders eyed benchmark borrowing costs climbing back towards 4% and awaited the resumption of the corporate earnings season.
Treasurys were playing catch-up to Monday's jump in German bund yields after European Central Bank governing council member Robert Holzmann said in an interview at Davos that lingering inflation may stop the ECB from cutting interest rates this year.
Though Holzmann is a renowned monetary hawk, his push-back against the market's hopes for swift rate cuts in 2024 dovetails with recent attempts by Federal Reserve officials to damp expectations of how quickly the U.S. central bank also may ease policy this year.
"I sense that the first quarter of this year will be marked by the realization that it's too early for the central banks to cut the interest rates unless something really bad--like another bank crisis, or a real estate crisis, or another debt crisis hits the fan," Swissquote Bank said.
Fed Governor Christopher Waller will speak on the economic outlook and monetary policy at 11 a.m.
Meanwhile, heightened tension in the Middle East is raising fears that the disruption of shipping through the Red Sea may add to inflationary pressures.
SPI Asset Management noted that despite recent airstrikes against them, Yemen's Houthi said they will continue to assault ships in and around the Red Sea. "Its hardly surprising risk is a bit unstable this morning."
Along with the monetary policy debate and geopolitical ructions, investors will also have an eye on the resumption of the fourth quarter 2023 earnings season.
"We go into [fourth-quarter] earnings season with subdued expectations for corporate profits but relatively high valuations, balanced on a fulcrum of anticipated Fed rate cuts and lower long term interest rates, " DataTrek Research said.
"A wide range of expected results by sector should keep overall market volatility low as we see companies report results. While this is not the usual setup for a big market rally over the next 4-6 weeks, it should be enough to keep stocks grinding higher."
Premarket Movers
Apple is removing a blood-oxygen sensor from some of its smartwatches to get around a patent dispute, which may raise questions about its push into health. Apple's stock fell more than 1.5%.
Boeing said a long-awaited resumption of deliveries of 737 MAX jets to China faces fresh delays after the Alaska Airlines incident, adding to the plane maker's woes. Boeing shares fell more than 1%.
Tesla's stock fell more than 2% after Elon Musk said he would rather build AI and robotics products outside of the company if he doesn't gain 25% voting control of it.
Economic Insight
It's too early to be conclusive about the level of central-bank rate cuts this year, according to Gita Gopinath, deputy managing director of the International Monetary Fund.
"The markets are expecting central banks to cut rates pretty aggressively--I think it's a bit premature to make that conclusion," she told a panel discussion at the World Economic Forum in Davos.
The job of central banks in bringing down inflation is not yet done, she argued, highlighting relatively tight labor markets in the U.S. and euro area. Interest-rate cuts will more likely come in the second half of 2024, and, longer term, policy rates will be on average higher than the low-rate period after the 2008 financial crisis, Gopinath said.
She also said central bank quantitative easing should be treated with more skepticism in the current economic environment.
Forex:
The euro is expected to move in a range against the dollar in the near term and to weaken in the medium term, Danske Bank Research said.
"While our forecast for the Federal Reserve and the European Central Bank suggests upside risk to the cross in 1Q, we stress that a broader central bank pricing could prove to be more crucial for EUR/USD," Danske said, adding that it saw levels above 1.10 as temporary.
It has maintained a strategic case for a lower EUR/USD in the medium term.
Sterling weakened after U.K. data showed wages continuing to slow from elevated levels , with average pay growth excluding bonuses falling to 6.6% in the three months to November from a revised 7.2% in the period to October.
This should reassure the Bank of England that risks of more persistent inflation in the U.K. are easing, MUFG said.
"It will encourage the U.K. rate market to price in earlier and deeper BOE rate cuts in the year ahead, weighing on the pound."
Danske Bank Research said sterling hasn't moved a great deal against the euro over the past month, but a relatively weaker performance of the U.K. economy than that of the eurozone will eventually weigh on the pound.
Danske expects EUR/GBP to rise to 0.89 in six to 12 months, compared with 0.8620 currently. For now, however, the global investment environment suggests there's little "meaningful difference" between sterling and the euro, it said.
Energy:
Oil prices edged higher but current sentiment is divided between concerns over weaker economic growth and escalating tensions in the Middle East following fresh attacks from Iran-backed Houthis on U.S. ships.
Recent attacks in the Red Sea are fuelling fears of a broader regional conflict in the Middle East, but oil production hasn't been directly affected so far, limiting further price gains, according to analysts.
"Crude oil is rangebound, torn between new bullish geopolitical risks and worsening global growth and demand prospects," Peak Trading Research said.
Metals:
Most base metals were lower in Europe on a stronger dollar and renewed concerns over China's demand outlook after the country left its key policy rates unchanged.
"The appetite across the [London Metal Exchange] remained lacklustre, as volatility is being sold across the board," Sucden Financial said.
"Moreover, the [People's Bank of China] has kept the one-year interest rate unchanged at 2.5%. Muted economic performance and a potential for another weakness in the yuan are the most likely reasons for the rate pause."
Lithium
Rio Tinto, eager to branch out into lithium , remains sanguine on the battery metal's outlook despite a plunge in prices last year.
In a quarterly report, Rio Tinto noted the continued decline in the lithium carbonate spot price, which has fallen roughly 80% since early 2023, and said it reflected increased global mine supply and destocking along the supply chain.
TODAY'S TOP HEADLINES
Shell to Sell Nigeria Subsidiary for Up to $2.4 Billion
Shell said it agreed to sell Nigerian onshore subsidiary Shell Petroleum Development Company of Nigeria, or SPDC, for up to $2.4 billion.
The London-based energy major said Tuesday that it will receive $1.3 billion initially, with the buyer-a consortium of five companies-additionally paying up to $1.1 billion, mainly relating to prior receivables and cash balances, with the majority expected to be paid at completion of the deal.
Chinese Property Stocks Fall on Subdued Sentiment Following Weak Sales
Chinese property stocks fell in Hong Kong on subdued investor sentiment, with companies reporting weaker contracted sales for December and the full year of 2023 as the property sector downturn continues.
The Hang Seng Mainland Properties Index, which tracks Chinese property developers, was 3.2% lower at the midday break on Tuesday, taking losses for this week to 4.5%. Longfor declined 7.1% and Yuexiu Property fell 6.6%, while Country Garden Holdings and Country Garden Services were 5.6% and 5.0% lower, respectively. Sunac China, Sino-Ocean Group, Kaisa Group and Greenland Hong Kong were each more than 6.5% lower.
Global Battery Race Heats Up With Billions for Europe's Northvolt
One of the world's most valuable battery startups is raising $3.4 billion in debt from the European Union and a group of banks including JPMorgan Chase, accelerating a race to build more batteries outside China and take advantage of a tidal wave of clean-energy subsidies.
Europe's Northvolt plans to use the funding to grow battery production at a factory in northern Sweden for customers such as Volkswagen and BMW. It also plans to expand a recycling facility next door that will convert scrap metal and old batteries into reusable battery materials.
Closing of Kroger, Albertsons, C&S Deal Postponed
The proposed merger of U.S. grocery giants Kroger and Albertsons, and sale of assets to C&S Wholesale Grocers, will be later than previously anticipated as the companies continues discussion with regulators.
In a joint statement on Monday, the companies said that due to continued discussions with the Federal Trade Commission and individual state Attorneys General, they now expect the deal to close in the first half of Kroger's fiscal 2024.
German Economic Outlook Improves on ECB Rate-Cut Hopes
Germany's economic outlook brightened unexpectedly in January, as expectations of lower interest rates in 2024 helped boost sentiment, according to a monthly survey published Tuesday.
The ZEW Indicator of Economic Sentiment over the next six months ticked up 2.4 points on month to 15.2 in January, better than expectations of a decline to 12.0 in a consensus of economists polled by The Wall Street Journal.
ETFs Make Bitcoin's Problems Even Worse
The new wave of U.S. bitcoin ETFs risk being doubly bad for investors.
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