MARKET WRAPS

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Manpower U.S. Employment Outlook Survey for 2Q; Canada Industrial Product & Raw Materials Price Indexes for February

Opening Call:

Stock futures lifted Tuesday as investors continued to watch developments in the Russia-Ukraine war and shook off remarks from Jerome Powell that the Federal Reserve may be headed for more aggressive interest rate policy.

"Caught between a rock and a hard place, the Fed sees little option but to try and chip away inflation with even bigger interest rate hikes this year, if price pressures keep mounting," said Susannah Streeter, an analyst at broker Hargreaves Lansdown. "And there are very few signs of much relief given that the only way has been up for the price of oil in recent days."

Markets are now faced with the prospect of more aggressive policy, which could hurt economic growth.

"Anxiety at how far and how fast the Fed will go hasn't turned into a full blown tantrum on the bond markets for now, but Treasuries slid in value and yields spiked, an indication that worries are mounting," noted Streeter.

Markets continue to react to developments on peace talks between Russia and Ukraine.

"Whilst Ukraine undoubtedly remains the most important news story right now, central bank comments dominated the market agenda," said Jim Reid, a strategist at Deutsche Bank. "On Ukraine, the headline risk around the stilted negotiation progress continued ... the Kremlin indicated progress in talks had been less than they would have liked, and no agreements had been reached as of yet."

Read Barrons.com: Nvidia Has Investor Day Tuesday. Here's What to Expect

Market Insight:

The SEC's proposal to require the public disclosure of climate risks and emissions data on companies' financial reports is a critical step forward in providing investors with the information they need to make decisions, said sustainable-investing trade group US SIF.

Climate change is the most important specific ESG issue considered by money managers with $4.2 trillion in assets, according to a survey US SIF conducted in 2020. The rule will create a framework to structure climate-related information already reported by most large companies, it said.

Economic Insight:

S&P said the U.S. economic outlook for 2022 is likely to remain solid due to an improvement in the public health situation even as the Ukraine war clouds the horizon, saying the conflict is set to shave 0.7% from GDP growth this year, with the economy set to expand 3.2%.

"The prospects of steadily rising interest rates and persistent inflation are the main drivers of this assessment, with an expected recession in Russia playing only a small part." While risks to the forecast are on the downside, the chance of a U.S. recession is moderate after the economic hit from the Covid-19 Omicron variant was less pronounced than expected, S&P said.

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Fitch has cut its forecast for 2022 world GDP growth by 0.7 percentage point to 3.5%, saying the outlook has deteriorated significantly as inflation challenges intensify and Russia's invasion of Ukraine threatens global energy supplies.

Russia supplies around 10% of the world's energy, including 17% of its natural gas and 12% of its oil. The jump in oil and gas prices will add to industry costs and reduce consumer real incomes. Fitch now expects U.S. CPI inflation to peak at 9% and average 7% for the year as a whole.

Forex:

The dollar gained around 0.3% in Europe after Jerome Powell's speech on Monday.

Danske Bank said it expects a 50 basis points rate rise in June but markets may expect this at the next meeting in May following Powell's remarks. "Irrespective of timing, the door is clearly wide open to accelerate the plan to tighten financial conditions."

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The yen is likely to weaken further against the dollar as the monetary policies of Japan and the U.S. will probably diverge more in favor of the greenback, according to UOB.

UOB said the stark monetary-policy divergence continues to warrant a higher USD/JPY in the medium to long term, as it raised its USD/JPY projections by 200 pips to 119 for the second quarter of 2022, 120 for the third quarter, 121 for the fourth quarter and 122 for the first quarter of 2023.

Bonds:

The benchmark 10-year Treasury note popped above 2.35% Tuesday.

BlackRock Investment Institute expects more pain ahead for long-term government bonds even with the yield jump since the start of the year.

Investors will demand more compensation for the risk of holding government bonds due to higher inflation, BlackRock said, keeping to its view of underweight nominal government bonds on both tactical and strategic horizons.

"Inflation expectations could de-anchor and spiral upward as markets and consumers lose faith that central banks can keep a lid on prices," BlackRock said. Markets' hawkish re-pricing in short-term rates is overdone, BlackRock said.

It prefers short-maturity bonds over long-term ones.

Commodities:

Oil prices were lower in Europe, erasing earlier gains as doubts lingered about the EU's willingness to ban Russian oil imports

Signs that the EU is getting close to banning Russian oil imports will--have supported prices. But continued signs of discord in the 27 member bloc remain. Both Germany and the Netherlands have said that the bloc can't cut itself off Russian supplies right now.

Meanwhile, Russian crude oil exports have not yet declined as cargoes booked before the war continue to be loaded, said Helge Andre Martinsen at DNB Markets. An EU ban on Russian oil would affect almost half of Russia's crude exports, he added.

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WTI crude prices have scope to continue their upward trajectory, according to technical analysis by DailyFX.

The front-month contract is rebounding from the key support level of $94.9 that it hit last week, and "the overall trend remains bullish-biased as prices formed consecutive higher highs and higher lows." DailyFX said the MACD [moving average convergence divergence] indicator "s about to form a bullish crossover, suggesting that buying pressure may be building."

DailyFX has put immediate support at around $105.80l and resistance at $119.25/bbl.

Other News:

It's becoming increasingly likely that the only way Russian aluminum producer Rusal will be able to source alumina is via purchases from Chinese entities, said Wood Mackenzie. Its remarks follow Australia's ban on alumina sales to Russia.

"One possible outcome could be Chinese buyers purchasing alumina and redirecting sales via eastern Russian ports," although "this poses a significant political challenge for China and its trading relationship with the rest of the world," Wood Mackenzie added.


TODAY'S TOP HEADLINES


Evergrande Delays Results as Banks Seize $2 Billion From Unit

Banks have unexpectedly taken control of more than $2 billion held by one of China Evergrande Group's key subsidiaries, as the embattled property developer said neither it nor its main listed units could meet an imminent deadline to publish their annual results.

The move by lenders adds fresh uncertainty to Evergrande's restructuring. Global bondholders view its two big Hong Kong-listed subsidiaries, which focus on property management and car making, as important sources of potential value for international creditors.


Alibaba to Buy Back Up to $25 Billion of Stock

Alibaba Group Holding Ltd. boosted its share buyback program to $25 billion from $15 billion, in a bid to reassure investors about the company's prospects after a year in which its stock has fallen by more than half.

The potential buybacks are substantial compared with the Chinese e-commerce giant's market value: As of Monday, it had a market capitalization of about $270 billion, according to FactSet.


Canadian Pacific Railway, Union Agree to Arbitration, Ending Work Stoppage

Canadian Pacific Railway Ltd. and the union representing its conductors and engineers agreed to shift stalled contract negotiations to binding arbitration, freeing the railway to resume freight shipments after a two-day work stoppage.

The agreement follows six months of contract negotiations and mediation with the Teamsters Canada Rail Conference, which represents more than 3,000 conductors, engineers and yard workers at the railway. The union, which seeks increased wages and pension benefits and more rest times, ceased negotiations before its strike deadline Saturday night, prompting the railway to halt shipments of large volumes of manufacturing goods, natural resources and agricultural products.


Okta Investigates Reports of a Digital Breach

Identity management software company Okta Inc. said it is investigating reports of a digital breach after hackers posted images they said were of the company's internal systems.

"Okta is aware of the reports and is currently investigating," the San Francisco-based company said Tuesday in an emailed statement. "We will provide updates as more information becomes available."


Flattening Yield Curve Stirs Recession Debate

Yields on shorter-term and longer-term U.S. government bonds have been converging rapidly, stirring fears-along with skepticism-that the bond market is close to signaling a looming recession.

Yields, which fall when bond prices rise, have been climbing all year based on expectations that the Federal Reserve will raise short-term interest rates. They got another big boost Monday, after Fed Chairman Jerome Powell emphasized that the central bank was prepared to raise rates in half-percentage steps to fight inflation.


AI Experts Warn of Potential Cyberwar Facing Banking Sector

U.S. authorities have cautioned banks about possible cyberattacks following Russia's recent invasion of Ukraine, but experts say financial institutions also face particular risks in a more murky area of their business-the now ubiquitous artificial-intelligence models that handle everything from lending to trading.

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