MARKET WRAPS
Watch For:
E.U. ECB consumer expectations survey results, retail trade; U.K. S&P Global/CIPS Construction PMI; Germany manufacturing orders, German Chancellor Olaf Scholz meets French President Emmanuel Macron; Italy's economic outlook released; trading updates from Ferguson, Norwegian Air Shuttle, British American Tobacco
Opening Call:
Stock futures indicate a slightly lower open in Europe on Tuesday following mixed U.S. economic data that has clouded the Federal Reserve rate outlook. In Asia, stock benchmarks were higher; Treasury yields were mostly higher; the dollar weakened; oil futures fell while gold advanced.
Equities:
European stocks could open lower on Tuesday as uncertainty among investors regarding the trajectory of Fed rate grows following mixed U.S. data.
Stocks had rallied in recent sessions on the removal of fears of a U.S. debt default and on hopes that the labor market is showing an economy that can avoid a sharp slowdown in the face of the Federal Reserve's inflation battle.
Investors "are now refocusing on sticky inflation and the extremely tight labor market, prompting a repricing of the market's rate outlook. Not only is a further policy-rate hike likely, but rate cuts this year are being steadily priced out," Seema Shah, chief global strategist at Principal Asset Management said.
Sharing a similar view, Brent Schutte, chief investment officer at Northwestern Mutual Wealth Management Company said, "while we believe enough progress has been made on the inflation front that the Fed should conclude its rate hiking efforts, we think they may pause on rates in June but not fully remove their bias toward higher rates until the employment market shows sustained signs of weakening."
With a blackout period in force for Fed staff, investors remain focused on economic data to help gauge whether the central bank will skip a rate hike at is June 13-14 meeting next week, or give more time for its rate increases to filter through the economy.
On Monday, the Institute for Supply Management said its services index fell to a five-month low of 50.3% last month from 51.9% in April.
The drop in the ISM services index reading helped ease expectations for a June Federal Reserve rate hike.
The ISM report "continues to support the idea of a slowing economy and prices coming down," said Luke Tilley, chief economist at Wilmington Trust.
Global equities are at risk of falling in the near term due to a weakening economy and deteriorating liquidity as central banks reverse quantitative easing, Morgan Stanley said.
"While the prospect of slower growth ahead is bad enough, our forecasts suggest that stocks will also have to contend with a stronger U.S. dollar and a less dovish than previously hoped stance from central banks, " the bank's analysts said.
Economic growth is likely to "slow materially over the next couple of quarters, a message reinforced by the ongoing slide in commodity prices."
Forex:
The dollar weakened in Asia amid mixed signals.
The U.S. ISM Prices Paid component is now at the lowest since May 2020, suggesting that price pressures in that country are coming off, MUFG Bank said.
But, U.S. factory orders slowed to 0.4% on-month growth in April from 0.9% on-month growth, it said, adding that signals in the American economy have been somewhat mixed.
The dollar has scope to extend its recent gains this year as it's an attractive defensive asset and offers positive carry, or yield, Morgan Stanley said.
"Even if the global economy manages to avoid an outright recession, asymmetry in central bank reaction functions and a relatively dour economic growth rate suggest that investors are likely to maintain a defensive bias across markets, with the dollar's positive carry offering rendering it an alluring proposition," it said.
"The dollar uniquely offers both defensive characteristics and positive carry in the G-10," they say.
Morgan Stanley expects EUR/USD to fall to 1.02 by year-end, from 1.0713 currently.
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Sterling is the best performing currency alongside the Swiss franc in the year to date--despite pessimism about the U.K.'s ability to handle higher interest rates and import prices--but it looks set to turn weaker, Morgan Stanley analysts said.
EUR/GBP could rise to 0.91 and GBP/USD fall to 1.17 by the second quarter of 2024, they said.
Sterling's valuation isn't compelling against the euro as capital repatriation into Europe contrasts noticeably with tepid demand for U.K. investments, they said.
The dollar should strengthen, hitting GBP/USD, due to its positive yield and safe haven flows.
Moreover, "U.K. political uncertainty could rise as markets look ahead to 2024."
Bonds:
Treasury yields advanced as investors assess what's next for the Fed's interest-rate decision at its June 13-14 policy meeting.
"The week after payrolls is almost always a bit quiet for data and this week we have the added kicker of a Fed that has started their media blackout period ahead of next week's FOMC. Remember that U.S. CPI comes out on Tuesday 13th, a day ahead of the FOMC decision," said Deutsche Bank.
"If the Fed wants to subtlety communicate to the market one way or another ahead of next week then well-placed media stories might surface. However, before CPI that does seem unlikely as nothing will be 100% decided until then. We are back to having a fair bit of uncertainly over the near-term Fed outlook though," it added.
Markets are pricing in a 79.4% probability that the Fed will leave interest rates unchanged at a range of 5.0% to 5.25% after its meeting on June 14, according to the CME FedWatch tool.
Just a week ago that probability was 36%, and the chances of a 25-basis-point hike was 64%.
However, the probability of another 25-basis-point rate rise in July has climbed from 5% a month ago to 52.7% on Monday.
Energy:
Oil futures were lower in Asia after gains overnight following Saudi Arabia's voluntary output cut for July.
Despite investors' initial cautiousness on the effectiveness of the output cut and raising of selling prices, they are likely to become comfortable on OPEC's price support measures, ANZ analysts said.
"The oil market is expected to tighten significantly in the second half of this year," they said and expect to see a strong oil price rally if more easing macro headwinds, such as Fed's pause on rate hike, happen.
The outcome of the OPEC+ meeting reinforces Saudi Arabia's "uneasiness with the level of short positions in the market rather than signaling concerns around demand outlook," Jefferies said.
"The open-ended part of the measure was likely put in place to discourage future short positioning."
"Spurring a bout of short-covering via a further surprise cut appears the best way to spur a relief rally but for now, the response by oil prices has been exceptionally tepid, "said Matt Smith, lead oil analyst, Americas, at Kpler.
Read: Saudi Arabia's planned oil cut could lead to 'cracks' within OPEC+ -- but not a spike in gasoline prices
Metals:
Gold gained in Asia following U.S. data showing that the service sector was cooling, adding to hopes of a Fed pause in its rate hike.
"The ISM services report showed prices paid cooled and employment fell to contraction territory, which is raising hopes that the Fed might not have to deliver anymore rate hikes if we see further weakness next month, " said Oanda.
Gold continues to "mirror both the dollar and expectations for Fed interest rates very closely, so the U.S. services sector data has seen the precious metal reverse Friday's jobs data slump as betting that the Fed will raise rates in 2 weeks' time has evaporated," said Adrian Ash, director of research at BullionVault.
If there is an increase in Fed rates in June, it would probably be 25 basis points, Jeff Wright, chief investment officer at Wolfpack Capital said.
He said the central bank "will have to maintain a hawkish stance and language even if no rate increase occurs in June."
Given that, he doesn't see gold going much higher in the short term and sees a "consolidation period under way."
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Copper prices declined early Tuesday.
Demand from China was likely in focus this week, as slowing industrial activity in the country could weigh, ANZ analysts said.
"An upside surprise in China's economic growth would be needed to maintain demand," they said.
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Iron-ore futures were higher in early China trade, extending recent gains as the steel-making ore continues to bounce back.
The commodity was likely able to enjoy further upside in the coming months, as demand outlook was brightening up with more local government support for the property sector in China, a major steel and iron ore consuming industry, analysts at SDIC Essence Futures said.
They also reckoned that the ore's current price levels presented limited downside risk.
TODAY'S TOP HEADLINES
Saudi Output Cut to Boost Oil Prices Could Be Costly
VIENNA-Saudi Arabia over the weekend slashed 10% of the kingdom's oil output to boost prices, and the returns so far suggest it could be a costly bet.
After warning speculators that OPEC+ could cut oil production again, Saudi Energy Minister Prince Abdulaziz bin Salman announced Sunday that the world's biggest crude exporter would reduce 1 million barrels of its own output in July after other cartel members refused to join the effort. The Organization of the Petroleum Exporting Countries and its Russia-led allies account for close to half of the world's oil production. An output cut was expected to prop up prices amid concerns about a slowing global economy crimping energy demand.
OPEC+ Meeting Shows Saudi Arabia's Willingness to Backstop Oil Prices - Talking Markets
The Organization of the Petroleum Exporting Countries is often described as the central bank of the oil market. Following Sunday's OPEC+ meeting, Saudi Arabia, long seen as the group's de facto leader, has shown its willingness to single-handedly take on that mantle.
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06-06-23 0015ET
