MARKET WRAPS
Watch For:
EU preliminary flash estimate GDP, ECB bank lending survey; Germany foreign trade price indexes, retail trade, unemployment; France GDP first estimate, consumer spending, PPI, provisional CPI; Italy unemployment, GDP preliminary estimate; UK money and credit; trading updates from Hapag Lloyd, UBS, Unicredit, Swedbank
Opening Call:
Shares could start lower in Europe on Tuesday ahead of a wave of central bank meetings and corporate earnings this week. In Asia, stock benchmarks declined; Treasury yields gained; the dollar was steady; while oil and gold lost ground.
Equities:
European stocks are expected to retreat Tuesday, as investors stay wary ahead of a raft of economic and corporate news in the coming week.
“Investors will have a better idea (we hope) about the outlook once the central-bank decisions, job numbers and earnings reports are in the bag, ” IG said.
Federal Reserve officials are broadly expected to raise interest rates by a quarter of a percentage point when their two-day meeting concludes Wednesday, lowering the size of the increase for a second straight meeting.
“The market has had a flying couple of weeks. But as we get closer to the Fed meeting, cautiousness is something that is certainly going to creep in,” said Principal Asset Management. “We will likely see Powell re-emphasizing that they are not at the end yet.”
The European Central Bank and the Bank of England are also both expected to raise interest rates this week, with policy decisions from both due Thursday. Inflation in Europe has yet to show the sustained decline that has been witnessed in the U.S.
“There is an emerging divergence between the Fed and the ECB,” said Mediolanum International Funds. “The forward-looking inflation data continues to move south in the U.S. In Europe, it is clear that the data isn’t yet doing the same.”
Forex:
The dollar was steady in Asia ahead of the FOMC’s two-day meeting.
At this time, it seems unlikely that the Fed would want to appear dovish, Pepperstone said.
Hence, with risks tilted toward a hawkish Fed in a market where leverage funds are short USD, the bias is slightly skewed to the dollar’s upside, it added.
“The dollar is ending January with a familiar death-by-a thousand-cuts routine, each week bringing a fresh round of controlled bloodletting,” JPMorgan said, citing Bank of Japan “(non)-drama” two weeks ago and the Bank of Canada’s last putative rate hike of the cycle that spurred “end-of tightening mini-euphoria in cyclical FX.”
“The broad decline in G10 money market yields this month has fostered a general sense of relief from central bank tightening pressures as global disinflationary trends have broadened, to the benefit of risky FX and the detriment of the dollar even as US-RoW rate differentials have not necessarily played ball.”
Bonds:
Treasury yields climbed, as investors awaited the Fed’s decision, along with clues to future moves..
The expected 25bp increase is a downshift from the outsize 75 and 50 basis point increases seen in 2022 that contributed to a sharp selloff in both bonds and stocks.
“January experienced the strongest bidding for Treasury securities since October 2021,” Navellier & Associates said. “Bond investors are fully expecting inflation cooling off and that the Fed’s key interest rate hikes will soon end.”
Another 25bp hike is expected for March, when the Fed’s economic projections will be updated. Two nonfarm job reports will be released before the March meeting.
The Fed is likely to “reiterate that it anticipates ‘ongoing increases’ in interest rates will be appropriate. And Chair Powell will probably use his press conference to push back against market expectations for 50bp of rate cuts in the second half of this year,” UniCredit Bank said.
“To reinforce the message, the Fed might decide to include a line in the post-meeting statement indicating that once rates rise to ‘sufficiently restrictive’ levels, they will likely remain there for ‘some time.'”
Energy:
Oil weakened in Asia, as strong Russian oil exports relieved some supply shortage concerns.
Uncertainty surrounds the outlook for demand and production ahead of an expected interest-rate hike by the Fed and a committee meeting of the Organization of the Petroleum Exporting Countries and their allies, both due Wednesday.
Also, the European Union’s ban on imports of Russian oil products will begin Feb. 5.
“A hawkish sentiment for potential future rate hikes will give weakness to crude and refined products across the board,” analysts on the Kansas City energy team at StoneX said.
However, Yongan Futures remained positive on the near-term price outlook for oil, pointing to lower-than-usual inventory levels in Europe and the U.S, which could suggest more buying activities ahead.
China’s solid travel traffic during the past week’s holiday period further brightens oil’s demand outlook, as the country is likely to stage a strong economic recovery after its post-reopening infection surge, it added.
Metals:
Gold prices slipped in Asia, as the precious metal extended its recent muted trading pattern.
The safe-haven commodity has sustained a strong bullish run in recent weeks on the back of global recession worries and continued geopolitical uncertainties.
But Galaxy Futures said recession concerns may be easing, as recent economic data from the U.S. and Europe have proved more resilient than feared. This could raise investors’ risk appetite and weigh on demand for assets like gold.
Traders are waiting to see whether Fed’s Powell will try to take investors down a peg by signaling that the Fed is nowhere near finished with its battle against inflation.
“Gold is seeing a modest corrective pullback and some mild profit-taking from the futures traders ahead of this week’s highly anticipated monetary policy meeting of the U.S. Federal Reserve,” said Kitco.com.
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Copper edged higher, buoyed by supply concerns.
Prices of the industrial metal could be supported by worries over supply from Peru and Chile, said ICICI Direct Research.
Also, prices could rally amid improving prospects for demand from top metals consumer China, it added.
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Chinese iron-ore futures were lower, but analysts were optimistic about the long-term price increase on expectations of strong Chinese demand after the reopening.
Given the Chinese government’s efforts to rescue the country’s real estate sector and the economic recovery after the pandemic, the iron market is likely to be bullish in the long run, Huatai Futures said.
TODAY’S TOP HEADLINES
China’s Services, Manufacturing Activity Rebounded Sharply in January
China’s official gauges measuring services, manufacturing and construction activity all rebounded sharply in January as the nation recovered quickly from a surge in Covid infections in the wake of a sudden reopening at the end of last year.
China’s nonmanufacturing PMI, which covers service and construction activity, rose to 54.4 in January, up sharply from 41.6 in December, the National Bureau of Statistics said Tuesday.
Biden Administration Considers Cutting Off Huawei From U.S. Suppliers
WASHINGTON-The Biden administration is considering entirely cutting off Chinese telecommunications giant Huawei Technologies Co. from U.S. suppliers over national-security concerns by tightening export controls targeting the firm, according to people familiar with the matter.
The move-should the administration move forward-would mark the latest salvo in the high-stakes clash between the world’s two largest economies as U.S. policy makers seek to counter China’s industrial policy they say threatens Western interests.
Israel Drone Strike Hit Iranian Weapons Facility
An Israeli drone strike inside Iran hit an advanced weapons-production facility in an attack that Israel believes achieved its goals, according to people familiar with discussions about the operation.
The operation early Sunday morning was executed by Israel’s intelligence agency, the Mossad, and targeted a Ministry of Defense site in Isfahan in central Iran, hitting a building in four different areas with precision strikes, the people said. Satellite photos showed what appeared to be minor damage to the site’s roof, but the people called the mission successful, without elaborating.
Flight Centre to Acquire U.K. Luxury Travel Brand Scott Dunn
SYDNEY-Australian travel agent Flight Centre Ltd. agreed to acquire U.K.-based luxury travel brand Scott Dunn for an enterprise value of 121 million pounds (US$150.0 million).
Flight Centre on Tuesday said that it would fund the deal with a fully underwritten institutional placement of 181 million Australian dollars (US$128.7 million) and a A$40 million non-underwritten share purchase plan. It will also use A$40 million of existing cash.
U.S. Presses Gulf States, EU to Boost Aid for Drought-Hit Somalia
MOGADISHU, Somalia-The U.S. is pressuring wealthy Persian Gulf states, as well as Europe, to boost humanitarian assistance to Somalia before a food crisis becomes a famine.
In a speech in the Somali capital, Linda Thomas-Greenfield, the U.S. ambassador to the United Nations, accused rich countries-both American allies and adversaries-of failing in their moral obligation to feed the starving.
Samsung Electronics Operating Profit Falls 69% on Lower Tech Demand
SEOUL-Samsung Electronics Co.’s fourth-quarter operating profits slumped as the company’s mainstay memory-chip and smartphone businesses grappled with a sharp drop-off in demand and high inventories.
On Tuesday, the South Korean tech giant reported a 69% drop in operating profit in the fourth quarter compared with the prior year due to a decline in demand for tech products including PCs and smartphones and the semiconductors that go inside them.
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January 31, 2023 00:15 ET (05:15 GMT)
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