Stocks to Gain But Caution Likely Ahead of U.S. Inflation

MARKET WRAPS

Watch For:

Germany CPI; OECD Harmonised Unemployment Rates; speech by Christine Lagarde; updates from Ubisoft, Metro, Siemens Energy, Continental, E.ON, ThyssenKrupp, Deutsche Wohnen, TUI, Telefonica Deutschland, Swiss Life, Tod’s, Puma, BMW, Commerzbank, Casino, Eni, Pirelli, K+S Group, home24, Leoni, Mediobanca, Thales, Compass, Airtel Africa, Ahold Delhaize, ITV, Ultra Electronics, Spirax-Sarco, Rentokil Initial, BP, Antofagasta, Standard Chartered, X5 Retail, Just Eat, Equinor, Telenor

Opening Call:

Europe is in line for a positive open as most major stock benchmarks in Asia advance, Elsewhere, the dollar, Treasury yields and gold were weaker, while oil staged a modest rebound.

Equities:

European shares should extend gains Wednesday, buoyed by a largely positive Asian session so far, although uncertainty over inflation, interest rates and the global economy will continue to weigh on the market.

U.S. stocks swung between gains and losses Tuesday, opening higher with Nasdaq up 2.8% at one point. By late morning, stocks had mostly erased those gains and appeared on track to extend a brutal three-day slide. But as the afternoon wore on, investors turned their attention to Wednesday’s report on consumer prices and the possibility that inflation may be peaking-and stocks rebounded again.

The stock market has been choppy as investors gauge whether the U.S. economy will have a “soft” or “hard” landing as the Federal Reserve seeks to bring high inflation under control by lifting interest rates, according to Steve Chiavarone, senior portfolio manager and head of multi-asset solutions at Federated Hermes.

“It’s a jump ball right now. Volatility is going to reign for some time, ” said Chiavarone.

“Markets are clearly confused about what the Fed will do this year and just how aggressive it will get. That can be seen in the volatility in expectations for where the fed funds rate will be at the end of 2022, as seen in fed funds futures. And it is reflected in stock market volatility, with the VIX above 30,” said Kristina Hooper, chief global market strategist at Invesco.

Market Insight:

A growth shock is highly likely within the next six months, said HSBC, adding that it was “firmly risk-off.”

Recent financial market moves have been “brutal,” with equities, credit and government bonds selling off and the dollar rising sharply, HSBC said.

“Pretty much all our fundamental and cyclical indicators clearly point to a growth scare coming–not in 2023, but in the next 3-6 months.”

Developments which could alter this prospect include a “sharp rally” in risk assets and developed-market sovereign debt, economic data holding up well, “significant stimulus” in China, the dollar dropping, as well as the Federal Reserve and other central banks pausing rate rises.

Economic Insight:

A global economic recession doesn’t look imminent, but risks will rise into 2023 and beyond, said Oxford Economics.

Of the three major factors that could lead to a recession–the Fed’s policy tightening, the lockdowns in China, and high commodity prices–, none are expected to lead to a major global economic contraction.

“[The three factors] are more likely to provoke a growth slowdown similar to the 2015-16 period rather than a full-blown global recession. This slowdown may be enough by itself to bring inflation down and ease the pace of global monetary tightening.”

Europe faces the highest immediate recession risks, while the U.S. will be most at risk in 2023, said Oxford Economics.

The war in Ukraine and lockdowns in China are hitting global trade flows, according to data from UniCredit’s proprietary leading indicator.

The index, which leads global trade by about two months, is consistent with global trade contracting by more than 3% in early summer. Supply shortages have become more severe, while surging commodity prices–especially for energy–have been denting the profit margins of companies and the purchasing power of households, said UniCredit.

Lockdowns in China are also weighing on domestic demand, and this weakness might have started to spill over into the rest of the global economy.

“The standstill in factories may lead to even more severe supply shortages worldwide and higher inflationary pressure.”

Forex:

The dollar edged lower in Asia with markets likely to be cautious ahead of the U.S. inflation data, according to MUFG Bank. However, a strong print may reinforce dollar strength later, said MUFG’s senior currency analyst Jeff Ng.

Goldman Sachs said a nearly 15% selloff this year in the yen vs the dollar has opened up significant value for the safe-haven currency, adding that fair-value estimates suggest the yen is 20%-25% undervalued against the dollar.

Goldman Sachs has assigned 15% odds to a U.S. recession in the next 12 months and 35% within the next 24 months.

“The yen screens as the most effective hedge against a ‘risk down, U.S. rates down’ shock–or a market backdrop consistent with recessionary pricing. Our standard FX models suggest that we could see 15-20% downside in USD/JPY in a recession scenario, given the various estimates and asymmetry created by valuation.”

Danske Bank’s EUR/USD target of 1.05 has been hit, leaving open the possibility of a drop towards parity over the next 12 months, against the backdrop is a large relative terms-of-trade shock.

“We think a move towards parity is likely. U.S. versus EU can be viewed as a commodity exporter versus [commodity] importer,” which can explain almost all of the euro’s weakness, said Danske.

Bonds:

Treasury yields weakened further in Asia after they mostly fell on Tuesday, handing 10- and 30-year rates their biggest two-day declines since March. Worries over the outlook for growth and the potential for stagflation continued to weigh on markets.

“We expect the U.S. 10-year to stabilize in the 3% area as global financial conditions have tightened dramatically in response to the Fed’s erratic shift to tight policy,” said Jay Hatfield, chief investment officer at Infrastructure Capital Management in New York.

Tuesday brought a number of appearances by Fed officials. John Williams said the central bank can bring inflation down while maintaining a strong economy this year. Meanwhile, Tom Barkin said the Fed doesn’t need to engineer a “Volcker-style recession” to get inflation under control.

Christopher Waller said now is the time to hike interest rates because the economy “can take it.” And Loretta Mester said policy makers aren’t ruling out 75 basis point moves forever.

Other News:

Treasury Secretary Janet Yellen says the department is actively examining whether or not to extend a carveout in sanctions allowing U.S. financial institutions and investors to process and receive sovereign debt payments made by the Russian Federation.

The carveout, which expires on May 25, has allowed Russia to avoid a default on its foreign debts since the war in Ukraine began and coordinated sanctions targeting Russia’s access to payments systems were levied by the U.S. and its allies.

During a meeting of the Senate Banking Committee, Yellen said the Treasury Department wants to ensure in understands what the “consequences and spillovers would be” if it allowed the carveout to expire and hadn’t yet reached a decision.

Energy:

Oil prices were higher, erasing their losses earlier in the Asian session, on a weak U.S. supply outlook.

The EIA cut expectations for U.S. production growth this year to 731 million barrels a day from 833 million barrels a day earlier, said ING. This implies U.S. oil output averaging 11.9 million barrels a day in 2022.

“The biggest concern for the global oil market is around supply in the short to medium term, given the uncertainty over Russian supply,” ING said.

Oil futures settled more than 3% lower Tuesday as worries mounted over global growth.

ANZ said oil producers are running out of spare production capacity dimming the supply outlook which could limit price falls.

“Saudi Arabia’s oil minister warned that the entire energy market is running out of capacity. His UAE counterpart added that without more global investment, OPEC+ won’t be able to guarantee sufficient oil supplies when demand fully recovers from the pandemic,” ANZ said.

Late Tuesday, the API reported inventories of crude in the U.S. unexpectedly rose by 1.6 million barrels in the latest week, according to a source, while gasoline supplies climbed by 823,000 million barrels.

The bearish results were released ahead of official inventory data from the DOE due later Wednesday. Average forecasts in a WSJ survey indicate the DOE report will show crude inventories fell by 300,000 barrels and that gasoline supplies decreased by 1.7 million barrels.

Metals:

Gold extended its retreat in Asia after it closed at its lowest in 3 months Tuesday as stocks zigzaged and the dollar surged

“Uncertainty and risk aversion in the markets is doing little to support gold at the moment, with the dollar instead being favored and the yellow metal under heavy pressure,” said OANDA senior market analyst Craig Erlam.

Although inflation is still high, investors seem to be responding more to central bank aggressiveness, which is making it difficult for gold to retain its earlier gains, Erlam added.

Aluminum was slightly higher, supported by low inventories, said ING. However, market sentiment appears fragile, with lockdowns in China and the resulting hit to demand still at the forefront of investors’ concerns, ING added.

“Shanghai is going into the hardest phase of lockdowns, weighing heavily on sentiment as local authorities vow to bring the Covid wave under control at the community level by the end of this week.”

Iron ore futures rebounded sharply in Asian morning trade, as the commodity picked up from recent steep losses due to fast-rising interest rates.

(MORE TO FOLLOW) Dow Jones Newswires

05-11-22 0031ET



Source link

Leave a Reply

Your email address will not be published. Required fields are marked *