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Opening Call:
Shares look set to rise in Europe on Monday after big U.S. banks posted stronger-than-expected earnings. In Asia, stock benchmarks were mixed; Treasury yields fell; the dollar gained ground; while oil nudged higher and gold was barely changed.
Equities:
European stocks could head higher, riding on the coattails of upbeat U.S. banking results, although executives warned that recent stress in the financial sector is darkening their outlook for the U.S. economy.
Amid the economic headwinds, strong earnings results from big banks indicated that size increasingly matters in a U.S. financial system responding to interest-rate hikes that many investors expect to continue.
"The empire strikes back," Barclays said. As depositors and other market participants digested the regional bank uncertainty in recent weeks, it added, "There's been a flight to bigness."
Investors were focused on first-quarter earnings, with the big banks' earnings appearing to soothe investors' concerns that the stress at regional banks could metastasize.
Analysts said strong bank earnings might reassure the Federal Reserve it can press ahead with further rate increases as it weighs the fallout from a spate of regional bank collapses last month.
Forex:
The dollar strengthened in Asia amid Fed rate-increase bets after Fed Gov. Christopher Waller said Friday that inflation is still much too high and that he is ready to approve another rate increase.
Markets are pricing another hike in May and bets on a subsequent increase in June are rising, which could support the dollar. Investors are likely to scrutinize upcoming housing data for more clues on monetary policy.
"Yields are rising and markets are expecting a 25-basis point hike in May. That means the spread differential between European and U.S. rates still favors the dollar," Spartan's Peter Cardillo said. He said macro indicators, particularly a higher-than-expected increase in March industrial production, support the currency.
Navellier & Associates' Louis Navellier said that "in light of the latest CPI and PPI data, plus lower Treasury yields, I expect that the Fed will not hike key interest rates further."
Bonds:
Treasury yields slipped after previous gains, as traders readjusted their expectations about how much longer the Federal Reserve is likely to keep hiking interest rates.
Data pointed to slowing inflation, but activity indicators still pointed to a somewhat hot economy and Fed's Waller suggests rates might not be high enough just yet.
Fed funds futures traders now see an 82.3% chance of a 25-basis-point rate hike by the Federal Reserve in May after Gov. Waller said policy makers need to keep raising borrowing costs. Such a move would take the fed funds rate target to between 5% and 5.25%. The odds of another quarter-point hike in June also jumped to almost 18%, as traders also pulled back on the extent of rate cuts they expect later this year, according to the CME FedWatch Tool.
"Investors have to once again re-evaluate how far the Fed is willing to go," said Tom di Galoma, managing director and co-head of rates trading for financial services firm BTIG. "I believe the Fed will do 25 basis points more in May, just based on Waller's comments."
Energy:
Oil edged up after a fourth straight weekly gain, as concerns eased over the impact of high inflation on energy demand.
Supply side issues may continue to dictate sentiment on market expectations of tightness in the global crude oil market following OPEC's surprise decision earlier this month to cut output by more than one million barrels a day, ANZ said.
It noted IEA's warning that the OPEC cuts were likely to drive prices higher and inflict more pain on consumers. "This has been exacerbated by other short-term issues, including interruptions to pipeline supplies from Iraqi Kurdistan," it added.
High inflation and a hawkish Fed had "spoilt the party for oil producers, but the oilmen are now back and the party is in full swing," said Velandera Energy Partners. "With the peak inflation appearing in the rear view mirror, traders can shake off the macro risk that had underpinned the oil trade for months."
Metals:
Gold prices were little changed after posting a loss last week.
"The near-term trend remains up on hopes that the U.S. Fed is nearing the end of the tightening cycle," said DailyFX. It said the yellow metal "is now approaching one of the strongest resistance levels that it has faced in months."
"For gold to break through any records, we'd probably need some confirmation that the [Federal Reserve] is done hiking rates," said Andrew Schrage, chief executive officer at Money Crashers. "Markets are coming around to this idea, but there's still significant uncertainty."
At the moment, it's "very difficult to say gold is ready to breakout to new highs in the coming days, or if it will take some weeks to consolidate below record highs and then make another push higher," said Peter Spina, president of GoldSeek.com. "The market is overbought short-term."
Still, "with prospects of rate hikes ending, inflation is not coming down to the 2% target, and an economy looking to enter into contraction phase, the stagflationary scenario looks to be coming into play," he said. "This is the most bullish of bullish scenarios for gold. Where real interest rates are negative and there are very few sectors seeing any growth."
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Copper edged lower amid Fed rate-increase fears spurred by Friday's comments from Fed Gov. Waller that inflation is still much too high and that he is ready to approve another rate increase.
There is a continued hawkish Fed narrative, as well as expectations of weakness in the U.S. economy, TD Securities said.
Meanwhile, improving Chinese economic data are falling flat in the minds of investors, it added.
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Chinese iron-ore futures were lower, extending last week's losses, as demand fell.
Demand for iron ore has shown signs of marginal weakening, as steel mills' profits continue to shrink, Donghai Futures said.
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