MARKET WRAPS
Watch For:
Services PMI data for eurozone, Germany, France, Italy; Germany foreign trade price indices; France provisional CPI, consumer confidence survey; UK monetary and financial statistics
Opening Call:
European shares look poised to rise Wednesday as traders look ahead to the Fed minutes due later today. In Asia, stock benchmarks advanced; Treasury yields fell; the dollar and oil futures retreated; while gold rose.
Equities:
Stock futures point to gains in Europe at Wednesday's open, despite U.S. indexes posting mild declines after giving up early gains.
There's the investor excitement that's going to come with the start of a new year and a new chance at gains and opportunities, said Scott Sheridan, CEO of tastyworks, an online brokerage. However, the underlying "structural issues" -- like high inflation and the ongoing war in Ukraine -- are still there, he said.
For all new year goals of better-looking portfolio, Sheridan thinks the market "might not be ready for the bold move people are hoping for."
Market consolidation is a "healthy response" ahead of whenever an upswing materializes, he said. The near-term volatility could present "good trading opportunities," but for longer-term investors, there "might be some rough spots."
Indeed, the International Monetary Fund greeted the new year with a warning that a third of the global economy will suffer recession in 2023, a downturn that will likely trim corporate profits.
"On a tactical basis, we are bearish, expecting investors to return from their New Years revelry in a sour mood," said Marko Papic, chief strategist at Clocktower Group. "Recession is yet to be priced in by the cyclical sectors and more downside may be ahead as the end-of-the-month FOMC meeting looms. However, we posit that the risk of a recession is overstated."
However, Julian Emanuel, strategist at Evercore ISI, reckoned that such concerns don't necessarily mean stocks can't rally.
"Forecasting an earnings recession in 2023 to accompany the economic recession that now seems inevitable, along with a 2023 year end S&P 500 price target of 4,150, would seem impossible," he said in a note to clients.
"Yet not only is there a long history of earnings down/stocks up years (1970, 1982 and 1985 stand out), but there is also the tendency for strong stock/bond return years to follow historically forceful tightening cycles (1982, 1985) particularly in years (1995) following 'havoc being wreaked' on a 60/40 portfolio such as 2022's declines." Emanuel added.
Read: What does the stock market's rocky 2023 start mean for the rest of the year?
Forex:
The dollar slipped in Asia after overnight gains as long-term Treasury yields fall, diminishing the allure of USD-denominated fixed-income assets and reducing USD demand.
Minutes from the Fed's December meeting are due later today, which may curb USD weakness.
Given strong consensus among FOMC members for further rate increases, discussions around prospects of recession, a softening labor market and progress on inflation will likely be critical to the outlook, said SPI Asset Management.
Bonds:
Treasury yields fell early Wednesday, extending declines in yields on most notes overnight as investors focused on the likelihood of an economic downturn this year.
Traders boosted the odds of a smaller-than-usual 25-basis-point rate Fed interest rate hike in February to 71% from 68% on Friday, which would take the fed-funds rate target to between 4.5% and 4.75%, according to the CME FedWatch tool. The central bank is mostly expected to lift borrowing costs to at least 4.75% and 5% by June, according to 30-day fed-funds futures.
"The first trading day of the year in Treasuries is in the books, and it was a bullish start to 2023 as bonds retained a large degree of their overnight rally coming into Tuesday's session," said BMO Capital Markets rates strategists Ian Lyngen and Ben Jeffery.
"The next leg of the repricing will be more fundamentally driven as the market's attention turns to [Friday's December nonfarm] payrolls, and before the BLS data will be Wednesday's ISM manufacturing read and Thursday ADP [employment] print," they said in a note. "We would be remiss not to acknowledge the role that a heavy corporate issuance calendar will also play in contributing to the process of what we expect will be choppy trading in the lead up to NFP [nonfarm payrolls]."
Energy:
Oil fell in Asia amid concerns over China's Covid-19 outbreak. Rising cases in China could weigh on oil demand in the immediate term, said ING.
The weakness in the oil market comes despite China's reopening story, which should help the outlook for demand in the medium to longer term, ING added.
The drop for oil prices came as recession fears mount, with the IMF expecting one-third of the world economy to enter a recession, while New York Fed President William Dudley said a U.S. economic downturn is likely.
All this doesn't really make investors feel good about the oil demand outlook, said Phil Flynn, senior market analyst at The Price Futures Group.
Metals:
Gold rose early Wednesday, underpinned by lower Treasury yields that enhance the appeal of the non-interest-bearing precious metal.
The precious metal should have a strong start to 2023 as much of Wall Street goes defensive, said Oanda, noting safe-haven flows as recession risks rise.
"Fear and doubt across wider financial markets mean gold and silver have begun 2023 with a typical New Year surge, attracting speculative inflows as traders see weak growth, high inflation and a worsening geopolitical outlook ahead," Adrian Ash, director of research at BullionVault, wrote in commentary.
"Central bank purchases might be another factor, following reports last month that the People's Bank of China has started to increase its gold reserves," said Marios Hadjikyriacos, senior investment analyst at XM.
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Copper prices edged higher, holding onto recent gains as optimism over China's reopening continues to support.
But analysts warned of increased downward correction risk for the metal's prices. The U.S. factory sector contraction deepened in December, with the S&P Global U.S. manufacturing PMI falling to 46.2, the lowest reading since the initial Covid-19 lockdown in May 2020, Galaxy Futures said.
A global recession looks more likely, which could partially offset any China demand rebound from reopening, Galaxy said.
Also, seasonally slower manufacturing activities in China ahead of the upcoming Lunar New Year could further dampen buying interest, Galaxy added.
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Chinese iron ore prices fell as the steel-making raw material pulled back from its recent bullish run.
Galaxy Futures said the recent rally may weaken over the coming months, as China's ongoing post-opening infection surge disrupts steel production and weighs on iron ore demand in the physical market.
The surge in infections could also lead to a slower-than-expected real estate recovery despite more policy support for the sector. Galaxy advised investors to stay cautious of potential profit-taking pressure at current elevated price levels.
TODAY'S TOP HEADLINES
Federal Reserve, FDIC and OCC Warn Banks About Cryptocurrency Risks
WASHINGTON-A group of powerful bank regulators on Tuesday highlighted what they said were a litany of risks stemming from cryptocurrencies and expressed skepticism that the assets can be safely held by the financial institutions they oversee.
The Federal Reserve, Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency said that recent failures of major crypto firms led them to exercise caution in reviewing banks' proposals to engage with the market. They highlighted fraud and scams, market volatility, legal uncertainty, and weak risk-management and governance practices at crypto firms, among other things, as reasons for concern.
Contraction in U.S. Factory Sector Deepened in December
The U.S. manufacturing sector contracted in December at the steepest pace since the onset of the Covid-19 pandemic as demand remained subdued and production weakened, data from a purchasing managers survey showed Tuesday.
The S&P Global U.S. manufacturing PMI decreased to 46.2 in December from 47.7 in November, posting the lowest reading since the initial Covid-19 lockdown period in May 2020 and unchanged from the preliminary reading.
EU Set to Impose Coordinated Controls on Travelers From China
European Union member states set the stage for coordinated controls on passengers arriving from China, including possible mandatory pre-travel testing, as the bloc works to ensure China's sudden reversal of its zero-Covid policy doesn't undermine the region's efforts to put the pandemic behind it.
The EU decision, which looks likely to be agreed on Wednesday, would see member states follow the decision of U.S. authorities in tightening controls on arrivals from China ahead of the lifting of travel controls by Beijing in the coming days. Several EU member states including France, Spain and Italy have announced independent controls on arrivals from China.
Russia's Basic Errors Jeopardize Its Ukraine Forces, Military Analysts Say
Russian forces are repeating basic errors that are compromising the security and safety of their own soldiers in occupied Ukraine, according to military analysts, including failing to shut down cellphone use in areas where troops are concentrated within range of Ukrainian artillery.
In the latest example that suggests poor Russian operational security, Ukrainian forces destroyed a facility used as a base for mobilized troops in the city of Makiivka, in the Donbas area of eastern Ukraine.
Twitter Says It Plans to Expand Political Ads It Allows
Twitter Inc. plans to expand the political advertising it allows on the social-media platform after banning most political ads in 2019, in the latest policy change by new owner Elon Musk.
(MORE TO FOLLOW) Dow Jones Newswires
01-04-23 0016ET
