MARKET WRAPS
Watch For:
EU special summit concludes; ECB Executive Board Member Isabel Schnabel Twitter Q&A; U.K. GDP, trade, industrial production, index of services, business investment: provisional results, Bank of England Chief Economist Huw Pill speaks at SUERF-BIS workshop; Germany balance of payments; trading update from Saab
Opening Call:
Shares look set to open lower in Europe on Friday tracking the negative lead from Wall Street. In Asia, stock benchmarks were mostly lower; Treasury yields were mixed; the dollar gained; oil and gold fell.
Equities:
European stocks may track lower at the open, as higher interest rates and growth slowdown worries continue to rankle investors.
U.S. stocks had ended lower on Thursday, logging back-to-back losses after failing to hold onto early gains, as investors confronted rising bond yields while reassessing some better-than-expected corporate earnings reports.
The fact that Federal Reserve officials including Chairman Jerome Powell have largely stuck to their message this week has helped to keep stocks from falling off a cliff, said Gene Goldman, CIO of Cetera Financial Group.
"There were no surprises from the Fed, they continued to stick to their message. Powell didn't reverse anything he said from his presser in Washington," Goldman said, referring to Powell's Q&A at the Economic Club of Washington D.C. on Tuesday.
However, in what could be a discouraging sign for equity investors, markets have started to come around to the Fed's warnings about further interest rate rises, Goldman said.
"Last week was an enormous week in a whole load of ways, from earnings, economic data and from central banks," said Niall O'Sullivan, chief investment officer of multiasset strategies for Europe, the Middle East and Africa at Neuberger Berman. "What is going on this week is the chewing of the cud as we figure out what it all means."
It could be years rather than months before inflation is properly curbed, said Mr. O'Sullivan, adding that he believes the Fed is unlikely to lower rates at all this year.
"Inflation is going to be harder to tame" this time around, Mr. O'Sullivan said. "Central banks will have to be at it much longer than many people think."
Investors are already looking ahead to next week's U.S. consumer-price inflation data for January, due out Tuesday, but before the week ends, they will receive an update on the University of Michigan's consumer-sentiment gauge Friday morning in New York, as well as more commentary from senior Fed officials.
Forex:
The U.S dollar gained early Friday, as investors continue to scrutinize the outlook for monetary policy around the globe.
Dollar weakness will be modest this year, and it will be occasionally reversed by periods of strength, said Steve Barrow, head of G-10 strategy at Standard Bank.
Barrow doesn't think the Fed's commitment to wringing inflation out of the economy will put a rocket under the dollar.
"As long as the market is sure that the Fed is at, or close to, the top in the rate cycle, and can still see the prospect of cuts next year, the dollar should fall -- as long as this policy position does not undermine asset prices, such as stocks," Barrow said.
"In our view, the risk of a significant and prolonged dollar surge from monetary policy alone comes if the Fed proves to be behind the inflation curve again because labor market pressure, and perhaps other factors, cause a re-acceleration of inflation that threatens multiple rate hikes, " he said.
Barrow and his team think there will be some "periods through the year" when the dollar strengthens, which is possibly due to adjusted Fed rate expectations, but "these bumps in the road should not change the general direction in our view, which is for a weaker dollar in 2023," and these "comebacks" will not be strong enough to embolden the dollar to test its 2022 highs.
Bonds:
U.S. Treasurys yields were mixed early Friday, after a weak 30-year bond auction on Thursday sent the 2-year yield to its highest level since late November and the 10-year rate to a one-month high.
The Treasury curve, as measured by the spread between 2- and 10-year Treasury yields, narrowly missed finishing the New York session with its most negative reading since October 1981. The spread was minus 82.5 basis points as of 3 p.m. Thursday versus the recent low spread of minus 84.9 basis points set Dec. 7.
The Treasury curve's extreme inversion "suggests a broad-based slowdown is coming," Oanda said.
"As inflation declines across Europe and the US, risks remain elevated that central banks will need to still deliver more tightening than what markets are pricing in," it said.
"Our call for 2s/10s to reach -100 bp is back on the table after appearing less realistic" at the end of last year, when the spread closed around minus 55 basis points, BMO Capital Markets strategists Ian Lyngen and Ben Jeffery said.
Energy:
Oil futures slipped as fears of a possible U.S. economic slowdown cloud the outlook for demand.
Oil prices have fallen after their "impressive" gains over the past few days, said Fawad Razaqzada, market analyst at City Index and FOREX.com.
"It looks like profit-taking to me."
A lot of people have been focused on rising demand from a China reopening, but "it overlooks the fact that Chinese oil stocks are probably already quite high due to lockdowns and any attempt to refill these supplies could be done at knockdown prices through Russian imports, " CMC Markets UK said.
"After all who else is Russia going to sell its oil to?"
Metals:
Gold prices were lower amid mixed signals.
The precious metal has been unable to move in either direction meaningfully in recent days, Fawad Razaqzada, market analyst at City Index and forex.com, said, citing USD's divergent movements.
On the one hand, USD has been supported on dips by the Fed officials' hawkish comments and mixed data, but on the other hand, the positive tone across risk assets has boosted the appeal of foreign currencies, the analyst added.
Gold prices and USD tend to move inversely.
Gold prices are "trying to ride the choppy waters that represent waves coming from multiple directions," with investors trying to "find the key to what is going to drive prices either way," said Adam Koos, president of Libertas Wealth Management Group.
The "real focus" will be on the January inflation numbers, said Chintan Karnani, director of research at Insignia Consultants.
"If inflation falls substantially in January, will the [Fed] stop increasing interest rates after March or make a change in interest rate strategy? This is what I and traders will be the looking at," he said.
"At the end of the day, inflation control is the key motto for the [Fed] and all central banks."
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Copper edged lower in Asia likely amid position adjustments, but losses may be limited.
Expectations of China's economic recovery have supported the outlook for demand for the metal, ANZ Research analysts said.
Copper has been also been aided by ongoing supply-side issues, the analysts added, noting Chile has been hit by setbacks at mines, including falling ore quality and water restrictions.
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Chinese iron-ore futures rose in early trade, helped in part by expectations that coming credit data for January will show that the central bank has injected more liquidity into the Covid-hit economy.
Still, the commodity's longer-term price growth faces challenges, with demand for homes unlikely to improve in the first half of the year and macroeconomic fundamentals in the first half likely to be weaker on year, Galaxy Futures analysts said.
TODAY'S TOP HEADLINES
China's Reopening Pushes Inflation Higher
SINGAPORE-Inflation in China accelerated in January as the world's second-largest economy emerged from almost three years of strict Covid-19 controls.
Economists expect China's reopening to put pressure on prices at home and around the world this year, though the impact probably won't be enough to prevent a gradual slowdown in global inflation as higher interest rates cool economic growth.
Swiss Trader Trafigura Hit by Suspected Nickel Fraud, Says It Could Lose $577 Million
Trafigura Group thought it was buying containers full of nickel. What showed up wasn't nickel at all, the giant commodities trader said, describing itself as the victim of a "systematic fraud" that could cost it more than half a billion dollars.
The potential loss is a black eye for closely held Trafigura, which has expanded aggressively over the past decade to become a huge, and highly profitable, player in global commodity markets. Like other trading houses and miners, Trafigura has raced to tap into growing demand for nickel, which is vital in producing batteries for electric vehicles.
U.S. Sanctions Nine Companies for Moving Iranian Oil Products
The U.S. Treasury Department has sanctioned nine companies for allegedly helping move Iranian petroleum products and petrochemicals valued at hundreds of millions of dollars to buyers in Asia via a previously sanctioned Hong Kong company.
Three companies in Malaysia and Singapore are among those facing sanctions, Treasury said Thursday. The companies were allegedly involved in the sale and shipment of products on behalf of Triliance Petrochemical Co., a Hong Kong-based broker that was added to the sanctions list in 2020.
After Earthquakes, Turkey's Haven for Refugees Is a Ghost Town
GAZIANTEP, Turkey-Before Monday's earthquakes, Gaziantep was a busy and prosperous border city, a haven for refugees fleeing conflict in neighboring Syria. In good weather, crowds strolled its green parks, shopped in a suburban-style mall and hung out in a plaza at the foot of an ancient citadel.
Today, Gaziantep is a ghost town. With thousands of buildings destroyed or damaged and no electricity or running water, many residents fled. Those who remain are sleeping in cars, schools or the street, despite freezing winter weather. They line up for food at soup kitchens.
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02-10-23 0015ET
