MARKET WRAPS
Stocks:
European stocks traded in positive territory on Monday as investors welcomed signs that recent anxiety surrounding the banking sector is waning.
Deutsche Bank led Europe's banking shares higher, with analysts noting that the sector should now be able to look forward with more confidence.
Many of the concerns raised by investors and media have now passed, and European banks are perhaps in the strongest position they have been in since the last global financial crisis, Jefferies said.
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News that First Citizens had agreed to buy the deposits and loans of Silicon Valley Bank also helped underpin sentiment.
Interactive Investor said it "remains to be seen whether this relief rally is justified until such time as the planks of banking uncertainty can be removed once and for all, leading to an improvement in investor confidence which is currently in scant supply."
Stocks to Watch
Shares in Southern European banks have taken a hit since the collapse of Silicon Valley Bank sparked worries about the financial sector, but there are no clear fundamental reasons for contagion risks, Jefferies said.
Banks in Italy, Spain, Portugal and Greece seem defensively placed with regard to deposit stability, given their high share of deposits covered by guarantee programs and typically stickier retail deposits--accounting for 63% of the total on average--Jefferies added.
Nevertheless, spillover effects could lead to higher deposit betas--the percentage of changes in interest rates passed on to depositors--and funding costs, it added.
UniCredit, BPER Banca and National Bank of Greece are Jefferies's top picks among Southern European banks.
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European real-estate values could experience falls of between 20% and 40% over the next two years, as sector headwinds are just getting started, Citi said.
A decade of zero interest rates has abruptly come to an end and its unwinding is expected to hurt both net asset value and earnings per share, Citi said.
Earnings growth is slowing as the sector heads into rate and recessionary risks, and the move in rates alone hasn't yet been priced in, it added.
Citi said its sell recommendations include office-focused Gecina and Inmobiliaria Colonial as well as shopping-center owner Klepierre, while it has buy recommendations on German residential names such as Vonovia and LEG Immobilien.
U.S. Markets:
Stock futures ticked up on the First Citizen news, with the health of the banking sector remaining at the top of investors' agenda.
"It's a bit of a relief rally after the selloff on Friday. It's also the last week of the quarter, so I don't think we're going to see the same levels of volatility," CMC Markets said.
There are still concerns about the banking sector but there were no negative headlines over the weekend for the first time in several weeks, CMC added.
Investors are looking ahead to this week's inflation data from the U.S. and the eurozone for more indications as to the path of monetary policy, as central banks try to balance the fight against inflation with instability in the financial system.
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Forex:
Eurozone data on Friday could show headline inflation eased considerably in March but this should have a limited impact on the euro, Unicredit Research said.
"In terms of the data impact on EUR/USD, a sticky core figure will probably more than offset the sharp drop we expect in the headline rate and prevent a new fall."
Unicredit expects eurozone headline inflation to ease to an annual rate of 7.0% in March from 8.5% in February but core inflation to rise to 5.7% from 5.6%.
Read Euro Trims Losses After German Ifo Survey
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Sterling may be moved by comments from Bank of England Governor Andrew Bailey later but should rapidly default to being driven by external factors, ING said.
"Essentially, GBP/USD is a USD story and EUR/GBP is a EUR story," ING said.
GBP/USD could rise to 1.2500 this quarter but EUR/GBP could rise to 0.8900 as the euro looks marginally more attractive than sterling, it said.
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The dollar edged higher as its safe-haven status gained ground amid concerns over stress in the banking sector, Unicredit Research said.
"This explains the difficulty USD/JPY has had in breaking below the key 130 baseline," Unicredit said.
EUR/USD rejected the peak of 1.0933 hit just after the Fed's meeting last Wednesday and has dropped back toward 1.07, it said, adding that is mostly because the selloff in European stocks was heavier than U.S. stocks and the German-U.S. yield spread has moved back in favor of the dollar.
Bonds:
Investors have to clearly distinguish between the near-term and the medium-term outlook when looking at 10-year German Bund yields, Morgan Stanley said.
"The fall in headline inflation data and slower growth will be supportive for EUR duration in 2H23 with a 10y Bund rally below 1.90%...potentially to 1.50%," it said, seeing 1.90% as the base case and 1.50% as the bull case.
However, the near-term rally is driven by unwarranted fear rather than the real factors, MS added.
It sees some near-term headwinds, including long positioning on the Bund future and overbought conditions.
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Sentiment on rate markets remains volatile as the new week gets underway, with headlines concerning the banking sector likely to continue driving yields in the near term, DZ Bank said.
A few positive and many negative headlines from the banking sector look destined to decisively shape yield levels over the next five days as well, DZ Bank added, noting that eurozone government bond yields trade higher as investors' risk appetite is improving.
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High-quality fixed income assets offer attractive opportunities given decent yields and the scope for capital gains, should an economic slowdown occur, UBS Global Wealth Management Investment Research said.
It prefers bonds relative to equities, and prefers high-grade government bonds, as well as investment grade and sustainable bonds relative to high-yield bonds.
The wealth manager also sees value in emerging market bonds. "Investors who actively manage their bond portfolios have the potential to take full advantage of the opportunities," it said.
UBS GWM recommends investors to lock in attractive yields.
"F or investors holding cash, or those with upcoming bond maturities, we advise against waiting for the 'final rate hike' before locking in current yields."
As the negative effects of the interest-rate rises so far become more apparent, UBS GWM believes that markets will increasingly start to price in the possibility of future interest-rate cuts.
Energy:
After recent steep declines due to the banking sector turmoil, oil markets appear to have stabilized, with the price picking up on fresh concerns about Russian supplies.
Russia said it would station tactical nuclear weapons in Belarus, refocusing minds on the threats to Russian supplies from geopolitical tensions, analysts said.
"OPEC supply remains constrained, but there are considerable uncertainties around the outlook on Russia," Fitch Solutions said.
Metals:
Copper prices wavered as traders balanced hopes for Chinese demand against concerns about global economic growth.
Positive signs for China's property sector so far this year could point to strong demand for copper, and the country also plans to boost spending on its power grid, which could also lift China's huge appetite for the red metal, the Commonwealth Bank of Australia said.
Still, copper supply should rise faster than demand, clouding the outlook for prices, CBA noted.
"We think copper-supply growth will still outpace copper-demand growth in 2023. That should weigh on copper prices through 2023, particularly if the banking crisis escalates."
Graphite
Graphite demand could rise by a compound annual growth rate of 27% to 2030, pushing prices as much as 50% higher than current levels, Macquarie said.
Graphite, currently used in all lithium-ion battery chemistry, should be in a market deficit by 2025, it added.
While graphite supply is expected to double over the next decade, led by Africa, "given demand growth, we believe a [more than] 300% increase in production is required to balance the market," Macquarie said.
It forecast the price for natural graphite fines--sub100 mesh--to rise from $800/metric ton in 2023 to $850/t in 2024 and to more than $1,000/ton by 2026.
Iron Ore
UBS is cautious on iron ore in the short term, expecting China's recovery to be led by consumption rather than construction. It is also wary on prices further out.
In the medium term, rising supply from Australia and Brazil and weak demand because of steel scrap growth are likely to be price headwinds, UBS noted.
"We believe China's steel demand has peaked and will decline medium-term as China drives its decarbonization agenda."
UBS forecast iron-ore prices will average about $103/metric ton in 2023, and fall to roughly $75/ton in the medium term, around 2025-27.
DOW JONES NEWSPLUS
EMEA HEADLINES
German Business Sentiment Improved Further in March Despite Banking Turmoil
Business sentiment in Germany edged up in March for a fifth consecutive month, with little signs that the recent stress in the banking sector has hit firms' short-term expectations.
The Ifo business-climate index increased to 93.3 in March from 91.1 in February, the highest reading since May, according to data from the Ifo Institute published Monday.
Deutsche Bank Shares Rise as Europe's Lenders Rally
Deutsche Bank AG led Europe's bank shares higher in early trade Monday, recouping some losses after a selloff at the end of last week.
However, banking turmoil might not yet be over, some analysts warned.
Novartis Shares Gain After Positive Breast-Cancer Trial Results
Shares in Swiss pharma major Novartis AG gained in early trading on Monday after the company reported positive trial data for its breast-cancer treatment Kisqali, which analysts said were eagerly awaited.
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03-27-23 0612ET
