MARKET WRAPS
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Advance Economic Indicators Report for February.
Opening Call:
Stock futures wavered and bond yields rose near their highest level in three years as investors prepared for a campaign of interest-rate increases from the Federal Reserve.
Meanwhile, oil prices declined as money managers worried lockdowns in China would sap demand.
Fed officials have recently signaled openness to the central bank doing half-percentage-point interest rate increases if the economy's outlook calls for it, rather than the more customary quarter-percentage-point changes.
"Market pricing suggests the Fed could do two back-to-back 50 basis-point [interest-rate] hikes at the next two meetings," said Neil Wilson, an analyst at broker Markets.com. "Recent rhetoric from several Fed officials indicate growing support for a more hawkish move."
Higher yields also discount the present value of future cash, putting pressure on tech stocks in particular-because high-growth companies like those in the tech sector have market valuations banking on profits years in the future. In turn, the tech-heavy Nasdaq index was on track to underperform on Monday.
A wave of economic data, including the personal-consumption expenditures (PCE) price index, which is the Fed's preferred measure of inflation, will be in focus in the week ahead. consumer-price index (CPI) data for February, released earlier this month, showed inflation at a four-decade high. A hot PCE reading could further stoke expectations that the Fed will act faster and more aggressively in raising rates.
"Given just how far the Fed is behind the curve it's fair to say that if the post [2008-09 financial crisis] cycle could be erased from people's memory banks, then I think markets might be pricing 300-400 basis points of hikes this year," said Jim Reid, a strategist at Deutsche Bank. "However the fact that the last decade was so moribund from an activity and inflation point of view means that markets still refuse to believe the Fed can get very far."
Federal-funds futures-derivatives used by traders to bet on the path of interest rates-show that investors have ramped up bets on a 50-basis-point rate increase at the Fed's May meeting since last week.
Russia's benchmark MOEX index edged down 1.8% Monday in a shortened session as Moscow allowed all Russian shares to trade. Foreigners remain barred from selling shares, helping underpin the benchmark's level.
Stocks to Watch:
Shares of Apple and the tech giant's suppliers were falling early Monday following a Nikkei Asia report that said Apple plans to make about 20% fewer iPhone SEs next quarter.
Earlier this month, Apple announced the latest version of its lower cost iPhone SE, starting at $429. The phone adds 5G wireless capability and uses the same A15 Bionic chip used in the company's flagship iPhone 13. Shipments of the phone began on March 18.
The company has been telling multiple suppliers that it aims to lower production orders by about 2 million to 3 million units for the quarter, citing weaker-than-expected demand, according to a report from Nikkei Asia, which cited four people briefed on the matter.
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Tesla stock fell Monday after reports said the electric-vehicle maker paused production in Shanghai after a surge in Covid cases prompted sweeping restrictions across the city.
Tesla was down 0.5% in premarket trading to $1,005.20.
The auto giant closed its Shanghai factory Monday, according to multiple reports, as the city is locked down in two stages over the next nine days to facilitate Covid-19 testing.
Forex:
The dollar was up 0.3% against a basket of currencies as expectations rise that the Fed will deliver more aggressive interest rate hikes.
"Since the start of the Russian invasion of Ukraine market expectations regarding the Fed's future rate course have risen massively," Commerzbank said. "This revision of Fed expectations justifies a revision of USD exchange rates."
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The euro looks set to weaken further in the near-term even if data on Friday show eurozone inflation accelerated in March, ING said.
Markets are almost fully pricing in higher inflation due to rising energy prices and the European Central Bank is already seen raising interest rates by 100 basis points in the next 12 months, ING said. That means the inflation data are unlikely offset the impact of the Ukraine-Russia conflict on the euro.
"We still see mostly downside risks for EUR/USD in the short-term, with a move to 1.0800 looking likely by the end of the year."
Other News:
In the digital asset space, Bitcoin and other cryptocurrencies continued their price momentum from late last week with a firm rally on Monday. The price of Bitcoin, the largest crypto, popped up around 6% to near $47,000, having traded just above $40,000 last week.
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China's yuan weakened against the dollar in the onshore market amid the pandemic-related lockdown in Shanghai.
The lockdown is set to add more downward pressure on China's growth, while the yuan has extended its recent weakness, Mizuho Bank noted.
Despite the lockdown's relatively short duration, market participants are concerned over China's tightening its pandemic-control policy to citywide lockdown from targeted district level, Mizuho Bank said.
The lockdowns are set to cause disruptions in production and logistics, and manufacturers may consider bringing forward their relocation plans to other countries, Mizuho Bank added.
Bonds:
The yield on the benchmark 10-year Treasury note continued a recent ascent, climbing to 2.510% Monday from 2.491% Friday, when it notched its highest level in almost three years.
Yields on short- and medium-term Treasurys, which are most responsive to Fed policy, were up more than those on longer-term bonds.
The yield on the two-year Treasury note stood at 2.397% Monday, putting it about 0.11 percentage point away from the 10-year note's level. An inversion where the two-year note yields more than the 10-year is historically tracked by investors as a predictor of recession.
Read: Government Bonds on Track for Worst Year Since the Marshall Plan Enacted
Other News:
Investors breathed a sigh of relief last week after the Russian government made a $117 million interest payment on its foreign debt. But a much bigger payment comes due April 4--to the tune of $2.2 billion--and creditors are far less optimistic Russia will pony up this time.
"The last payment was a small investment in credibility, but when Russia has to start writing billion dollar checks it's a different calculation, " said Jay Newman, former Elliott Management portfolio manager. "I don't think it's realistic that Russia comes up with the $2.2 billion.
Read more here .
Commodities:
Crude futures were down around 4% in Europe after local officials in Shanghai locked down the city following a rise in Covid-19 cases, in a move that's likely to disrupt business and consumers, potentially weighing on demand for oil.
"The market at the moment is assuming that [higher energy prices] will moderate the pace of growth and central banks will tighten," said Mike Bell, global market strategist at J.P. Morgan Asset Management. The degree to which central banks may increase interest rates though is likely to depend on global growth and whether higher prices for energy and oil require lower rates to cushion growth, he added.
OPEC and the IEA have warned that demand for oil is already under pressure thanks to the fighting in Ukraine and sanctions on Russia that have pushed prices sharply higher. Still, prices should remain supported by constrained supply and eased lockdowns elsewhere, said Swissquote.
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OPEC+ members are set to meet Thursday against a backdrop of millions of lost Russian barrels of oil that have been cut off since the war in Ukraine broke out.
The meeting will be another test of OPEC's alliance with Russia as it comes under strong Western pressure to increase output, something which could irk Moscow.
"OPEC+ is in a delicate positions as it is tricky to increase output to compensate for loss of production from fellow member Russia without risking a collapse of the OPEC+ collaboration," said DNB Markets.
The cartel's last meeting took just 13 minutes, despite coming only days after Russia's invasion and as oil prices soared above $120 a barrel. The group then chose to stick to its planned modest output hikes.
Read: Why OPEC+ Will Likely Stick to its Output Plan
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Copper miners are poised to benefit the most from the mismatch between mine supply and demand over the next decade, Jefferies said.
The market is valuing these companies based on the assumption that we are now at a cyclical peak, but the bank believes that we are in the early stages of a structural bull market, reflecting a lack of supply growth in the industry and demand growth from renewables and electric vehicles.
"This is a multi-year story that will gradually play out. Freeport, First Quantum, Glencore and Antofagasta are all highly leveraged to the price of copper and should benefit," Jefferies said.
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Although a sharp slowdown in global growth would be a temporary headwind for mining equities, the commodity cycle won't die until supply growth comes, and that is years away, Jefferies said.
The U.S. bank expects the mining sector to continue to materially outperform the market, mainly driven by an expansion of what are currently very low price-to-earnings ratios.
"Our base case assumption is that commodity markets will enter a demand soft patch in the near future, but we believe the risk to this is increasingly to the upside. The best idea, in our view, is to stay long and ignore the volatility, if possible," Jefferies said.
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