MARKET WRAPS

Watch For:

ECB survey of monetary analysts; trading update from Naturgy Energy Group

Opening Call:

European shares look set to start the week lower. In Asia, stock benchmarks mostly declined; the dollar strengthened; while oil and gold futures fell.

Equities:

European and U.S. stock futures declined amid a cautious start to the week in Asian markets. Traders are watching U.S. Secretary of State Antony Blinken's trip to Beijing and Federal Reserve Chair Jerome Powell's congressional testimony this week.

U.S. stock markets will be closed today for the Juneteenth holiday.

U.S. stocks ended lower Friday without derailing the S&P 500 index and Nasdaq Composite from extending their long weekly win streaks. Investors cheered signs that the Fed's interest-rate hikes have helped to cool inflation, but have yet to drive the U.S. economy into a recession.

"There's a lot of cash on the sidelines" as investors have been earning around 4% to 5% interest rates from Treasury-bills or certificates of deposits while worrying about a recession, said Saira Malik, chief investment officer at Nuveen.

"I'll call 2023 the most talked about recession that never happened," she said, and now "there's a bit of FOMO going on."

Stocks had climbed after the Fed said Wednesday that it paused its interest-rate hikes, but the central bank's summary of economic projections showed that two more rate increases may follow this year as it continues its effort to bring high inflation down to its 2% target.

"A pause in rate hikes is good for equity markets," said Adam Hetts, global head of portfolio construction and strategy at Janus Henderson Investors. It's a "little bit of a sigh of relief" for markets, even with projections for potentially two more rate hikes in 2023, as it signals the Fed is nearing the end of its hiking cycle, he said.

But there's "still looming risk of an earnings slowdown," Hetts cautioned, saying that he now favors a defensive slant toward high-quality large-cap stocks with earnings resilience. But against the backdrop of a slowing economy, he said he also likes some exposure to profitable small and mid-cap companies to position for gains after a potential U.S. recession.

On Friday investors were weighing remarks by a pair of Fed officials.

Richmond Fed President Tom Barkin said Friday that inflation is still too high and he needs to be convinced it's slowing more quickly before he would back an end to rate increases. Fed Gov. Christopher Waller said the same day that the fallout from several bank failures in the spring is likely to continue to play a role in the central bank's decision on how much to raise rates.

Read: What is driving the new bull market for stocks?

Forex:

The dollar rose in Asia amid mild risk-off sentiment prompted by regional equity-market losses.

However, trading activity in foreign-exchange markets could be extra light today, given the public holiday in the U.S., said RBC Capital Markets.

Also, "we are in the midst of typical summer listless markets," RBC said.

For this week, the most important macroeconomic event will be Fed Chair Powell's semiannual congressional testimony on Wednesday and Thursday.

Bonds:

Treasurys were untraded early Monday due to the Juneteenth holiday in the U.S.

The policy-sensitive 2-year Treasury yield jumped Friday, finishing with its second week of advances, after two Federal Reserve policy makers reinforced the central bank's message that more rate hikes are needed to bring down inflation.

Before Friday, investors appeared doubtful that the Fed would be able to deliver two more 2023 rate increases, as projected by policy makers on Wednesday.

Sentiment started shifting Friday. After Richmond Fed President Tom Barkin's remarks, traders priced in a slightly higher chance of a quarter-of-a-percentage-point rate hike in September following a similar move in July - which would take the Fed's main policy rate target to between 5.5%-5.75% three months from now, according to the CME FedWatch Tool.

"The era of coordinated global policy has more starkly come to end, as displayed this past week, with three major central banks [the Fed, the European Central Bank, and the People's Bank of China] taking three different stances on interest rates to support their respective economies," said Stephen Kolano, managing director of investments for Integrated Partners.

"Markets appear to have accepted that policy, in the developed world, will remain restrictive for longer than originally expected given inflation remains well above central bank targets. The silver lining appears to be that inflation, while still higher than desired, has stopped surprising to the upside," Kolano said.

Energy:

Oil futures fell early Monday after settling Friday at their highest level in more than a week.

But oil's short-term fundamental outlook seems to have gotten better, with Europe's diesel premium climbing and China delivering a huge crude import quota, said Oanda.

China's oil imports will probably become robust once stimulus flows through the economy, Oanda added.

Metals:

Gold futures fell steadily in Asia, supported by hopes for less Fed tightening.

U.S. economic data may not corroborate the Fed's hawkish view, said TD Securities. For now, market participants are heavily leaning on upcoming data, looking for early cues of labor-market stress, as highlighted by a notable reaction across precious metals related to the U.S. weekly claims data, TD added.

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Copper dropped, weighed by weak global demand and China's slower-than-expected recovery.

Prices for base metals, including copper, "will remain under pressure in response to the global economic slowdown and China's service-led recovery," BMI said.

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Chinese iron-ore futures extended gains on recent strong demand.

"Short-term demand for iron ore is resilient, which continued to give strong support to prices," Baocheng Futures said.

Looking ahead, Baocheng expect demand to retreat in the midterm amid China's plans to cut annual crude steel output this year to curb carbon emissions.


TODAY'S TOP HEADLINES

After Months of Cold Shoulder, China Welcomes Antony Blinken to Beijing

BEIJING-While preparing for Secretary of State Antony Blinken's visit, China's leadership has had its sights on two sets of audiences other than the U.S.

On Sunday, Blinken and Chinese Foreign Minister Qin Gang had seven-and-a-half hours of direct talks and a dinner meeting on a host of topics, with the two agreeing to work together on increasing the number of flights between the U.S. and China, a senior state department official said.


Lots of Hiring, but Not So Much Working

The hiring boom obscures what looks like a contradictory economic trend: Employees are working fewer hours.

The average number of hours worked a week by private-sector employees declined to 34.3 in May, below the 2019 average and down from a peak of 35 hours in January 2021, according to the Labor Department.


Global Tax Mess Awaits U.S. Companies, and Congress Isn't Helping

WASHINGTON-U.S.-based multinational companies face a slow-brewing tax squeeze over the next few years, and Congress is deadlocked over what to do.

Companies will start paying higher taxes in foreign countries next year under a global minimum-tax agreement. The following year, the deal will cause U.S. companies to lose domestic tax breaks. In 2026, U.S. taxes on companies' foreign income will rise because of long-delayed provisions of the 2017 tax law.


Richmond Fed's Tom Barkin Warns Against Ending Rate Hikes Too Soon

The president of the Federal Reserve Bank of Richmond said he is "still looking to be convinced" that inflation is heading down to the Fed's 2% target and warned that halting interest-rate increases too early could lead to higher inflation down the road.

"If you back off inflation too soon, inflation comes back stronger, requiring the Fed to do even more, with even more damage. That's not a risk I want to take," Richmond Fed President Tom Barkin said Friday in Ocean City, Md.


Israel's Netanyahu Touts Expanded Investment by Intel Amid Tech Backlash

Israeli Prime Minister Benjamin Netanyahu said Sunday chip maker Intel has agreed to invest billions in a semiconductor factory, in a deal he said signaled economic confidence in the country amid controversy over his policies.

Netanyahu put the figure at $25 billion. A person familiar with the plan said that figure includes $10 billion toward the plant announced in 2021. Work at the site, in the southern Israeli town of Kiryat Gat, is already under way, the person said.


Ukraine Hits Russian Ammunition Depot Deep in Occupied Territory

DNIPRO, Ukraine-Ukraine destroyed a major Russian ammunition depot in an occupied part of the country's south on Sunday, as it launches fresh advances along the southern and eastern parts of the front line in a bid to break through strong Russian defenses.

The Ukrainian Air Force said explosions at the facility in Rykove village-deep in Russian-held territory and just north of the Crimean Peninsula seized by Russia in 2014-were the result of a successful attack.


Elon Musk Says Twitter Advertisers Are Coming Back

PARIS-Elon Musk said Twitter is winning back nearly all of the advertisers who left since his takeover of the social-media company last fall, saying his goal for the platform was to "make it a positive force for civilization."

Speaking before an at times raucous audience at a tech conference in the French capital, Musk Friday afternoon also gave a vote of confidence in his new Twitter CEO, Linda Yaccarino, saying that "almost all of the advertisers have said that, they've either come back or they said they will come back."


Microsoft Looks to the Stars While Doing Activision Duty

Microsoft the tech giant will do just fine if it can't acquire Activision Blizzard. Microsoft the videogame company could still really use the deal.

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06-19-23 0017ET