MARKET WRAPS
Watch For:
EU harmonized CPI; Italy balance of payments; France OECD interim economic outlook report; trading updates from Renishaw, Hargreaves Lansdown, Kingfisher, Ocado Group, TUI,
Opening Call:
Shares may start off with mild gains in Europe on Tuesday amid cautious sentiment ahead of this week's monetary-policy decisions by major central banks. In Asia, stock benchmarks were mixed; the dollar held steady; Treasury yields fell slightly; while oil advanced and gold inched up.
Equities:
European stocks are poised for a cautious rise as investors look toward a busy week of central bank action.
The Federal Reserve will deliver its policy decision on Wednesday, followed by the Bank of England on Thursday and the Bank of Japan on Friday
Although the expectations are for no move by the Fed, "what could move the markets would be any unexpected changes in the language of the statement or the Summary of Economic Projections, which would be in the rate or inflation projections," said Scott Buchta, the Franklin, Tenn.-based head of fixed-income strategy at Brean Capital.
He said the Fed's projections are still likely to show one more rate hike this year, but the "interesting thing" will be if the prior forecast for four quarter-point rate cuts in 2024 remains in place or "if you get an unexpected change there that could move markets."
Gregg Abella, chief executive of Investment Partners Asset Management, said investors might still be overestimating how soon the Fed will cut rates.
Even if inflation continues to fall toward the Fed's 2% target, he said, it will be hard for the central bank to cut rates "if the economy is still revved up and markets are still trading at relatively high valuations."
Forex:
The dollar was consolidating early Tuesday ahead of this week's key central bank meetings such as the Fed's.
Foreign-exchange markets could continue to "chop around" on reduced volumes without a clear catalyst, with the Federal Open Market Committee and Bank of England meetings in the pipeline, said Matt Simpson, market analyst at City Index and https://urldefense.com/v3/__http://FOREX.com__;!!F0Stn7g!HkVruVbQ6-a9Njz1NtklPgh2NcZOdBrQxE4KIt_rcz8XPk4hwlOYq_viKJxG9FyiGeC65-p9pwiYCVlnSEjp0CXa_k448fg5C0V8xmC7Zfo$ , in an email.
The dollar will be prone to volatility during the Fed's announcement on Wednesday, especially if economic projections or 'dot plot' forecasts of future interest-rate moves see big revisions, said Jamie Dutta, market analyst at Vantage.
The dollar has enjoyed nine consecutive weeks of gains, and "streaks of this type, stretching into double figures, are very rare in major currencies so the broader uptrend could be ready for some consolidation, " he said.
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Sterling is expected to stay in a tight range against the euro in the coming months as the outlook for both U.K. and eurozone economies is for weak growth until 2024, Bank of America analysts said.
In addition, this month will likely mark final interest-rate rises for both the Bank of England and the European Central Bank, BofA said.
"On EURGBP, we remain comfortable with our 0.85 year-end forecast for now," it said.
Sterling may also struggle to rise against the dollar and commodity-linked currencies like Australian dollar, Norwegian Krone, and Canadian dollar.
"With the Bank of England market pricing now more reasonable and sterling positioning still long, we think it will be harder for sterling to stage fresh rallies in the near term," it added.
BofA sees near-term risks of GBP/USD falling below their 1.24 year-end forecast.
Bonds:
Treasury yields slipped as investors absorbed recent stronger-than-expected economic data and looked ahead to the Fed's policy decision.
Markets are pricing in a 99% probability that the Fed will leave interest rates unchanged at a range of 5.25%-5.50% on Wednesday, according to the CME FedWatch Tool. The chance of a 25-basis-point rate hike to a range of 5.50%-5.75% at the subsequent meeting in November is priced at 30.7%.
"Investors will likely be focused on the Summary of Economic Projections (SEP), which will be released along with the FOMC statement," BofA Securities said.
"We expect the 2023 median policy rate forecast to show one more 25bp hike, for a terminal rate of 5.5%-5.75%. Perhaps the most important forecast is the 2024 median, which in our view will shift up by 25bp to 4.875%, reflecting just 75bp of cuts next year."
Energy:
Oil prices were higher in Asia amid supply tightness and better demand outlook.
Exports from Russia declined almost a third to 63,000 tons/day in the first two weeks of September amid seasonal refinery maintenance, ANZ analysts said.
They also noted that Saudi Arabia's Energy Minister said Monday at the World Petroleum Congress that OPEC is working to keep oil markets stable and improve global security, although he didn't mention any specific price level for crude.
"What's striking is that this relentless oil price rally has taken place even amid concerns about lower demand from Europe and China as those economies grapple with a severe slowdown, which demonstrates just how tight the supply side of the equation has become," Marios Hadjikyriacos, lead investment analyst at XM, said.
"Taming the current bullishness will likely rest on non-OPEC production -- especially U.S. shale -- showing a stronger response to higher prices and lifting global supply," said Robbie Fraser, manager, global research & analytics at Schneider Electric.
"There are early signs of that occurring, but it will need to be stronger and more consistent to reverse course."
Metals:
Gold edged higher, finding some support from weakness in the U.S. dollar ahead of a Fed rate decision on Wednesday.
The prospect of strong demand from China is also buoying sentiment, ANZ analysts said.
The PBOC has lifted temporary curbs on gold imports as the yuan recovered, they noted.
"With markets pricing in a 'soft-landing' scenario for the U.S. economy...we see limited downside in U.S. yields that will ensure that gold prices trade with a downside bias in 2023," ICICI Bank analysts said.
Still, "a reversal in gold prices is possible if the FOMC pivots to a neutral regime and prepares markets for possible rate cuts" the second quarter of 2024 onwards," they said.
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Copper was steady but may be weighed by worries over global demand.
The macroeconomic backdrop favors continued weakness in U.S. and European demand, while China's targeted stimulus measures don't point to a substantial offset, TD Securities said.ulus measures don't point to a substantial offset, TD Securities said.
For copper prices, the real level to watch is $8,000 a ton, with recent resilience in price action having pulled the highly-watched pandemic-era trendline support higher, it added.
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Iron ore prices were lower in early Asian trade, extending Monday's losses as demand weakened.
The output of molten iron, used to make steel, fell slightly compared with a month earlier, Everbright Futures said.
In focus were steel mills' potential production cuts and concerns about Chinese government regulations, it said.
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09-19-23 0016ET
