MARKET WRAPS
Stocks:
European stocks were higher on Wednesday, with sentiment helped by hopes of moderating inflation and less aggressive Federal Reserve interest rate rises.
The generally upbeat session in Europe came ahead of some potentially market-moving reports due later in the week. Investors are eyeing U.S. monthly inflation figures due on Thursday and coming fourth-quarter earnings as potentially important market drivers.
Earnings season will gather speed later this week, with a raft of corporate reports from major U.S. banks including Bank of America, JPMorgan Chase and Citigroup due on Friday.
"The question among traders and investors is how low can the inflation reading go for the U.S. economy, meaning how close it can get to the Fed's target. More importantly, how long will it take for the reading to reach that level?" Avatrate said.
Stocks to Watch
Bluebell Capital Partners has built a holding in Bayer and is now pushing for a governance overhaul and for a breakup of the company's agricultural and pharmaceutical divisions, Bloomberg reported citing unnamed sources.
Bluebell has also pressed Bayer to consider a sale of its consumer-health division and to appoint an independent chairman to its supervisory board, according to Bloomberg.
Bayer told Bloomberg that the company is always willing to engage constructively with stakeholders but declined to comment further. Bluebell declined to comment to Bloomberg.
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Recent guidance from European chip makers benefited from the euro trading below the dollar, but the strengthening of the currency is now likely to harm results going forward, Jefferies said.
"The euro has strengthened to over $1.07. We believe this will impact the results and outlook statements of a number of companies."
Infineon is expected to show signs of this as more than 50% of guided sales growth for fiscal 2023 came from the euro's weakness, Jefferies said.
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French banks should have had a solid fourth quarter at their trading divisions, with normal seasonality on revenue and costs and well-known pressures at its domestic retail arms, Credit Suisse said.
BNP Paribas remains the Swiss bank's top sector pick for its capital-return potential in 2023, including a EUR4 billion buyback related to its sale of Bancwest, now expected to complete in 1Q 2023.
Credit Suisse also ticked down its target price for Societe Generale to EUR38 from EUR40 on a slightly more cautious outlook for French retail and higher near-term restructuring costs. Its target price for BNP is EUR75 and for peer Credit Agricole is EUR12.
Economic Insight
Money markets are likely to continue pricing higher terminal rates for the European Central Bank than expected by economists, reflecting concerns of sticky inflation, JPMorgan said.
"Our economists expect the ECB to deliver a terminal of depo rate of 3.25% by early May 2023, stay there until 1H24 and then gradually ease after that. We, however, expect the market to continue pricing higher ECB terminal vs. our base case, on risks of stickier inflation, especially given the lack of clear framework provided by the ECB."
This dynamic warrants tactical duration trading over the coming months.
U.S. Markets:
U.S. equity index futures were little changed and government bond yields fell as caution prevailed after a steadily positive start to the year, and with traders eyeing looming inflation data,
Economists surveyed by The Wall Street Journal expect consumer prices in December to have risen 6.5% on an annual basis, down from 7.1% inflation the month before.
The S&P 500 SPX bounced off its 100-day moving average and finished Tuesday's session above its 50-dma, taking its gain for the year so far to 2.1%, a four-week high.
Forex:
The dollar was steady in Europe at weaker levels, with investors likely to wait until the U.S. inflation data before they resume selling the currency as they continue to bet the pace of Fed rate rises is set to slow, UniCredit Research said.
"Investors will likely wait for CPI inflation data tomorrow before taking more aggressive bids against the greenback. The dollar remains broadly soft and selling the currency into its modest intraday recovery attempts is still prevailing."
Read Options Market Turns More Positive on Euro Vs Dollar
Bonds:
German 10-year Bund yields are expected to trade in "choppy wide ranges" between 1.90% and 2.50% until there is clarity on the end of the ECB's tightening cycle, likely by the early part of the second quarter, JPMorgan said.
Bund yields are expected to remain in a tug of war between "hawkish" comments from the ECB and inflation prints that have started to decline, JPM said. With current levels close to the middle of its expected range, JPM remains neutral on Bunds both in outright terms and cross-market versus Treasurys.
Read Cost of Insuring Against Euro Junk Bond Defaults Falls
Energy:
Crude prices declined slightly after figures from the API reported to have shown a nearly 15 million barrel build in U.S. oil stocks in the week through Friday.
The figures camme ahead of the Energy Department's reading later on Wednesday at which analysts had been forecasting a 600,000 barrel fall in U.S crude stocks.
Other Oil News
G7 nations are seeking to place two price caps on Russian refined oil products in February, Reuters reported citing a G7 official. The group has already implemented a price cap on Russian oil exports, setting the level at $60 a barrel level, which was introduced alongside an EU ban on Russian crude imports, according to Reuters.
The caps on Russian refined products, such as diesel and kerosene, would be split into one targeting oil products currently trading at a premium to crude and one targeting products trading at a discount, Reuters reported.
A separate EU ban on imports of Russian crude products is set to come into effect on Feb. 5.
Natural Gas
The outlook for European natural gas inventories is positive for 2023 after a mild winter, demand reductions and as LNG cargos have helped offset lost Russian gas, SEB said.
Inventories, which were filled to the brim in the autumn, could remain 35%-45% full at the end of the heating season, leaving significant spare capacity for the summer and as inventories are rebuilt ahead of the next winter, SEB said.
The levels could mean the EU is able refill its inventories without Russian gas and without any demand reductions this summer, SEB added.
European natural gas prices were recently down 2.9% at EUR68.06 a megawatt hour, close to their lowest level since September 2021.
Metals:
Copper prices moved past $9,000 a metric ton for the first time since June, as positive sentiment around China demand helped boost buying of the red metal. Gold, another bellwether for the economy, was at its highest level since April.
Fitch said it expects stronger demand in China and a weaker dollar to boost buying, upping its copper price expectation for 2023 to $8,500 a ton from $8,400 a ton.
"In the longer term, we expect the copper market to remain in deficit as the green transition accelerates along with the demand for 'green' metals including copper."
Iron Ore
Iron ore is "on a remarkable run," having climbed by more than 50% since the start on November, Morgan Stanley said. "This rally appears mostly forward looking on China reopening optimism, as underlying supply-demand fundamentals haven't significantly tightened up."
Morgan Stanley said Chinese steel production continued to fall through the of 2022, while shipments from dominant suppliers Australia and Brazil were rather strong.
"That said, we see further upside in iron ore prices and pencil in an average price of $140 [a metric ton] for 2Q23, though acknowledge the possibility of short-lived pull-backs."
Read China Iron-Ore Buying Agency Biggest Market Shake-Up Since 2010
Lithium
While Jefferies holds some concerns around the short-term outlook for lithium demand after some countries removed subsidies for electric vehicles, it believes these will be offset by risks to supply growth.
Lithium supply will increasingly come from greenfield projects, rather than expansions of existing mines, and these often suffer setbacks during development.
"We see the likelihood of targets being missed as increasingly high. Hence (we) see supply forecasts as high-risk with greenfield projects likely to sustain higher attrition due to higher restrictions and difficult development environments."
Jefferies expects lithium prices to remain above the cost curve through 2023 before a more balanced market evolves in 2024.
DOW JONES NEWSPLUS
EMEA HEADLINES
U.S., Allies Prepare Fresh Sanctions on Russian Oil Industry
WASHINGTON-The U.S. and its allies are preparing their next round of sanctions on Russia's oil industry, aiming to cap the sales prices of Russian exports of refined petroleum products in a step some market watchers warn could squeeze global supply.
In meetings across Europe this week, Treasury officials are discussing the details of the coming sanctions on Russian oil products, which are set to go into effect on Feb. 5. The penalties will set two price limits on Russian refined products: one on high-value exports such as diesel and another on low-value ones such as fuel oil, according to people familiar with the plans.
Airbus Plane Deliveries Rose in 2022 -- Update
Airbus SE said Tuesday that it delivered more aircraft in 2022 than in the previous year despite withdrawing its full-year target in early December.
The European plane maker said Tuesday that it delivered 661 commercial aircraft in 2022, compared with the 611 it had delivered to customers in 2021.
J Sainsbury Sees FY 2023 Profit Toward Upper End of Views on Robust Christmas Period
J Sainsbury PLC said Wednesday that it expects to deliver profits for fiscal 2023 toward the upper end of its current guidance following record trading during the Christmas period.
(MORE TO FOLLOW) Dow Jones Newswires
01-11-23 0551ET
