MARKET WRAPS
Watch For:
Italy CPI; OECD Composite Leading Indicators; Bundesbank monthly
report; Eurogroup meeting of eurozone finance ministers; U.S.
Martin Luther King Day, financial markets closed; updates from
Vonovia, Smith & Nephew, Taylor Wimpey, Ashmore, Rio Tinto
Opening Call:
China's move to ease monetary policy should help Europe to open
on a firmer footing Monday. However, gains for shares may be capped
following choppy trading in Asian stock markets and with U.S.
markets closed. Elsewhere, oil and gold have managed modest gains
while the dollar and Treasury were steady.
Equities:
European stocks should advance early Monday, buoyed by news that
China cut two key rates to support its slowing economy.
The People's Bank of China lowered rates on the one-year
medium-term lending facility and seven-day reverse repurchase
agreements by 10 basis points each, according to an official
statement.
The MLF interest rate, which is used to price China's benchmark
loan prime rate, was cut to 2.85%, while the reverse repo rate was
lowered to 2.1%, the PBOC said.
The rate cuts came as China released data that showed the
economy expanded 8.1% in 2021, but growth momentum continued to
slow in the final months of the year. The cuts signaled Beijing's
determination to stabilize growth in 2022, as the world's
second-largest economy faces mounting headwinds from a property
slump, scattered coronavirus outbreaks and sluggish domestic
consumption.
Investors in Asia appeared underwhelmed by the Chinese news,
with markets in the region mixed.
Citigroup said China is set to ease its monetary setting further
in the face of the significant drag of the property sector
downturn. While it expects the PBOC to trim both one-year and
five-year loan prime rate later this month, it also anticipates 25
bps of interest rate cuts and a 50bp reserve requirement ratio cut
in the second half.
"As long as the PBOC lowers interest rates enough, its
determination would help turn market and business sentiment
around," Citigroup economists said.
Forex:
The dollar was a touch lower in Asia but the USD Index managed
to remain above the 95.00 level.
Increasingly hawkish rhetoric from Fed officials seems to be
doubling down on "sooner and faster" tightening across taper, rate
increases and quantitative tightening, Mizuho Bank said. All else
equal, this should spell sharp dollar strength in tandem with an
upswing in Treasury yields across the curve, Mizuho Bank said.
However, Commonwealth Bank of Australia said dollar weakness is
likely to mark the week ahead in currency trading, with no
significant data or Fed speeches scheduled before the weekend,
lowering the risk of anything that might materially change bets
that the FOMC will start raising interest rates in March.
At the same time, the view that Omicron is unlikely to derail
the global economic recovery is a weight on the counter-cyclical
dollar, CBA said.
Capital Economics continues to think the dollar will strengthen
again before long, "as we expect strong cyclical price pressures in
the U.S. to mean the Fed tightens by more and for longer than
investors currently discount."
Jerome Powell reinforced this view with comments that the FOMC
wants to move interest rates "'to a place that is more neutral, and
then perhaps tight,' which implies the policy rate could eventually
rise above 2.5%," said Capital Economics' Joseph's Marlow.
He added that "combined with recent suggestions that
quantitative tightening may start sooner than expected, this leaves
us comfortable with our view that the dollar will strengthen this
year."
Bonds:
Treasury yields added to gains in Asia but with U.S. bond
markets closed Monday for Martin Luther King Day and as Fed
officials enter a blackout period for speeches ahead of their Jan.
25-26 meeting, trading will be subdued.
On Friday, the two-year yield climbed to its highest level in
almost two years, while notching a fourth straight week of gains
and the 10-year note rate registered its largest one-day gain since
Jan. 3, as traders adjusted to a tighter Fed policy outlook.
Demand for eurozone government bonds should return as soon as
the current spike in developed market rates runs its course and
volatility normalizes--at least temporarily--said Erjon Satko,
rates strategist at Bank of America.
Bids and volumes have been lower at syndicated government bond
issues so far this year, but it is too early to conclude that
investor demand will remain weak for the remainder of the first
quarter, especially for the periphery.
"The noise around the Italian race to the Presidential elections
on the one hand, and the high rates volatility propelled by central
bank speakers [the Fed in particular] on the other generated a
challenging environment for borrowers less geared towards
opportunistic issuance strategies," Satko said.
European corporate bonds are set to outperform German government
bonds again this year, LBBW said.
"Credits still offer a better buffer against this drag on total
return thanks to their higher initial rate of return," LBBW said,
adding that the expected sustained economic recovery also suggests
that default rates will continue to be low.
This indicates that credit spreads "will remain low or even fall
slightly" and "implies that credits will outperform Bunds again in
2022." LBBW advises clients to overweight euro corporate bonds, or
hold a larger-than-average position.
Energy:
Oil extended its rally in early Asian trade as an analyst warns
the Ukraine crisis could be a 'seismic event' for the energy
market.
Oil futures settled around 2% higher on Friday to post a fourth
straight weekly gain, with an analyst offering a dire warning of
potential supply disruptions as tensions between Russia and Ukraine
intensified.
"From an energy standpoint, this could be a seismic event," said
Phil Flynn, senior market analyst at The Price Futures Group.
Russia is not only a major oil producer but Europe, in their rush
to get off of fossil fuels, has "become more dependent on Russia as
major source for their energy."
"The emerging crisis between Russian and Ukraine raises
political risk premium," Manish Raj, chief financial officer at
Velandera Energy Partners, told MarketWatch.
Read: Tensions between Russia and Ukraine aren't fully priced
into commodities
Metals:
Gold futures edged higher in Asia, recovering some of Friday's
modest falls.
Several factors, including hawkish signals from the Fed, have
prompted speculators to reduce their long gold exposure, TD
Securities said. However, Powell's recent comments that signaled a
very measured course of action to fight inflation imply that real
interest rates may rise only modestly and that the precious metal
could climb on potential short-covering, the brokerage added.
Following Friday's "devastating U.S. retail sales report,"
prices for gold climbed, but then moved lower, pressured by
"profit-taking against the news and ahead of the long weekend,"
said Colin Cieszynski , chief market strategist at SIA Wealth
Management.
Copper prices also nudged higher on expectations that demand for
the industrial metal will be lifted by the growing electric-vehicle
and battery demand.
Rystad Energy expects the copper market's tightness to persist,
as it forecasts long-term demand to outpace supply.
"As the energy transition continues at pace and EV adoption
grows in populous nations like China and India, the copper mining
industry requires significant investment to keep up with demand,"
Rystad said.
A copper deficit "would have wide-reaching ramifications for the
energy transition as there is currently no substitute for copper in
electrical applications."
TODAY'S TOP HEADLINES
China Cuts Two Key Rates to Support Slowing Economy
China's central bank on Monday cut two key interest rates that
would likely translate into lower benchmark lending rates, in a bid
to provide more support for the slowing economy.
The People's Bank of China lowered rates on the one-year
medium-term lending facility and seven-day reverse repurchase
agreements by 10 basis points each, according to an official
statement.
China GDP Grew 8.1% in 2021, Though Momentum Slowed in Fourth
Quarter
BEIJING-China's economy expanded 8.1% last year as a
pandemic-plagued world snapped up its goods, though slowing growth
in the final months of the year points to challenges ahead for its
economy.
As expected, the annual gross domestic product figure easily
topped Beijing's official growth target of 6% or more, as exports
surged to a record high. The 8.1% growth figure for 2021, which
matched economists' forecasts, adds to the country's post-pandemic
recovery, after China eked out a 2.2% expansion in
coronavirus-ravaged 2020.
China's Property Market Cooled in 2021 as Beijing Reined in
Developers
BEIJING-Property investment and new construction starts slumped
in China in 2021 as the government's move to rein in developers'
debt hobbled an important pillar of growth for the country.
Overall investment in China's property sector increased 4.4% in
2021, down from the 7.0% growth rate marked in 2020, the country's
National Bureau of Statistics said Monday. The result was weaker
than the 6.0% year-over-year gain recorded over the first 11 months
of 2021.
Big Tech Braces for a Wave of Regulation
Big tech companies are facing the biggest expansion in potential
technology regulation in a generation. And while the jury is out on
whether all that sound and fury will signify anything, for the
first time there are signs that the big-tech backlash could have a
substantive impact.
New laws under consideration in Europe, Asia and the U.S. could
put sharp limits on how big tech companies can treat smaller
competitors and restrict their use of artificial intelligence like
facial recognition. Some proposals could ban common practices such
as companies giving their own products a boost in their own
rankings, something that could have an operational impact,
executives and analysts say.
Credit Suisse Chairman to Leave After Breaking Covid Travel
Rules
Credit Suisse Group AG Chairman António Horta-Osório is leaving
the global bank following a board investigation into his travel and
personal conduct, according to people familiar with the bank.
Credit Suisse said late Sunday that Mr. Horta-Osório had
resigned following an investigation commissioned by the board. The
people said the investigation examined his conduct, including
travel that breached Covid-related government rules and his
personal use of corporate aircraft. He joined the Credit Suisse
board less than a year ago.
Unilever Makes Approach for Glaxo's Consumer-Healthcare
Business
LONDON-Unilever PLC said it had approached GlaxoSmithKline PLC
and Pfizer Inc. about an acquisition of their consumer-healthcare
joint venture, a potential $68 billion deal that would reshape the
consumer-products giant's portfolio at a time when it is under
pressure to accelerate growth.
Unilever said in a statement Saturday that the business, known
as GSK Consumer Healthcare, was "a leader in the attractive
consumer health space" and would be a "strong strategic fit,"
though cautioned there was no certainty that any agreement would be
reached.
Russia's European Neighbors Rattled by Putin's Moves
BERLIN-Europe's relations with Russia are sinking to depths
unprecedented in the three decades since the collapse of the Soviet
Union.
After more than 20 years in power, President Vladimir Putin is
rattling his European neighbors more than ever, signaling that he
might invade Ukraine, deploying troops to shore up the autocracy in
Kazakhstan, weaponizing his country's natural-gas exports and
demanding sweeping security concessions from the West.
London Stock Exchange Proposes Special Listings for Private
Companies
The London Stock Exchange Group is seeking to blur the line
between public and private companies, part of a plan to attract
fast-growing technology firms to list in the U.K. in the wake of
Brexit.
The LSE has proposed the creation of a special market for
private companies to trade their shares publicly on the exchange on
certain days, according to a person familiar with the matter and
proposals from the LSE to its regulators, the Financial Conduct
Authority, and the U.K. Treasury, seen by The Wall Street
Journal.
Write to paul.larkins@dowjones.com
Expected Major Events for Monday
00:01/UK: Jan Rightmove Monthly House Price Index
07:00/NOR: Dec External trade in goods
08:00/SVK: Nov New orders in industry
08:00/CZE: Dec PPI
09:00/POL: Nov Merchandise trade
09:00/ITA: Dec CPI
10:00/CRO: Dec CPI
11:00/FRA: Nov OECD Composite Leading Indicators
11:00/IRL: Nov Goods Exports and Imports
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(END) Dow Jones Newswires
January 17, 2022 00:38 ET (05:38 GMT)
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