EMEA Morning Briefing: Worries Over War, Fed Tightening Continue to Cloud Markets

MARKET WRAPS

Watch For:

EU EuroCOIN indicator, Flash Estimate Inflation; Eurozone, Germany, France, UK, Italy Manufacturing PMI; Italy Foreign Trade non-EU; U.S. Employment Report; no major earnings scheduled

Opening Call:

European stocks will likely open little changed Friday, remaining under pressure as worries over Ukraine and Fed tightening persist. In Asia, shares were mostly lower; the dollar extended its gains; while oil and gold prices were weaker.

Equities:

European stocks will likely struggle to break free of recent trading ranges Friday, as the impact of the Russia-Ukraine war, rising risks of recession and the Federal Reserve’s monetary tightening continue to weigh on sentiment.

After U.S. stocks ended lower Thursday, booking their biggest quarterly loss in two years, OANDA’s Edward Moya said Wall Street “will have a lot to debate over the next few months, but a choppy stock market seems likely as no clear answers will be had on when peak inflation happens and how aggressive will the Fed be with tightening until geopolitical risks are resolved.”

Economic Insight:

S&P has lowered its global GDP growth forecast by a 60 basis point reduction to 3.6% this year, followed by a 20 bps fall in 2023.

The eurozone is expected to take the biggest hit to GDP growth from the Russia-Ukraine conflict, while the largest driver of the U.S. downward growth revision comes from higher domestic interest rates.

S&P said the conflict remains geographically contained, with the economic impact peaking in the second quarter. It assumes that China stays out of the conflict, providing no direct support.

Forex:

The dollar remained firm against most major currencies, as a mild risk-off mood played out in Asian markets.

IG said from a technical chart perspective, the USD Index’s resistance at 99.30 is a key level to watch while support remained at 97.68.

Scott Petruska at Silicon Valley Bank said the index could get to 100 in the next couple months, adding that the dollar is the safe haven currency of choice these days. “Oftentimes the yen and franc enter in as safe havens but not this time.”

Petruska said: “We’ve seen a bit of a correction over the past couple days and we may see more of a correction.” But elevated geopolitical risk, U.S. rates that are likely to go up faster than elsewhere and a Fed that’s more aggressive than other major economies’ central banks lead me “to believe the dollar will be stronger than it would have been otherwise over the medium term.”

Bonds:

Treasury yields were mixed in early Asian trade, with the yield on the 10-year note edging higher.

Yields finished lower for the day Thursday, as President Biden announced plans to releases oil from the U.S. reserves to alleviate inflationary pressures. Still, the 10-year yield notched its best quarterly gain since a year ago, while the two-year yield rose much faster, posting its biggest quarterly gain since 1984.

The combination of high inflation, tight labor markets, and uncertain expectations is raising the prospect of a 1970’s-type wage-price spiral, hedge-fund giant Brevan Howard warned, according to Bloomberg.

The yield curve teetered on the brink of inversion again Thursday, two days after the spread between 10-year and 2-year notes briefly fell below zero. A sustained inversion of that area of the curve is seen as a reliable indicator of recession albeit with a lag of up to two years.

Analysts at UniCredit said they see increasing signs the yield on the 10-year Treasury, as well as the yield on the 10-year Bund, have “peaked for the time being.”

“In money markets, eight additional rate hikes by the Fed are priced in for the current year, and the peak level of the fed funds target rate is seen at close to 3% by the middle of next year,” they wrote. “It is currently barely conceivable that investors would position for an even steeper and/or longer rate-hike cycle.”

Energy:

Oil prices edged lower still in Asia after they tumbled Thursday with the U.S. announcing its largest-ever release from the nation’s crude reserves and OPEC+ sticking to a previously agreed plan to raise output in May.

It’s “essentially a temporary measure designed to minimize the spring rally [in prices], and to that end, it could increase supplies marginally and thereby keep prices commensurately lower,” said Marshall Steeves, energy markets analyst at S&P Global Commodity Insights. “However, the war in Ukraine remains the overriding consideration and the possible loss of Russian output is the motivating factor.”

Mizuho’s Robert Yawgler said Biden‘s decision may not be enough to stabilize prices, noting that near 2 million bpd of Russian crude have been taken off the markets. Yawgler doubts the U.S. oil sector will ramp up production anytime soon, as the White House indicated in a press release.

“Many U.S. producers have said they have no intention to increase production, and intend to buy back shares and increase dividends with the windfall from higher oil prices.”

Read Barrons.com: Ukraine’s Friends Refuse to Pay Russia Rubles for Gas. What Could Come Next.

Metals:

Gold futures edged lower but OANDA said the precious metal looks set to make another run higher as the latest Russian move on gas contracts suggests a breakthrough in Russia-Ukraine peace talks seems very far away.

Stephen Innes, managing partner at SPI Asset Management, told MarketWatch Thursday that he’s raised his year-end target on gold to $1,850 from $1,650 as “the lingering Ukraine war effect will fuse with concerns about growth and inflation” and could lead to broad-based reallocation to the precious metal.

Even so, he believes the “market’s stagflation concerns are likely misplaced – meaning prices will eventually come under pressure as the [Federal Reserve] raises interest rates but, more importantly, real rates rise.”

Given that, it will be a “tall task for gold to breach recent highs,” said Innes.

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Aluminum prices were little changed, supported somewhat by the easing of some lockdowns in China.

Residents of Jilin will be able to move about freely starting Friday for the first time in more than three weeks, while the city of Shanghai prepared Thursday to reopen its eastern half, while shutting its western half.

Market participants seem willing to look beyond the demand impact of China’s lockdowns and supply disruptions should still outweigh metals demand risk, TD Securities said.

TODAY’S TOP HEADLINES

Ukrainian Troops Push Forward as Russian Forces Regroup and Give Back Control of Chernobyl

Ukrainian officials said their armed forces are pressing forward against Russian military units around Kyiv, seeking to exploit Moscow’s efforts to regroup after weeks of heavy losses, while Russian forces handed control of the Chernobyl nuclear power plant back to Ukraine.

After taking back the city of Irpin to the northwest of Kyiv this week, Ukrainian forces are now engaged in heavy fighting in the neighboring towns of Bucha and Hostomel, officials said.

China Caixin Manufacturing PMI Falls to Lowest Level in Over Two Years

A private gauge measuring activity in China’s manufacturing sector tumbled to its lowest level in more than two years in March, reflecting the impact of strict government measures to stamp out the highly transmissible Covid-19 Omicron variant sweeping the country.

The Caixin China purchasing managers index slipped to 48.1 in March from February’s 50.4, hitting its lowest level since February 2020, according to data released Friday by Caixin Media Co. and Markit.

Japan Manufacturing Sentiment Worsens for First Time in Seven Quarters

TOKYO-Sentiment among Japan’s large manufacturers deteriorated in the three months to March for the first time in nearly two years, reflecting concerns over the war in Ukraine and higher energy and raw material prices.

The main index for large manufacturers’ sentiment was plus 14, compared with plus 17 in the previous survey in December, according to the Bank of Japan’s quarterly tankan corporate survey released Friday. The reading marked the first worsening in seven quarters and was lower than a projection for plus 12 from a poll of economists by data provider Quick.

Following Fed’s Lead, Banks Shift Forecasts to Big Rate Increases

After key Federal Reserve officials opened the door to raising interest rates by more than the customary quarter-percentage point, several of Wall Street’s biggest banks now believe the increases will come in jumbo increments.

Major banks in recent days have predicted some combination of half-percentage point rate rises by the Fed throughout the year. The Fed usually moves its federal-funds rate target by quarter-percentage point increments, but faced with surging inflation bringing the worst price pressures in 40 years, economists believe aggressive action by the central bank is now likely.

Top Banking Regulator Calls for Caution as Risk Landscape Worsens

Banks face a more uncertain environment amid the war in Ukraine and need to shore up their risk management programs to gird against multiple negative scenarios unfolding at once, a top U.S. banking regulator said.

So-called tail risks-unlikely but highly impactful risk events-are a growing potential issue that financial institutions’ risk departments need to grapple with, Michael Hsu, acting comptroller of the currency, said Thursday at a conference hosted by the American Bankers Association.

Deutsche Bank Must Face Lawsuits Alleging It Enabled Ponzi Scheme

Judges in New York and Miami ruled that investor lawsuits could advance against Germany’s Deutsche Bank AG for allegedly ignoring warnings that it was helping finance a real-estate-linked Ponzi scheme.

Cayman Islands liquidators won rulings Tuesday and Wednesday in separate lawsuits in Florida and New York alleging that Deutsche Bank helped facilitate a wide-ranging fraud by Biscayne Capital International LLC, an investment advisory firm.

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April 01, 2022 00:42 ET (04:42 GMT)

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