Marketmind: Hang on a minute
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[February 22, 2023] A
look at the day ahead in U.S. and global markets from Mike Dolan
Only seven weeks into the new year and many of the year's favoured
investments look spent already - or at least they require something of a
rethink.
With Wall St stocks clocking their worst day of 2023 on Tuesday, many of
the big consensus trades - short dollar, long bonds and long emerging
markets - all look questionable if the U.S. and world economies are re-acclerating,
buoying above-target inflation and forcing central banks to tighten
further.
At 4.73%, two-year U.S. Treasury yields closed at their highest in 15
years. The dollar is now almost 1% higher for the year to date. Emerging
market equities are at their lowest since Jan 4, the VIX 'fear index' is
at its highest since Jan 3 and the S&P500 and Nasdaq have wiped out all
of February gains.
Whether or not stocks are in what Morgan Stanley strategist Mike Wilson
likens to the 'death zone' at the top of Everest, some soul searching is
underway nonetheless. And markets have calmed a little early on
Wednesday.
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Minutes of the Federal Reserve's latest policy meeting are due for
release on Wednesday - but data releases showing sticky inflation,
booming retail sales and a service sector back in expansion emerged
after that meeting. And so a speech from New York Fed chief John
Williams make give a better steer on current thinking.
Markets are now priced for a Fed 'terminal rate' in the 5.25-5.50% range
by July and no cut from there by year-end.
European central bankers are also talking tough as the region's
economies dodge recession and inflation stays high. Deutsche Bank lifted
its forecast for where the European Central Bank's key rate will peak in
this tightening cycle to 3.75% from 3.25% previously - 125bp up from
current rates.
The only positive inflation news was that ebbing world oil prices are
now tracking year-on-year declines of 15% as huge base effects from last
February's Ukraine invasion kick in. Weak U.S. housing updates and
downbeat retail readouts from Walmart and Home Depot also question the
prevailing narrative.
But geopolitical concerns rankle again ahead of Friday's anniversary,
with Russia unilaterally withdrawing from a key nuclear arms control
treaty.
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Traders work on the floor of the New
York Stock Exchange (NYSE) in New York City, U.S., February 17,
2023. REUTERS/Brendan McDermid
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As G20 finance chiefs meet in India, the world is watching closely
the extent of the alliance between Beijing and Moscow. According to
the Wall Street Journal, China's top diplomat has indicated that
Beijing's relationship with Moscow is "rock solid" and Chinese
leader Xi Jinping is preparing to visit Moscow for a summit with
Vladimir Putin in the coming months.
Elsewhere, the Bank of Japan doubled down again on its bond yield
cap as Japan's 10-year government bond yield breached the BoJ's
policy band for a second straight session. Big manufacturers in
Japan remained gloomy in February too.
In banking, shares of Lloyds fell 2.6% after Britain's biggest
mortgage lender reported a flat annual profit for 2022 as a jump in
interest income was offset by mounting bad loan provisions. Lloyds
said falling house prices, competition for savings and rising costs
may crimp future returns.
With results from Nvidia due on Wednesday, Microsoft struck a
10-year deal to bring "Call of Duty" and other Activision games to
Nvidia's gaming platform if the Xbox maker is allowed to complete a
much-contested $69 billion acquisition of Activision.
Coinbase Global reported a fourth-quarter loss, as trading volume at
the cryptocurrency exchange came under pressure from an
industry-wide downturn triggered by a string of high-profile
bankruptcies.
Key developments that may provide direction to U.S. markets later on
Wednesday:
* U.S. Federal Reserve's Federal Open Market Committee releases
minutes from its latest meeting; New York Fed President John
Williams speaks
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* G20 finance ministers and central bank chiefs meet in Bengaluru in
southern India
* U.S. Treasury sells 5-year notes, 2-year floating rate notes
* U.S. corp earnings: NVIDIA, EBay, NetApp, ETSY, Garmin, Allegion
etc
(By Mike Dolan, editing by Christina Fincher mike.dolan@thomsonreuters.com.
Twitter: @reutersMikeD)
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