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Marketmind: Rates angst, China cut and credit card deal

[February 20, 2024] A look at the day ahead in U.S. and global markets from Mike Dolan

Wall St returns from its long weekend to a mix of interest rate cut doubts, retailer updates and the biggest U.S. corporate deal of the year - while China's latest monetary easing was brushed off by markets overseas.

With the Federal Reserve releasing minutes of its January policy meeting on Wednesday, the rates market has been dragged kicking and screaming back closer to where the Fed had originally indicated at the end of last year.

After sparky new year consumer and producer price readings last week, two and 10-year Treasury yields hit their highest for 2024 on Friday and Fed futures pricing now has little more than 90 basis points of cuts in the mix for the year.

That's now within range of the 75bps of 2024 cuts indicated by Fed policymakers in December.

Don't fight the Fed?

The inflation backdrop won't have been helped by the latest jump in oil prices, which hit their highest in more than three months on Tuesday and crude is now back positive year-on-year for the first time since October.

Iran-aligned Houthis continued attacks on shipping in the Red Sea and Bab al-Mandab Strait, with at least four more vessels hit by drone and missile strikes since Friday. One of them, British-registered and Lebanese-managed Rubymar cargo vessel in the Gulf of Aden, was in danger of sinking, according to Houthis -- raising stakes in their campaign to hit shipping in solidarity with Palestinians in Gaza.

Canada releases its January inflation numbers into that scenario later too.

The cloudier inflation picture also comes alongside poor U.S. retail and industrial soundings for last month. WalMart and Home Depot results later on Tuesday may give a reality check on the former and to what extent freezing January weather distorted sales data.

But bracing for two and 20-year debt auctions on Wednesday, Treasury yields slipped back a touch from the year's highs ahead of Tuesday's open - with China's latest monetary easing greeting the new week.

China's central bank surprised many with the size of the 25bp cut to mortgage references rates earlier, even though fragile markets remained slightly underwhelmed by the authorities' efforts to stimulate credit and revive the ailing property market.

The blue-chip CSI300 index notched a sixth straight daily gain - broken by the lunar new year holiday - but its advance on Tuesday was a paltry 0.2%. Hong Kong's Hang Seng benchmark did a little better and rose 0.6%.

Despite the rate cut, the offshore yuan appreciated slightly - though it was laced once again with suspicion of state-back buying. The dollar was more mixed elsewhere - a touch higher on the yen but lower on the euro.

On the other hand, China optimists cling to more upbeat lending and tourism data that show signs of domestic demand re-emerging.

But a potential crackdown in the financial sector will keep markets on edge. China's top financial watchdogs vowed to ensure the sector adheres to 'Communist Party values' and serves the economy while avoiding "excessive" and "reckless" risks, the party's official newspaper said on Tuesday.

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Traders work on the floor at the New York Stock Exchange (NYSE) in New York City, U.S., February 14, 2024. REUTERS/Brendan McDermid

Back on Wall St, S&P500 futures were in the red ahead of Tuesday open but the long-weekend also brought the biggest corporate merger of the year.

Warren Buffett-backed U.S. consumer bank Capital One plans to acquire U.S. credit card issuer Discover Financial Services in an all-stock transaction valued at $35.3 billion to create a global payments giant.

The deal, which is expected to receive intense antitrust scrutiny, would form the sixth-largest U.S. bank by assets and a credit card behemoth that would compete with rivals JPMorgan Chase and Citigroup.

Discover Financial's share price was up more than 10% premarket.

The other buzz of the coming week will be Nvidia's hotly-awaited results on Wednesday -- as the artificial intelligence chip boom sees investors scramble for all things AI-related.

Nvidia shares, up about 50% this year, could swing by about 11% in either direction, according to data from options analytics service ORATS. That's the largest expected move options traders have priced in ahead of Nvidia's earnings over the last three years and well above the stock's actual average earnings move of 6.7% over that period, ORATS reckoned.

With Nvidia's market capitalization at $1.8 trillion, a move of that size would make for a potential swing in market value of about $200 billion. That would be greater than the market capitalization of chipmaker Intel and larger than the respective market values of about 90% of S&P 500 constituents.

In Europe, Barclays shares surged 7% as the British bank laid out a three-year plan to revive its flagging stock price, including axing 2 billion pounds of costs, returning 10 billion pounds ($12.6 billion) to shareholders and investing in its high-returning UK bank.

Key diary items that may provide direction to U.S. markets later on Tuesday:

* Canada Jan inflation, US Jan leading indicators, Philadelphia Fed's Feb service sector business survey

* U.S. corp earnings: Walmart, Home Depot, Palo Alto Networks, Allegion, Medtronic, Public Storage, Caesars Entertainment, Celanese, International Flavors and Fragrances, Realty Income, CoStar, Keysight Tech, Chesapeake Energy, Diamondback Energy, CentrePoint Energy, Evonix

* U.S. Treasury sells 3-, 6-, 12-month bills

(By Mike Dolan, editing by Ed Osmond mike.dolan@thomsonreuters.com)

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