MARKET WRAPS
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Opening Call:
Europe is primed for a modestly-higher open after the Dow and S&P 500 eked out small gains Wednesday. In Asia, most stock indexes were higher; the dollar and bond yields extended their rallies; while oil and gold weakened.
Equities:
European equities should open in positive territory Thursday, with tentative gains spurred by a modest recovery on Wall Street.
U.S. stocks finished mostly higher Wednesday, even as investors juggled several concerns at once, including fears the Federal Reserve could knock the economy into recession as it raises interest rates to battle high inflation, mixed U.S. corporate earnings and worries about China's Covid outbreak.
It was a day of fluctuations, with the S&P 500 and Dow industrials hitting session highs in the early afternoon before paring their gains into the close. The Dow ranged about 588 points between its high and low of the day.
"Stocks have been so weak so far this month I believe investors are seeing some value in the current pricing," said Tracie McMillion, head of global asset allocation strategy at Wells Fargo Investment Institute.
Seema Shah, chief strategist at Principal Global Investors, said she sees the next moves in the stock market as either sideways or down.
Earnings are "supporting the market to some extent, but I don't think it's enough to support it higher," Shah said. She said her team has moved to a neutral recommendation on their overall equity positions.
"The risks are just piling up," she said. "We don't want to be picking up pennies in front of the steamroller."
Stocks to Watch:
Renault is in talks with the Russian government about handing over its 68% stake in Russia's biggest auto maker to a state-backed entity, according to a report in Russian state media.
The French auto maker is expected to sell its stake in AvtoVAZ for the symbolic sum of one ruble to NAMI, a state-backed automotive research and development center, Russian Industry Minister Denis Manturov was quoted as saying by Russia's state-run news agency Ria Novosti.
Read more here.
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TotalEnergies said it has taken a $4.1 billion accounting charge on the value of its natural-gas reserves, citing impacts from the Western sanctions targeting Russia.
Total's write-down was tied to a massive Arctic liquefied natural gas project under development called Arctic LNG 2, making it the latest major oil company to document the financial repercussions of doing business with Russia following the country's attack on Ukraine.
Read more here.
Economic Insight:
While the outlooks for most European banking systems are stable, those of the Baltic states of Estonia, Latvia and Lithuania are negative, Moody's said, "as the Ukraine crisis and consequent sanctions against Russia will lead to higher inflation and slower economic growth in the Baltic states."
Meanwhile, most European economies will continue recovering from the pandemic, although the pace will be slower due to the effect of the Ukraine conflict, Moody's added.
Forex:
The dollar continued to strengthen in Asia, with the USD Index surging to levels last seen in February 2017.
Rabobank said the buck could stay stronger for longer as investor demand for safe havens rise on fears about weaker global economic growth.
The potential for China to ramp up Covid-19 lockdowns threatens the outlook for global growth, said Rabobank forex strategist Jane Foley. "The step-up in risks to Chinese growth is set against the widespread acceptance that the war in Ukraine could continue for many months and an anticipated aggressive tightening in monetary policy by the Federal Reserve this year."
OANDA said a key factor supporting the dollar has been a risk-aversion theme in Asia. Overall, "you're going to see the interest-rate differential theme drive flows back into the greenback," said senior market analyst Edward Moya.
The Fed won't deviate from its aggressive tightening plan and that suggests half-point rate hikes at next couple meetings, Moya said. He added that markets see greater concerns for growth in Europe that is really going to drive dollar dominance versus the euro, especially because Germany is getting ready to talk about supporting a gradual EU ban on Russian oil, which will lead to harder economic times for Europe's largest economy.
Elsewhere in Asia, USD/JPY rose sharply after the Bank of Japan maintained its easing policy and showed its determination to keep rates low, saying it will conduct fixed-rate operations every business day to buy 10-year Japanese government bonds at 0.25%. USD/JPY hit 129.87, its highest level since April 2002, compared with 128.67 before the policy announcement.
Bonds:
Treasury yields edged higher, extending Wednesday's gains which saw them post their biggest rises in almost a week. Concerns about Fed tightening leading to a recession had been weighing on yields.
"Volatility in bond markets is a reminder that market expectations for the pace of Fed rate hikes can decrease as well as increase," said UBS. "The level of expectations for Fed tightening has increased to such an extent that it could provide a catalyst for market sentiment to improve if inflation starts to fall and the Fed is perceived to have more flexibility around moving rates higher."
Investors are bracing for next week's highly-anticipated FOMC meeting, when a 50-basis point hike is likely, as well as the kick-off of quantitative tightening.
"As it stands now, markets expect the Fed to return rates to the neutral level of 2.4% before the end of this year and then to continue hiking to nearly 3.5% next year," said Capital Economics' Paul Ashworth.
Other News:
S&P expects global bond issuance to contract about 4.9% in 2022, driven by tightening financing conditions.
"Quickly rising rates combined with the unpredictability of the Russia-Ukraine conflict are the main drivers behind our lowered issuance forecast compared to last quarter."
Thus far, interest rate volatility and rising geopolitical risks have had a mixed impact on bond issuance across sectors, S&P said, adding that the only country to see an increase in issuance among international public finance was China, whose investor base is largely limited to domestic participants, allowing for less interest-rate volatility relative to the rest of the world.
Energy:
Oil futures were down almost 2% after they shook off early weakness to end higher Wednesday, finding support from a large drop in U.S. inventories of gasoline and distillates.
Analysts continued to weigh up risks to energy supplies after Russia cut gas to two EU countries Wednesday.
"Germany's support for a gradual EU embargo on Russian oil imports suggests there is a scenario where the EU can wean themselves from Russia's oil imports," said CBA analyst Vivek Dhar, adding that Middle Eastern supplies remain key.
Other News:
Poland will speed up the construction of a floating storage and regasification unit at Gdansk after Gazprom said it will no longer sell natural gas to the country.
"We are speeding this up to 2025. The plan was to have it ready in 2027," said Piotr Naimski, the minister in charge of energy security.
Poland is one of a series of EU countries turning to FSRUs to boost their LNG capacity. Gas traders say the Russian LNG ban on Poland and Bulgaria will have a limited effect in the long run as both countries were planning to gradually cease buying gas from Moscow after this year.
Poland, whose gas storage facilities are 85% full, began operating another FSRU in 2019 and has chartered a number of gas moving ships to bring in LNG, while Bulgaria awaits new gas supplies through a pipeline from Azerbaijan.
Metals:
Gold extended its retreat as investors' attention increasingly turns to the Fed meeting in May.
The precious metal appears to be struggling and could be vulnerable to further selling pressure that takes it to the $1850 level, said OANDA's Edward Moya. "Gold prices are stuck in the danger zone until the Fed rips off the tightening band-aid next week."
A soaring dollar took the steam out of gold Wednesday, with the yellow metal posting its lowest finish in two months.
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Aluminum prices made modest gains on signs that Covid-19 case numbers were stabilizing in Shanghai, said ING, with higher natural gas prices also supporting aluminum, which is an energy-intensive metal. Headwinds from a stronger dollar aren't enough to offset the tailwinds, ING said.
TODAY'S TOP HEADLINES
Gold Demand Surges on Political, Economic Uncertainty
Gold demand surged during the first quarter of 2022 as political and economic uncertainty drove investors toward the precious metal, the World Gold Council said Thursday.
Demand for gold rose 34% to 1,234 tons in the first quarter compared with the same period last year, heavily influenced by inflows into exchange-traded funds, according to a new report from the WGC.
Russian Gas Stoppages Spur Europe's Race for New Energy Supplies
As the war in Ukraine rages, an energy battle is spreading across Europe, with countries racing to replace Russian fossil fuels while Moscow cuts off gas supplies to some nations and threatens others with the same.
(MORE TO FOLLOW) Dow Jones Newswires
04-28-22 0028ET
