MARKET WRAPS

Stocks:

European stocks were slightly weaker on Tuesday, with sentiment cautious, as geopolitical tensions combined with worries over U.S. interest rates.

"...the move towards a higher-for-longer consensus seems to be back in motion today as the hawkish drumbeat grows louder even as we approach U.S. PMI and existing home sales data," SPI Asset Management said.

"Hence traders feel compelled to hedge that hawkish sting in the tail in case the data comes in stronger than expected, as a " no landing" is not an option for the Fed."

In the U.K., mining shares fell after BHP posted lower-than-expected first-half profits and copper miner Antofagasta's annual earnings also fell short of forecasts.

Antofagasta took a hit from weather and production issues and lower copper prices, eToro said.

Still, China's economic re-opening and potentially shallower-than-expected recessions in the U.S. and Europe could support metal prices.

"Therefore, if Antofagasta can avoid any major production-process disruption, we should see copper and gold production increase in 2023."

Stocks to Watch

Lufthansa has managed to fix its balance sheet since the pandemic and it is now free from state aid-related restrictions, Barclays said, initiating coverage of the stock with an overweight rating and a price target of EUR14.8.

"The key feature of the Lufthansa equity story rests on further deleveraging. Lufthansa faces relatively moderate capex, and is introducing a larger share of leasing than before."

The airline trimmed net debt to EUR6.2 billion at September 2022 from EUR9.9 billion since December 2020, Barclays said.

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The core banking businesses of Italy's UniCredit, Credem and Banco BPM might continue to generate positive earnings surprises with better-than-expected net interest income trends in 2023, Deutsche Bank said.

While Italian banks reported better-than-anticipated trends, with net income ahead of expectations and net interest income beats, the price action was less brilliant, Deutsche Bank added. It said only Monte dei Paschi di Siena, Intesa SanPaolo and Unicredit outperformed after the 4Q release.

"Investors are starting to discriminate on the quality of the net interest income beat in 4Q and its sustainability going forward, with those not ready to improve EPS guidance not being rewarded with market multiple upgrades."

Deutsche Bank cut Mediobanca from hold to sell.

Inflation

The European Central Bank expects the inflation shock to persist for longer than seems likely, Berenberg said.

The ECB is concerned that inflation expectations could be unanchored and trade unions may set off a wage-price spiral, two risks that for now are contained.

"The ECB had underestimated the structural uptrend in underlying inflation for a long time. We believe that the ECB has now succumbed to the converse mistake."

With declining energy prices, the ECB should lower its inflation forecasts soon, lessening the need to raise interest rates as aggressively as signaled, Berenberg said.

"That leaves the door open for a pivot towards a less aggressive posture."

U.S. Markets:

Stock futures and government bond prices fell to kick off a new trading week, dragged down by growing worries that the Federal Reserve will keep interest rates higher for longer.

Headlining earnings will be retail giant Walmart. Home Depot and Molson Coors also report before the market open.

Forex:

The euro remained weaker against the dollar after February's eurozone purchasing managers' index survey showed services activity improved but manufacturing activity contracted further.

The services PMI rose to 53.0 in February from 50.8 in January but the manufacturing PMI fell to 48.5 from 48.8. Analysts in a WSJ survey had expected manufacturing PMI at 49.2 and services PMI at 50.9.

The data showed inflationary pressures eased but elevated prices in the services sector will concern ECB policymakers, S&P said.

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Sterling rose after the latest U.K. PMI survey exceeded expectations.

The composite PMI rose to 53.0 in February from 48.5 in January, above the 49.0 reading expected in a WSJ survey of analysts.

The "resilience of the economy and the stickiness of the survey's inflation gauges add to the likelihood of the Bank of England tightening policy further, and potentially more aggressively," S&P said.

Read Norwegian Krone to Rise if Norges Bank Signals Higher Rates

Bonds:

Bund yields have scope to rise as the European economy can accelerate again in the second half, albeit with a slightly less pronounced upward movement at the long end of the curve, DZ Bank said.

It has targeted the 10-year yield at 2.6% on a six-month horizon--compared with their previous forecast of 2.8%--with the rise also to be supported by the ECB's expected termination of reinvestment under the Asset Purchase Programme in the second half.

"The scope for higher 10Y Bund yields over the course of the year will also be limited to some extent by lower U.S. capital market yields again in this period."

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ING said current euro fixed-income rates aren't particularly high.

"Ten-year Bund yields hovering around 2.5% and 10Y swap rates around 3% is roughly where we pitched fair value at the start of the year, so we are open to the idea of a further increase in market rates."

Another series of upbeat indicators on Tuesday could reinforce the higher-for-longer narrative, ING said.

Energy:

Oil prices edged lower in Europe as investors monitored the outlook for U.S. interest rates, China's reopening and Russian crude output.

Investors continue to hope that China's reopening will drive oil demand higher later this year. A jump in Russian oil exports in recent weeks has kept a lid on prices, however.

"Despite early reopening and a brighter forward macro-outlook, traders remain wary due to the surge in Russian oil exports," SPI Asset Management said.

With concerns also present about the destination for interest rates in the U.S., Wednesday's release of the Federal Reserve's latest meeting minutes will be a key focus this week.

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Fears of an energy crisis sparked by Russia's invasion of Ukraine appear to be outweighing the moral obligation to reduce carbon emissions, allowing investments in fossil-fuel projects in Africa such as Uganda's 900-mile crude oil export pipeline to remain on track, Oxford Economics Africa said.

TotalEnergies' $10 billion oil project in Uganda remains on track, with the country expected to start shipping as much as 230,000 barrels of crude oil a day to global markets in 2025.

Oxford Economics noted that fears of an energy crisis have "provided a window for many companies to invest in new oil-and-gas projects in Africa without receiving heavy pushback from climate-change activists."

Read Energy Companies Are Neglecting Easy Solutions to Methane Emissions, IEA Says

Metals:

Base metals were mixed in early trading, with gold lower, as contrasting political messages from China and the U.S. added to market uncertainty.

"From the macro perspective, the uncertainty comes from the political issues," Marex said, adding that Joe Biden's visit to Ukraine and promise of $500 million in military aid coincided with China saying it was seeking a "political solution" to the Ukraine crisis.

China is also looking to boost private investment in real estate, including residential, commercial, and infrastructure projects, Marex said.

DOW JONES NEWSPLUS


EMEA HEADLINES

U.S., Allies to Boost Efforts to Stop Russia Skirting Sanctions

The U.S. and its allies are preparing to increase efforts to enforce sanctions against Russia, threatening to hit foreign companies helping Moscow evade economic restrictions.

In a speech Tuesday ahead of the first anniversary of Russia's invasion of Ukraine, Treasury Deputy Secretary Wally Adeyemo is expected to say that the Kremlin is making an all-out effort to evade Western sanctions.


Eurozone Economy Gained Pace in February, PMIs Suggest

The eurozone economy expanded in February for a second straight month, according to data from a purchasing managers survey, signaling resilience midway through the first quarter even as the drag from higher interest rates is set to hit activity.

The S&P Global Flash Eurozone PMI Composite Output Index, which gauges activity in the manufacturing and services sectors, rose to 52.3 in February from 50.3 in January, a nine-month high and beating the 50.5 consensus forecast by economists in a poll from The Wall Street Journal.


HSBC Posts Higher Profit After Rise in Global Interest Rates

Global banking giant HSBC Holdings PLC reported a sharp rise in fourth-quarter profit as it benefited from higher interest rates and continued to sharpen its focus on Asia and the Middle East.

The British lender's profit more than doubled in the final three months of 2022 from a year earlier to $4.6 billion, HSBC said Tuesday. That exceeded analyst expectations. For the full year, HSBC's profit rose nearly 18% to hit its highest level in almost a decade.


Engie 2022 Net Profit Fell Despite Revenue Growth - Update

Engie SA on Tuesday posted rising revenue for 2022 and set its dividend for the year, although net profit declined on impairment and credit losses and provisions.

The French utility company reported net profit of 216 million euros ($230.8 million) from EUR3.66 billion the previous year. Net recurring income, which strips out one-offs, came in at EUR5.2 billion, up from EUR2.9 billion the previous year, narrowly beating consensus expectations of EUR5.1 billion.


Credit Suisse shares fall after Swiss regulator reportedly probes chairman's remarks on outflows

Credit Suisse Group's CH:CSGN stock fell almost 6% on Tuesday morning following a Reuters report that Swiss financial regulator Finma is looking into comments made by the bank's chairman Axel Lehmann in December about outflows at the struggling banking giant.

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02-21-23 0604ET