MARKET WRAPS

Stocks:

European stocks struggled for traction on Tuesday, following eurozone and German PMI figures, and as U.S. futures drifted lower as investors eye a big batch of earnings, as well as important economic data.

"The recent easing of runaway inflation pressures has driven investors out along the risk curve on the expectation that central banks can pause their rate hike cycles this year and potentially even begin to reverse course, helping to dampen worst-case recessionary fears," SPI Asset Management said.

"Following better data, lower gas prices and China's reopening, the Euro area's growth prospects had thought to have improved significantly, and US investors slid huge blocks of risk outside the US, where Europe was a prime destination after the continent was supposed to have skirted recession thanks to Mother Nature."

"The mixed yet still soggy PMI data brings today's EU feel-good into question. At least at the survey level, the China reopening hasn't caught the European industrial heartland by hype storm yet," SPI Asset Management said.

Stocks to Watch

Renault shouldn't have trouble achieving its guidance for 2022, Baader Helvea said.

The French car maker targeted an operating-profit margin of above 5% and free cash flow of at least EUR1.5 billion for last year.

"The guidance looks to be in easy reach with the H2 margins expected in the range of 6%, up from 4.4% in H1, and hardly any burden on free cash flow from the working capital requirement," Baader said.

For 2023, Renault should guide for an operating-profit margin of more than 5% and free cash flow of more than EUR2 billion based on its mid-term targets, it added.

Economic Insight

The eurozone economy is expected to contract slightly in early 2023, to stabilize later in spring and to experience a rebound from summer that should gather pace at year-end and in 2024, Berenberg said.

"Despite significant near-term risks for markets after the strong start into 2023, the prospect for a return to solid growth after a mild downturn this winter points to some further upside for Eurozone equities, the euro and German benchmark bond yields over the course of this year."

The outlook for the eurozone has improved this year, and risks to Berenberg's forecast of annual GDP growth of 0.3% in 2023 and 1.5% in 2024 are tilting to the upside.

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Read Eurozone PMI Data Bolsters ECB for Strong Interest-Rate Increases

U.S. Markets:

Stock futures edged down ahead of earnings from major companies and a key economic-data release.

The benchmark 10-year Treasury yield inched down to 3.497%, from 3.522% yesterday.

Earnings season is in full swing, with General Electric, Johnson & Johnson, Danaher, Verizon Communications, 3M, Raytheon Technologies and Lockheed Martin all scheduled to report ahead of the opening bell. Microsoft is expected to post earnings after markets close.

"The biggest thing this week would be earnings. So far, the earnings season hasn't been that interesting," Legal & General Investment Management said.

"Everyone was worried that it could be an earnings season where we get revisions down, so when you get a season where nothing happens, you also get the idea that this pushes out the timing of a U.S. recession."

Economic updates set for release include the 'flash' S&P U.S. manufacturing and services PMIs for January.

Forex:

The dollar fell as fears over a hard landing for the global economy eased, driving investors away from safe haven assets, MUFG Bank said.

"Europe's economies appear to be holding up better than feared during the winter, there is building optimism over stronger rebound for China's economy this year, and there is more encouraging evidence that inflation pressures are now easing albeit from very elevated levels."

Easing inflation is giving markets confidence that central banks can pause their interest-rate hike cycles this year and potentially begin to reverse course, which is helping dampen hard landing fears, MUFG Bank said.

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The euro remained flat on the day versus the dollar even after the latest eurozone PMI survey exceeded expectations.

The data added to evidence that the eurozone might escape a recession but the region is "not out the woods" as demand continued to fall and continuing price pressures supported the case for higher interest rates, S&P said in the survey's press release.

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Sterling fell after data showed a key measure of U.K. manufacturing and services activity contracted by more than expected in January.

"Weaker-than-expected PMI numbers in January underscore the risk of the U.K. slipping into recession," S&P said in the survey's press release.

Bonds:

Both the 10-year Treasury and 10-year Bund yields have peaked, ABN Amro said.

"The recession will weigh on EU rates in 2023 with the 10y Bund yield expected to fall below the 2% level in 2023," ABN said, forecasting a similar path for U.S. rates.

ABN expects both Treasury and German Bund curves to remain inverted through most of 2023 as elevated core inflation will maintain short-term rates higher for longer.

Read German 10-Year Bund Yields Find 'Decent' Bottom at 2%

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Bonds are at the mercy of the "hawkish/dovish roulette" from ECB policymakers' comments but the day's attention will shift from the speakers to macro data, with flash purchasing managers indices due, Mizuho said.

"Any upside surprise would give more support to the [interest rate rises of] 50 basis points in February and 50bp in March call for the ECB that is nearly fully priced by markets."

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U.K. gilt market-makers and gilt investors support issuance of more short and medium maturity gilts in fiscal 2024 compared to fiscal 2023, the Debt Management Office said.

Participants also support increased issuance of green gilts, with recommendation for new maturities to be launched, the DMO said.

Nonetheless, there are mixed views on the size of long-dated gilts issuance with some market-makers in favor of a reduction of the issuance of long-maturity government debt.

DMO said retail investors are likely to contribute more significantly to U.K. government financing needs by investing in the gilt market as public sector net borrowing needs rise in FY 2023/24.

Energy:

Oil prices steadied as traders await greater signals on China's post-Lunar New Year demand.

Traders are hoping that Chinese demand comes back strong as the nation reopens but many are still cautious about a flare-up of Covid-19 cases that could occur during the holiday period.

"China will need more oil to grease its economic consumption and production engines," SPI Asset Management said.

"The oil market is still lightly positioned...So, there should be way more upside on this trade."

Natural gas

European natural gas prices slumped as a cold spell is expected to pass and temperature increase next week.

Western Europe has been in the grip of a cold spell which has boosted demand for natural gas for heating. Prices have remained subdued however as stockpiles remain healthy and the cold weather is not expected to last long.

Metals:

Metal prices were moving higher in early trading as the macroeconomic environment was seen improving.

"The macro environment is bullish for commodity money flows," Peak Trading Research said.

Crude oil prices rising yesterday, rallies in equities and inflation expectations rebounding have all helped improve macroeconomic sentiment.

Steel/Copper Outlook

The outlook for steel ingredient iron ore continues to be buoyed by optimism about China's economic recovery, according to Citi.

"Iron ore currently has upside risk from the China reopening theme, given its inelastic demand and supply which leaves it able to trade more financially, rather than physically (as its physical market remains weak at present)."

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Base-metal prices have started 2023 strongly, fueled by China's reopening, while unrest in Peru is clouding the outlook for copper supplies, Macquarie said.

"The biggest outperforming commodities have been tin, zinc, and copper which are up 18%,14% and 10% higher than where they started the year, respectively," it said.

Copper-mining operations in Peru, the world's No. 2 producer of the metal, are facing production disruptions due to protests, adding to uncertainty around 2023 supply, Macquarie added.

It highlighted lead, nickel and cobalt--which are 8%, 6% and 6% lower than where they started January, respectively--as the biggest underperformers in the year to date.

DOW JONES NEWSPLUS


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Eurozone Economy Swung to Expansion in January, PMIs Show

The eurozone economy expanded in January for the first time in seven months, according to a purchasing managers survey, adding to signs that the region could face a milder-than-expected downturn this winter or even avoid a recession.

The S&P Global Flash Eurozone PMI Composite Output Index, which gauges activity in the manufacturing and services sectors, increased to 50.2 in January from 49.3 in December, the highest level since June.


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01-24-23 0623ET