MARKET WRAPS
Watch For:
EU flash consumer confidence indicator, euro area balance of payments; Germany PPI; U.K. Chancellor Jeremy Hunt takes questions in the House of Commons, Prime Minister Rishi Sunak appears before the Liaison Committee; Italy balance of payments; trading update from Petrofac
Opening Call:
Shares in Europe are poised to track lower on Tuesday. In Asia, stock benchmarks fell; Treasury yields rose; the dollar slipped; oil and gold gained.
Equities:
European shares may fall at the open on Tuesday, tracking overnight declines on Wall Street, amid investor concerns over the health of the global economy and the path for interest rates.
“There’s still so much concern overhanging markets about the never-ending Covid story and the worries about a hard landing due to rate hikes,” said Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown.
“Even if we do get a year-end rally, it will fizzle out because those concerns are still there.”
Sharing a similar sentiment, SPI Asset Management said, “the Fed and ECB seem determined to leave a lump of coal in everyone’s stockings this holiday season.”
“With economic data undershooting expectations, it’s not a stretch to think investors may shift their focus from inflation and the Fed to the growing impact that the Fed’s actions are likely to have on the economy in 2023,” it said.
Forex:
The dollar lost ground early Tuesday, maintaining yesterday’s downward trend.
A final round of year-end rebalancing is driving most major currencies up against the dollar,” said Karl Schamotta, chief market strategist at Corpay.
The dollar weakened sharply versus the yen after the Bank of Japan on Tuesday said it is loosening its control over 10-year Japanese government bond yields.
The move would allow the yield curve to shift higher, narrowing the gap between long-term U.S. and Japanese government bond yields.
Meanwhile, the pound looks vulnerable, especially against the euro, Generali Investments said.
“We do not see the British pound out of the woods,” it said.
“Given its gas dependency and tight labour market, the U.K. faces the most striking stagflation dilemma.”
A widened current account would also weigh on sterling, which was likely to weaken versus the euro even if it gained “some modest ground” against a broadly weaker dollar, it added.
Bonds:
Treasury yields were higher, after rising Monday, as investors came around to the increasing likelihood that central banks around the world will keep raising rates in 2023 despite the economic impact.
“There isn’t a great deal on offer that will shift the prevailing macro narrative — the Fed remains in rate hiking mode with another 75 bp slated before reaching terminal, risk assets are responding to the absence of a policy pivot, and hawkishness among other major central banks indicates that Q1 will see policymakers willing to err on the side of a tighter stance even if faced with evidence the global economy is flagging,” said BMO Capital Markets.
“There is now even chatter that the ultra-dovish Bank of Japan might be due for a policy change when the current Governor Kuroda steps down in April,” it added.
Earlier Tuesday, the BOJ made a surprise decision to let Japanese government bond yields rise to a higher level.
The Japanese central bank set its target range for the 10-year Japanese government bond at between minus 0.5% and plus 0.5%. Previously the target range was between minus 0.25% and plus 0.25%.
The BOJ’s move is “a small step toward an exit” from monetary easing, said Mitsubishi UFJ Morgan Stanley Securities.
The BOJ needed to narrow the gap between its cap on the 10-year yield and where the yield would stand if market forces were given full rein.
“Otherwise magma for higher yields could build up, causing the yield to rise sharply when the BOJ actually unwinds easing,” it added.
Energy:
Oil prices rose in Asia amid ongoing demand hopes.
Crude-oil prices have gained on optimism toward China’s reopening as well as on the Biden administration’s recent plan to replenish the U.S. strategic petroleum reserves, beginning with a purchase of three million barrels of oil, CMC Markets said.
“Going forward, it seems more likely that we will see further support from the PBOC (People’s Bank of China) to support economic growth in China, and Beijing is likely to ease off all the policies around Covid,” Ava Trade said.
Metals:
Gold prices edged lower early Tuesday, as slightly higher U.S. Treasury yields diminished the appeal of the non-interest-bearing asset.
The precious metal is still holding up relatively well in December and this could gain traction as investors position their portfolios a bit more on the defensive side, Oanda said.
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Copper prices fell, pulling back from previous gains as investors weighed mixed signals of long-term demand optimism from China’s reopening, and temporary concerns over its ongoing infection surge.
Galaxy Futures analysts said buying activities in the physical market have been muted so far this week as many traders have tested positive.
Demand may remain weak for now with many copper-consuming sectors slowing production on Covid infections among their staff, the analysts said, warning of further downside risk for copper prices.
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Chinese iron-ore futures gained, recovering from declines in the past two sessions.
Market expectations are split between potentially strong winter restocking demand and concerns about the extent of policy support for the real-estate sector, as well as Covid-19 outbreaks in the country, Guotai Junan Futures said.
Near-term increases in iron-ore prices appear limited, it added.
TODAY’S TOP HEADLINES
Bank of Japan Lets a Benchmark Rate Rise, Causing Yen to Surge
TOKYO-The Bank of Japan made a surprise decision to let a benchmark interest rate rise to 0.5% from 0.25%, pushing the yen higher and ending a long period in which it was the only major central bank not to increase rates.
The BOJ said the yield on the 10-year Japanese government bond could rise as high as 0.5% from a previous cap of 0.25%. The central bank has set a target range around zero for the benchmark government bond yield since 2016 and used that as a tool to keep overall market interest rates low.
China PBOC Keeps Benchmark Lending Rates Unchanged
China’s benchmark loan rates remained unchanged this month, according to a statement released by the central bank on Tuesday, despite more signs of weakness in the world’s second-largest economy.
The one-year loan prime rate stood at 3.65% while the five-year rate was 4.3%, both unchanged for a fourth straight month, the People’s Bank of China said in the statement.
U.S. Delays Key Step for EV Subsidy Program After Foreign Pushback
WASHINGTON-The Biden administration on Monday delayed proposing detailed rules for new tax incentives for electric vehicles, following strong pushback from European and Asian allies that the subsidy program discriminated against their companies.
The Treasury Department said details on the battery-sourcing requirements that electric vehicles must meet to qualify for up to $7,500 in tax credit will be released in March, instead of by the end of this year as earlier planned.
Italy Found a Fix for Its Gas Crisis, but Locals Are Resisting
ROME-Italy’s ability to keep its homes warm and lights on beyond this winter hinges partly on a liquefied-natural-gas terminal off the coast of Tuscany.
Roberta Degani is fighting it tooth and nail.
European Energy Ministers Agree to Emergency Natural-Gas Price Cap
BRUSSELS-European energy ministers reached an agreement Monday to impose an emergency limit for natural-gas prices, which have been sent soaring by Russia’s invasion of Ukraine.
The ministers agreed to impose a price cap if month-ahead prices remain above 180 euros a megawatt hour, equivalent to $191, on the European Union’s main trading hub for three consecutive days. Prices must also be at least EUR35 higher than a reference level for global liquefied natural gas during the same period.
Sam Bankman-Fried’s Lawyers Hash Out His Transfer to U.S. After Confusion in Court
NASSAU, Bahamas-FTX founder Sam Bankman-Fried inched closer to being transferred into U.S. custody to face criminal charges related to the cryptocurrency exchange’s collapse, after a chaotic court hearing here Monday in which his local lawyer appeared at odds with his U.S. legal team.
Mr. Bankman-Fried has agreed to be extradited, according to a person familiar with the matter, and plans were being fleshed out by his legal team after the day’s court proceedings. Mr. Bankman-Fried’s lawyers hope to have a new hearing on the matter as early as Tuesday, the person said.
Binance.US to Buy Assets of Bankrupt Crypto Lender Voyager, Eyes More Acquisitions
The U.S. arm of Binance, the world’s largest cryptocurrency exchange by trading volume, has agreed to buy the assets of bankrupt crypto lender Voyager Digital.
Voyager resumed its search for a buyer after the collapse of crypto exchange FTX. In September, FTX beat Binance.US to win the auction for Voyager’s customer accounts with a purchase price of around $50 million and in a deal valued at $1.42 billion, The Wall Street Journal reported.
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Expected Major Events for Tuesday
05:30/NED: Dec Consumer confidence survey
05:30/NED: Oct Consumer Spending
06:00/FIN: Nov Labour force survey, incl unemployment
07:00/GER: Nov PPI
07:00/SWI: Nov Trade Balance
07:00/DEN: Dec Consumer expectations
08:00/SVK: Nov PPI
09:00/POL: Nov Average gross wages
09:00/ICE: Nov Harmonized CPI
09:00/POL: Nov PPI
09:00/POL: Nov Industrial Production Index
09:00/EU: Oct Euro area balance of payments
09:00/POL: Nov Agricultural prices
10:00/BEL: Dec Consumer Confidence Survey
10:00/ITA: Oct Balance of Payments
10:00/LUX: Nov Unemployment
11:00/POR: Nov PPI
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December 20, 2022 00:15 ET (05:15 GMT)
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