A look at the day ahead in U.S. and global markets from Mike Dolan
Only seven weeks into the new year and many of the year's favoured investments look spent already - or at least they require something of a rethink.
With Wall St stocks clocking their worst day of 2023 on Tuesday, many of the big consensus trades - short dollar, long bonds and long emerging markets - all look questionable if the U.S. and world economies are re-acclerating, buoying above-target inflation and forcing central banks to tighten further.
At 4.73%, two-year U.S. Treasury yields closed at their highest in 15 years. The dollar is now almost 1% higher for the year to date. Emerging market equities are at their lowest since Jan 4, the VIX 'fear index' is at its highest since Jan 3 and the S&P500 and Nasdaq have wiped out all of February gains.
Whether or not stocks are in what Morgan Stanley (NYSE:MS) strategist Mike Wilson likens to the 'death zone' at the top of Everest, some soul searching is underway nonetheless. And markets have calmed a little early on Wednesday.
Minutes of the Federal Reserve's latest policy meeting are due for release on Wednesday - but data releases showing sticky inflation, booming retail sales and a service sector back in expansion emerged after that meeting. And so a speech from New York Fed chief John Williams make give a better steer on current thinking.
Markets are now priced for a Fed 'terminal rate' in the 5.25-5.50% range by July and no cut from there by year-end.
European central bankers are also talking tough as the region's economies dodge recession and inflation stays high. Deutsche Bank (ETR:DBKGn) lifted its forecast for where the European Central Bank's key rate will peak in this tightening cycle to 3.75% from 3.25% previously - 125bp up from current rates.
The only positive inflation news was that ebbing world oil prices are now tracking year-on-year declines of 15% as huge base effects from last February's Ukraine invasion kick in. Weak U.S. housing updates and downbeat retail readouts from Walmart (NYSE:WMT) and Home Depot (NYSE:HD) also question the prevailing narrative.
But geopolitical concerns rankle again ahead of Friday's anniversary, with Russia unilaterally withdrawing from a key nuclear arms control treaty.
As G20 finance chiefs meet in India, the world is watching closely the extent of the alliance between Beijing and Moscow. According to the Wall Street Journal, China's top diplomat has indicated that Beijing's relationship with Moscow is "rock solid" and Chinese leader Xi Jinping is preparing to visit Moscow for a summit with Vladimir Putin in the coming months.
Elsewhere, the Bank of Japan doubled down again on its bond yield cap as Japan's 10-year government bond yield breached the BoJ's policy band for a second straight session. Big manufacturers in Japan remained gloomy in February too.
In banking, shares of Lloyds (LON:LLOY) fell 2.6% after Britain's biggest mortgage lender reported a flat annual profit for 2022 as a jump in interest income was offset by mounting bad loan provisions. Lloyds said falling house prices, competition for savings and rising costs may crimp future returns.
With results from Nvidia (NASDAQ:NVDA) due on Wednesday, Microsoft (NASDAQ:MSFT) struck a 10-year deal to bring "Call of Duty" and other Activision games to Nvidia's gaming platform if the Xbox maker is allowed to complete a much-contested $69 billion acquisition of Activision.
Coinbase (NASDAQ:COIN) Global reported a fourth-quarter loss, as trading volume at the cryptocurrency exchange came under pressure from an industry-wide downturn triggered by a string of high-profile bankruptcies.
Key developments that may provide direction to U.S. markets later on Wednesday:
* U.S. Federal Reserve's Federal Open Market Committee releases minutes from its latest meeting; New York Fed President John Williams speaks
* G20 finance ministers and central bank chiefs meet in Bengaluru in southern India
* U.S. Treasury sells 5-year notes, 2-year floating rate notes
* U.S. corp earnings: NVIDIA, EBay, NetApp (NASDAQ:NTAP), ETSY, Garmin (NYSE:GRMN), Allegion (NYSE:ALLE) etc
Graphic: World economy surprises in 2023 https://fingfx.thomsonreuters.com/gfx/mkt/movakqnyjva/One.PNG
Graphic: US service sector expanding again https://www.reuters.com/graphics/USA-STOCKS/klvygnewkvg/spglobalpmi.png
Graphic: Japan govt. bond yields breach cap https://www.reuters.com/graphics/JAPAN-ECONOMY/BOJ%20JAPAN-ECONOMY/myvmoanagvr/Screenshot%202023-02-22%20at%2011.43.03%20AM.png
Graphic: Coinbase reports 4th consecutive quarterly net loss https://www.reuters.com/graphics/FINTECH-CRYPTO/COINBASE/klvygnkexvg/chart.png
Graphic: Moscow suspends nuclear arms control treaty https://www.reuters.com/graphics/UKRAINE-CRISIS/PUTIN-NUCLEAR/akpeqogrwpr/chart_eikon.jpg
(By Mike Dolan, editing by Christina Fincher mike.dolan@thomsonreuters.com. Twitter: @reutersMikeD)