MARKET WRAPS

Watch For:

Flash PMI data for eurozone, Germany, France, UK; foreign trade and CPI data for EU, Italy; Deutsche Bundesbank semiannual forecasts; UK retail sales; trading updates from Allianz, Finnair

Opening Call:

Shares in Europe seem poised for opening gains on Friday after falling overnight amid signals by central bank officials on both sides of the Atlantic that they have more work to do to tame inflation. In Asia, stock benchmarks mostly retreated; Treasury yields rose; the dollar and oil slipped; while gold gained.

Equities:

European shares could bounce back Friday after declining overnight on the heels of rate increases by European central banks and the European Central Bank's signal that investors shouldn't expect a halt in rate hikes any time soon.

Central banks in Europe on Thursday followed the Federal Reserve in slowing the pace of interest-rate increases. The ECB and the Bank of England hiked their key lending rates by 50 basis points, but policy makers at the ECB emphasized that market participants should prepare for a series of rate increases to come.

"The message has been that they're going to continue to be pretty aggressive raising rates," Raymond James said.

ECB President Christine Lagarde "reset market expectations for how high rates can go, which should cripple the economy," Oanda said. "If the next couple of meetings contain consecutive half-point rate increases, the eurozone will have a much deeper recession."

"There's definitely an air of worry about recession in the market right now," said Baird. "The market is not worried about inflation anymore. It's worried about looming recession or the Fed going too far."

Capitol Securities Management said it looks like there will be no Santa Claus rally this year, with investors instead likely to hold their breath to get through the rest of an extremely painful year in financial markets.

Forex:

The dollar lost ground in Asia after ECB's Lagarde delivered supportive signals for the euro.

Lagarde indicated at least a couple more 50 bps hikes in February and March, which is more aggressive than priced in and boosted the euro, Ebury said.

"Unlike in the U.S., we are yet to see clear signs of an easing in euro-area inflation, and that could encourage the Governing Council to raise rates deeper into 2023 than the Federal Reserve--a bullish signal for the euro," Ebury added.

While the ECB's rate rise of 50 basis points was largely expected, "concrete QT details came as a surprise, and the upward revision to inflation and forward guidance element on future rate hikes is a clear signal that the ECB won't be finished with just another 25bps or 50bps in hikes," TD Securities said.

While the ECB's hawkish tone is euro supportive, with the Federal Reserve failing to push back against easing financial conditions there is "no compelling reason" to seek a major dollar reversal, TD Securities added.

Bonds:

Treasury yields advanced after retreating overnight.

Recession fears have been on the upswing since Wednesday's decision by the Fed to lift interest rates by a half-percentage-point and to deliver a 2023 median forecast for a 5.1% fed-funds rate target. Those actions were accompanied by Fed Chair Jerome Powell's remarks on the need to keep rates higher for longer.

"The last round of major central bank meetings for the year has proven an eventful one, with some surprising messages sending financial markets into another policymaker-induced convulsion," said Capital Economics.

"Hopes of a 'pivot' from the Fed and, in particular, the ECB have (yet again) been disappointed," and "while the Fed has led the way in tightening policy aggressively for much of the year, this time around the ECB came across as the most hawkish."

Charles Schwab said "we didn't expect inflation to rise as high as it has and, as a result, hadn't expected this many Fed rate hikes." Charles Schwab now sees the 10-year yield ending 2023 between 3% and 3.25%, though it could get there sooner, and should retest the 4.25% level in the near term.

Energy:

Crude oil declined in Asia, extending its overnight fall partly on a partial restart of the Keystone pipeline.

"Oil's recent rally is running out of steam as risk aversion runs wild," Oanda said.

The Fed's decision was slightly hawkish on the surface, said Sevens Report Research. For oil, "persistent hopes for a soft landing will be important for the bull case as a deep recession would more than likely cripple consumer demand for refined products and see energy prices fall substantially."

However, fresh supply concerns could be rising amid tentative signs that key Russian oil exports from a port in Asia are dipping following G-7 sanctions, Saxo Markets said.

Metals:

Gold rose slightly early Friday after settling lower overnight.

Tighter monetary policy and high inflation are likely to lead to slower global economic growth in 2023, which is good news for gold demand, ANZ said.

Any depreciation in the U.S. dollar could also boost the demand for the precious metal, since gold is typically seen as a haven asset, ANZ added.

"With the Fed still waging war against inflation and interest rates expected to climb higher than anticipated, the appetite for zero-yielding gold took a hit," said Lukman Otunuga, manager, market analysis, at FXTM.

Whether gold can "make further progress from here may depend on how good a job the Fed does in convincing traders of its intentions, with the initial reaction suggesting they're not fully buying it," Oanda said.

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Copper prices were higher, picking up from a slight downturn in recent sessions.

ANZ said the metal's price may encounter some fluctuations in the near term, as investors re-evaluate China's economic rebound momentum after authorities abruptly dropped the country's Covid-zero policy.

The latest official economic data suggest substantial weakness in November, ANZ said, adding that "the current surge in Covid-19 cases raises the prospect of that weakness persisting into December and early 2023."

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Chinese iron-ore futures rose, as investors welcomed Beijing authorities' latest supportive message for the country's property sector, a major consumer of steel and iron-ore.

Haitong Futures said the ore's elevated prices may be sustained in the near term, on a rosy demand outlook driven by China's reopening and policy support to the real-estate sector.

Iron-ore inventories of steel producers also remain at low levels, which could further boost demand in the coming months, Haitong added.


TODAY'S TOP HEADLINES

U.K. Consumer Confidence Rose to Five-Month High in December

Consumer confidence in the U.K. recovered in December to its highest level since July, but remained at very subdued levels as high inflation and dim economic prospects weighed.

Research firm GfK said its consumer-confidence barometer increased to minus 42 in December, up from minus 44 in November, posting a third-consecutive monthly rise. Economists polled by The Wall Street Journal expected confidence to improve to minus 43.


Ukraine Steps Up Attacks on Russian Targets in Occupied Territory

KYIV, Ukraine-Ukraine said it struck a Russian ammunition depot and military base on occupied territory in the country's east, as both sides ruled out the possibility of a Christmas cease-fire after almost 10 months of fighting.

"A full cease-fire from our point of view will come only when there are no more occupying forces on our land," Gen. Oleksiy Hromov, a senior officer on Ukraine's General Staff, said Thursday in comments reported by Ukrainian media.


European Parliament Corruption Scandal Casts Shadow Over EU

BRUSSELS-European Union leaders raised concerns about a corruption scandal at the bloc's Parliament on Thursday amid growing worries that the bloc's reputation would be tarnished by allegations that EU legislators took bribes from Qatar.

Belgian police have detained two EU lawmakers and several other people linked to the European Parliament over suspicions that they accepted hundreds of thousands of euros from Qatari officials to influence the legislature's decisions. Police have staged raids in Belgium and Italy, in what threatens to become the biggest scandal in Brussels in years.


U.S. Sanctions Russia's Rosbank, Subsidiaries of VTB

The U.S. government has sanctioned Russian lender Rosbank and has expanded sanctions against VTB, one of the country's largest banks, in a move to further limit the Russian government's efforts to fund its war in Ukraine.

The Treasury Department's Office of Foreign Assets Control on Thursday announced sanctions against 17 subsidiaries of VTB, building on sanctions placed on the parent company in February, after Russia invaded Ukraine.


EU Greenlights 15% Corporate Minimum Tax, Advancing Global Deal

Countries in the European Union are set to start collecting additional taxes in 2024 under a long-stalled global deal to set a minimum rate on company profits, after Hungary and Poland dropped their objections to the move.

In October 2021, 137 countries agreed to impose a 15% minimum tax on large companies, paving the way for the most significant overhaul of international tax rules in a century. By imposing the tax in each jurisdiction where a company operates, large countries aim to reduce tax-rate competition and the advantages of operating in a low-tax locale. Getting to that point took years of negotiations that often seemed close to collapse.


Twitter Suspends Accounts of Several Journalists

Twitter Inc. suspended the accounts of several journalists Thursday without publicly specifying why, the latest instance of the platform making content or user decisions under Elon Musk without much transparency.

The accounts belonged to journalists from publications including CNN, the Washington Post, the New York Times and Mashable. Representatives for the outlets said they didn't receive any explanation of why the accounts were suspended.


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12-16-22 0016ET