MARKET WRAPS
Stocks:
European stocks suffered broad losses on Wednesday, as concerns about higher U.S. interest rates and intensifying geopolitical fears continued to weigh on investor sentiment.
On the monetary-policy front, investors are awaiting the latest Federal Reserve minutes that will be scrutinized for signals about interest-rate policy, while after the U.S. close, New York Fed President John Williams gives a speech on inflation.
Investors have moved to price in higher rates for longer, following stronger-than-expected economic data, including PMI surveys released on Tuesday.
"What's really occupying the market's mind now is this resilient growth, which is likely to mean more resilient inflation," J.P. Morgan Private Bank said.
European Central Bank
SEB has raised its forecast for the ECB's peak rate, expecting the terminal deposit rate at 3.50% in June, up from the previous forecast of 3.25%.
The new forecast means a 50 basis point interest-rate rise in March, followed by 25bps increases in May and June, SEB said, but acknowledges upside risks to the forecast.
"Based on our current inflation forecast, we think that at the time of the June meeting the ECB has gained confidence that core inflation is on a downward trend that is solid enough to motivate ending the rate hike cycle and shifting the focus to the balance sheet reduction."
Read Deutsche Bank Raises ECB Peak Deposit Rate Forecast by 50Bps to 3.75%
U.S. Markets:
Index futures struggled for traction, a day after the major benchmarks suffered their worst session of 2023 so far.
The S&P 500 closed below 4,000 as 2-year Treasury yields flirted with their highest level since 2007. The CBOE Vix index, a measure of expected stock market volatility, stands above 23, having dipped below 18 at the start of the month.
"Investors are waking up to a stark realization that the Fed's work is not done, and that interest rates may have to be hiked even higher to cool hot inflation," Hargreaves Lansdown said.
Nvidia and eBay are scheduled to report earnings after markets close.
Forex:
A resurgence of geopolitical risk in the Russia-Ukraine conflict is curbing appetite in the euro, ING said.
Markets may need to get some reassurance on that issue before jumping back into EUR/USD long positions, which expect the exchange rate to rise, ING added.
"At this stage, support around EUR/USD 1.0640-1.0660 is enough of an encouraging sign for EUR/USD given the strength of the dollar against other pro-cyclical currencies."
However, EUR/USD could fall below support if the Fed's meeting minutes at 1900 GMT deliver a "hawkish surprise" on the need for further interest rate rises and/or more geopolitical risk is priced in, ING said.
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Higher long-term Treasury yields, following Tuesday's U.S. PMI data, have helped to prop up the dollar, UniCredit Research said.
"This is preventing any concrete downward correction of the dollar. The dollar index is stuck at around 104 with lingering geopolitical tensions offering additional support."
Read Sterling Could Have Limited Room to Rise Vs Euro
Bonds:
Demand from asset managers at eurozone government bond syndications this year has fallen versus the recent past but it has been made up by stronger demand from other investor groups, Deutsche Bank said.
A comparison of demand at syndications year to date with the same country and tenor either in 2022, if available, or in 2021, for less frequent issuers, shows a 7.2% drop in demand from asset managers, Deutsche Bank said.
This is, however, filled predominantly with stronger demand from central banks and official institutions, with a 4.7% increase in allocation, followed by bank treasuries [+1.7%] and other non-financial investors [+1.5%].
Demand from hedge funds as well as pension funds and insurance companies is little changed, Deutsche Bank said.
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BlackRock has increased its exposure to short-term Treasurys to an overweight.
"The jump in yields-the two-year U.S. Treasury yield is now near 4.6% compared with 1.5% a year ago-that now means short-term bonds provide income," it said.
BlackRock also likes the ability of Treasurys to preserve capital at higher yields in this more volatile macro and market regime.
Energy:
Oil futures were around 1% lower, with investors concerned that U.S. economic resilience will drive the Fed to be more aggressive on interest rates.
"Markets continue to come to terms with expectations of a more hawkish Fed, following a raft of economic data suggesting the Fed still has quite a bit of work to do," ING said.
Metals:
Base metals fell close to 1%, with gold slightly firmer, as hawkishness from central banks continued to keep a cap on prices of commodities.
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The Ifo business-climate index rose to 91.1 in February from 90.1 in January, the highest reading since June, data from the Ifo Institute showed Wednesday. The reading matches economists' expectations in a poll by The Wall Street Journal.
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02-22-23 0553ET
