MARKET WRAPS
Watch For:
EU PPI, U.K. BRC-KPMG retail sales monitor, Halifax house price index; Germany industrial production Index; France OECD CPI; trading updates from UBS, Renault, SAS, Deutsche Post, Deutsche Boerse, Daimler Truck Holding, ENGIE, Enel, Capgemini, RS Group, Associated British Foods, MTN Group, Persimmon, Finnair Oyj, Direct Line Insurance Group
Opening Call:
European stock futures were lower tracking declines in U.S. stock futures and Asian equity markets. The dollar strengthened; Treasury yields were mixed; oil futures and gold declined.
Equities:
Stock futures tracked lower early Tuesday amid a risk-off sentiment and weaker-than-expected China trade data pointing to continued economic headwinds for the world's second-largest economy and shrinking appetite for the country's goods.
China's exports fell 6.4% on year in October, compared with a 3.5% fall expected by economists polled by The Wall Street Journal.
"On one side, people are hoping for a seasonal rally, and on the other are signs that the economy is slowing. That's what you're seeing playing out right now," said Mark Neuman, founder of Atlanta-based Constrained Capital, said.
U.S. stocks edged higher on Monday, rising for a sixth straight session as the market built on its gains from the best week of 2023.
While this week is light on economic data, Fed Chairman Powell is due to speak Thursday in a conference and markets will watch for confirmation of last week's message that rising borrowing costs were doing part of the Fed's job.
Neel Kashkari, the president of the Federal Reserve Bank of Minneapolis said he would err on the side of overtightening monetary policy rather than not doing enough to bring inflation down to the central bank's 2% target.
"Undertightening will not get us back to 2% in a reasonable time," he said in an interview with The Wall Street Journal.
The economy has proven resilient, Kashkari said. But he has concerns about inflation "ticking up again. That's what I'm worried about."
Forex:
The dollar strengthened early Tuesday amid risk-off sentiment spurred by overnight gains in Treasury yields and hawkish comments from a Fed official overnight.
The remarks from Minneapolis Fed President Kashkari showed a continued lean to the hawkish side, Maybank analysts said.
With Treasury yields continuing to bounce back on Monday, foreign-exchange markets have slightly readjusted to the higher yields, ING economists said, noting weakness in the GBP.
"European economies are slowing given the respective central banks' rate hikes, which does not justify a sustained rally by sterling and the euro, " said Paul Mackel, global head of FX research at HSBC.
This contrasts with how European economies were healing when heading into 2023.
China's economy is also struggling and "a lot more optimism" is needed for the dollar to keep weakening, especially against European currencies and the Chinese yuan, he said.
Bonds:
Treasury yields were mixed as traders considered a slight chance of another Federal Reserve rate hike by January.
Economists at U.K. bank Barclays, one of the primary dealers for U.S. Treasurys, pushed back their call for a Fed rate hike to January.
Meanwhile, fed funds futures traders put a 17.1% chance on either a quarter-point or half-point hike occurring by the first month of next year.
If financial conditions continue to loosen, Fed officials "would need to be on the front foot to raise rates," said Rob Daly, director of fixed income for Glenmede Investment Management.
"They could raise rates in December if conditions look loose and it's the right thing to do, but I think it's more of a January scenario."
Energy:
Oil futures headed lower on concerns over weaker demand.
"Weaker economic expectations have weighed on crude prices recently, which has contributed to prices pulling off their highs and, arguably, once again justified the positions of OPEC+ nations in cutting supply," Craig Erlam, senior market analyst at Oanda said.
Russia and Saudi Arabia, two major oil producers, have confirmed they will extend production cuts through the end of December.
However, he added, "it's not a question of whether the two countries keep to end-of-year targets, but whether they extend them" beyond that time frame.
"Our oil balance shows that the market will be in surplus in [the first quarter of 2024], which may be enough to convince the Saudis and Russians to continue with cuts through the seasonally weaker demand period of [the first quarter]," ING commodity strategists said.
Meanwhile, investors continue to monitor the Israel-Hamas war for potential spillovers that could affect crude supplies.
Metals:
Gold edged down in the Asia session amid rising U.S. Treasury yields.
Oanda analyst Craig Erlam reckoned that the yellow metal hovering around $2,000 for a while without staying above the key level suggests its rally over the last month was running on fumes, and it may need a bullish catalyst to rise above that mark.
Gold would likely get some support near term as a haven bet due to the impact of the Israel-Hamas conflict and a weakening U.S. job market, Huatai Securities analysts said.
In the medium to long term, it may be tough to keep real U.S. interest rates high for an extended period, potentially giving gold room to rise, the Huatai analysts added.
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Copper fell in Asia amid continued demand headwinds.
Inflationary pressures, geopolitical tensions, and a high-rate environment remain cyclical headwinds for demand for base metals, Citi Research analysts said.
However, copper consumption still seems resilient for now and investors have net short positions in the metal, suggesting that a deteriorating physical balance is already being priced in somewhat and so pricing downside appears limited, the analysts added.
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Iron ore prices were flat in early Asian trade after earlier gains on the back of stronger demand.
However, market sentiment was still positive toward iron ore after the Chinese government approved an additional $1 trillion in sovereign bonds to support infrastructure investment, Huatai Futures analysts said.
Low steel inventories and the shortage of scrap steel supply were also supporting iron ore prices, the analysts added.
Steel inventories at major Chinese steel mills fell to 13.8 million tons in late October, down 16.6% from mid-October, according to the China Iron and Steel Association.
TODAY'S TOP HEADLINES
China Exports Drop More Than Expected, Signaling Continued Headwinds
China's exports fell by more than expected in October, pointing to continued economic headwinds and shrinking global appetite for the country's goods.
Exports, a key driver of the world's second-largest economy, dropped 6.4% in October compared with the same period a year earlier, the General Administration of Customs said Tuesday. In September, exports had declined 6.2% on the year.
Fed's Neel Kashkari Not Convinced Rate Hikes Are Over
A top Federal Reserve official said he would err on the side of overtightening monetary policy rather than not doing enough to bring inflation down to the central bank's 2% target.
"Undertightening will not get us back to 2% in a reasonable time," Neel Kashkari, the president of the Federal Reserve Bank of Minneapolis, said in an interview with The Wall Street Journal on Monday.
Credit is getting tighter, and it's only a matter of time before it chokes growth, economist says
The numbers: Banks continued to tighten standards for business loans in the third quarter, according to a survey of loan officers conducted by the Federal Reserve.
In addition, a "significant" number of banks tightened lending standards for credit-card, automobile and other consumer loans.
Fed's Cook says debt not a big threat yet to U.S. economy
Households, businesses and banks are in pretty good financial health and don't appear to pose a big threat to the U.S. economy, a senior Federal Reserve official said Monday.
"In my view, our financial system is substantially more resilient than it was in the mid-2000s," said Fed governor Lisa Cook in a speech at Duke University.
Fed likely to cut rates below 3%, making bonds attractive now, Guggenheim says
Guggenheim Investments thinks investors should look past the carnage in bonds and gear up for the Federal Reserve to pivot to rate cuts.
While the investment team expects the Fed to leave its policy rate unchanged at a 22-year high of 5.25% to 5.5% over the next several meetings, they also see a recession as likely in the first half of 2024.
Couche-Tard Gets Regulatory OK For TotalEnergies Deal
Alimentation Couche-Tard can complete its purchase of TotalEnergies' European retail assets after the company received a decision from the European Commission not to oppose the deal.
The Canadian convenience-store operator said it expects the deal to close in December.
Israel Deepens Push Into Gaza City
TEL AVIV-Israel pushed further into Gaza City, sending troops into an urban Hamas stronghold that is still packed with civilians after one of the most intense bombing barrages of the monthlong war.
Israeli military spokesman Rear Admiral Daniel Hagari said that Israeli forces "are continuing to deepen the pressure into the depths of Gaza City." He didn't say during a briefing Monday where Israeli soldiers are operating, and Israeli officials have been careful not to disclose the location of their ground forces in Gaza.
Flights to Europe Are Becoming Cheap Again
Flying to Europe in 2024 without spending a fortune is in the cards after a long stretch of sky-high prices.
(MORE TO FOLLOW) Dow Jones Newswires
11-07-23 0015ET
