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Euro Market Open: US stocks closed lower post-CPI, Fed speak in focus

  • US stocks tumbled after a hot CPI report pushed the 10yr yield above 2%; S&P 500 -1.81%, Nasdaq 100 -2.33%
  • Fed's Bullard (2022 voter) favours 100bps of interest-rate increases by July 1st and a half-point rate hike in March
  • Asian stocks declined following the weak US handover and remarks from Bullard. US equity futures extended losses overnight
  • European futures are indicative of a negative open with the Eurostoxx 50 future down by 1.6% after the cash market closed lower by 0.2% yesterday
  • DXY is firmer against G10 peers with antipodeans lagging, EUR/USD is back below 1.14
  • ECB's Lagarde said raising rates would not solve any of the current problems and does not want to choke off the recovery
  • Looking ahead, highlight include UK GDP, German CPI (Final), US Uni. of Michigan Prelim, IEA OMR, Speech from ECB's Elderson, Italian supply, Earnings from Under Armour and British American Tobacco.

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US TRADE

  • CLOSES: S&P 500 -1.81% at 4504, Nasdaq 100 -2.33% at 14705, Dow Jones -1.47% at 35241, Russell 2000 -1.55% at 2051.
  • US stocks tumbled after a hot CPI report eventually pushed the 10yr yield above 2% and markets started to price in a more hawkish expectation from the Fed, while moves were exacerbated after Fed's Bullard (2022 voter) voiced support for a 50bps liftoff, 100bps of tightening by July 1st and inter-meeting hikes.

NOTABLE US HEADLINES

  • Fed's Bullard (2022 voter) favours 100bps interest-rate increases by July 1st and a half-point rate hike in March but defers to Chair Powell on that, while he favours a balance sheet reduction start in Q2. Bullard also suggested they should be open to considering inter-meeting increases and that the balance sheet reduction may require asset sales, according to Reuters.
  • Fed's Barkin (2024 voter) said he would like to be in a position to move where they need to move in a year from now, which means getting back to pre-pandemic rate levels by then, while he supports a more forward-leaning notion of how to normalise rates but would have to be convinced of a screaming need to do a 50bps hike now, according to Reuters.
  • SGH Macro's Tim Duy noted that he would not be surprised by an inter-meeting move either Friday or Monday although a Bloomberg article stated that Fed officials are in no hurry to hike rates before the March meeting and a 50bps move in March is not yet likely despite the speculation.
  • Federal Reserve released scenarios for 2022 bank stress tests with 34 large banks to be tested against a severe global recession with heightened stress in commercial real estate and corporate debt markets, according to Reuters.
  • US Moderate Democratic Senator Sinema called for "targeted" federal spending in wake of the hot CPI report, according to Reuters.
  • US Moderate Democratic Senator Manchin said he is still willing to use reconciliation to raise taxes on corporations and the wealthy, while he is fine with some spending and his priority is bringing down debt, according to NBC's Kapur.

APAC TRADE

EQUITIES

  • Asian stocks declined after hot US CPI and hawkish Bullard comments fueled expectations for 7 Fed hikes this year.
  • ASX 200 (-0.9%) was pressured with the tech sector suffering the brunt of the higher yield environment.
  • Nikkei 225 was closed.
  • Hang Seng (-0.5%) and Shanghai Comp. (-0.6%) were also subdued but with losses in the mainland stemmed after stronger than expected Aggregate Financing data from China and with press reports speculating that the PBoC could ease again next week.
  • US equity futures extended on losses; E-mini S&P -0.8%, E-mini Nasdaq 100 -1.0%.
  • European futures are indicative of a negative open with the Eurostoxx 50 future down by 1.4% after the cash market closed lower by 0.2% yesterday.

FX

  • DXY eventually gained and reapproached the 96.00 level amid residual tailwinds from the hot CPI print and hawkish comments from Fed's Bullard which spurred expectations by some including Goldman Sachs for seven hikes this year.
  • EUR/USD weakened with recent moves in the single currency largely at the mercy of the greenback and following an abundance of ECB rhetoric including further dovish comments from Lagarde.
  • GBP/USD traded marginally lower following yesterday's aggressive pullback from resistance near 1.3650.
  • USD/JPY was uneventful due to the holiday closure in Japan but was kept afloat by the dollar tailwinds.
  • Antipodeans were subdued amid the cautious risk tone and RBA Governor Lowe’s continued patient message.
  • Mexican Interest Rate (Jan) 6.0% vs. Exp. 6.0% (Prev. 5.5%); 4-1 vote split as Esquivel (Dove) voted to hike rates by 25bps, while it noted that inflationary pressures have been greater and lasted longer than expected.

FIXED INCOME

  • 10-year USTs remained lacklustre beneath the 126.00 level after dropping around a point on the hot CPI print and hawkish comments from Fed Bullard with 10yr yield above 2% and with the CME FedWatch Tool pointing to a 98.6% chance of a 50bps move in March.
  • Bund futures were subdued but off the prior day’s lows as ECB President Lagarde continued with the dovish rhetoric in which she noted that raising rates would not solve any of current problems and that they don't want to choke off the recovery.

COMMODITIES

  • WTI and Brent were rangebound with WTI contained by resistance at the USD 90/bbl level.
  • US President Biden said he will work to bring gas prices down and strengthen supply chains to bring the cost of energy and goods down, according to the White House.
  • Iraq raised March Basra medium crude price to Asia to Oman/Dubai + USD 1.30/bbl, according to Reuters sources.
  • Spot gold was lacklustre amid higher yield environment and firmer dollar.
  • Copper pulled back amid the mostly negative risk tone.
  • Brazilian miner Vale Q4 iron ore production at 82.47mln tons and its 2021 iron ore output reached 315.61mln tons.

CRYPTO

  • Crypto markets were muted overnight with Bitcoin down 0.6%.

NOTABLE APAC HEADLINES

  • PBoC injected CNY 20bln via 7-day reverse repos with the rate at 2.10% for a CNY 180bln net drain
  • PBoC set USD/CNY mid-point at 6.3681 vs exp. 6.3665 (prev. 6.3599)
  • RBA Governor Lowe reiterated the board is prepared to be patient and that they have scope to wait and see how the data develops and how some of the uncertainties are resolved. Lowe recognises there is a risk to waiting but there is also a risk to moving too early and noted a big deviation between what they expect to do on rates and what markets expect, while he would like to see a couple more CPIs before deciding on rates, according to Reuters.
  • RBNZ said OCR expectations continue to increase in the short and medium-term with mean estimate for the OCR on year ahead at 2.11% and mean estimates two years ahead at 2.47%, according to Reuters.

DATA RECAP

  • New Zealand RBNZ 1-Year Inflation Expectations (Q1) 4.4% (Prev. 3.7%)
  • New Zealand RBNZ 2-Year Inflation Expectations (Q1) 3.3% (Prev. 3.0%)

EUROPE-SPECIFIC HEADLINES

  • ECB's Lagarde said raising rates would not solve any of the current problems and that they don't want to choke off the recovery. Lagarde is confident inflation will fall back during the year and stated the EU situation cannot be compared with US and UK, while she added they will act if needed but all moves will be gradual, according to Reuters citing Redaktionsnetzwork Deutschland.
  • UK PM Johnson and Chancellor Sunak are seeking to reform Solvency II rules, to allow insurance names to invest into infrastructure, according to FT sources; BoE will announce the reform details later in the year.

GEOPOLITICS

  • Russian Kremlin envoy Kozak said there were no results at the meeting that could be transformed into an agreement and they hope that Ukraine is wise enough not to start military action against its own citizens, according to Reuters.
  • Ukraine's Head of the Presidential Office Yermak said all parties confirmed they are ready to continue negotiations but could not agree on signing of a document in Berlin, while he added everyone expressed support for the cease-fire and there is a will to continue negotiating in Russia talks, according to Reuters.
  • US President Biden said Americans should leave Ukraine now and that things could turn crazy very quickly, while the State Department also issued an advisory that Americans should depart Ukraine now, according to Reuters.
  • US new laws allow it to impose sanctions where a person has been involved in destabilising Ukraine or undermining or threatening the territorial integrity, sovereignty, or independence of Ukraine, according to Reuters.
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