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EMEA Morning Briefing: China Easing to Spark Early European Gains

01/17/2022 | 12:39am EDT

MARKET WRAPS

Watch For:

Italy CPI; OECD Composite Leading Indicators; Bundesbank monthly report; Eurogroup meeting of eurozone finance ministers; U.S. Martin Luther King Day, financial markets closed; updates from Vonovia, Smith & Nephew, Taylor Wimpey, Ashmore, Rio Tinto

Opening Call:

China's move to ease monetary policy should help Europe to open on a firmer footing Monday. However, gains for shares may be capped following choppy trading in Asian stock markets and with U.S. markets closed. Elsewhere, oil and gold have managed modest gains while the dollar and Treasury were steady.

Equities:

European stocks should advance early Monday, buoyed by news that China cut two key rates to support its slowing economy.

The People's Bank of China lowered rates on the one-year medium-term lending facility and seven-day reverse repurchase agreements by 10 basis points each, according to an official statement.

The MLF interest rate, which is used to price China's benchmark loan prime rate, was cut to 2.85%, while the reverse repo rate was lowered to 2.1%, the PBOC said.

The rate cuts came as China released data that showed the economy expanded 8.1% in 2021, but growth momentum continued to slow in the final months of the year. The cuts signaled Beijing's determination to stabilize growth in 2022, as the world's second-largest economy faces mounting headwinds from a property slump, scattered coronavirus outbreaks and sluggish domestic consumption.

Investors in Asia appeared underwhelmed by the Chinese news, with markets in the region mixed.

Citigroup said China is set to ease its monetary setting further in the face of the significant drag of the property sector downturn. While it expects the PBOC to trim both one-year and five-year loan prime rate later this month, it also anticipates 25 bps of interest rate cuts and a 50bp reserve requirement ratio cut in the second half.

"As long as the PBOC lowers interest rates enough, its determination would help turn market and business sentiment around," Citigroup economists said.

Forex:

The dollar was a touch lower in Asia but the USD Index managed to remain above the 95.00 level.

Increasingly hawkish rhetoric from Fed officials seems to be doubling down on "sooner and faster" tightening across taper, rate increases and quantitative tightening, Mizuho Bank said. All else equal, this should spell sharp dollar strength in tandem with an upswing in Treasury yields across the curve, Mizuho Bank said.

However, Commonwealth Bank of Australia said dollar weakness is likely to mark the week ahead in currency trading, with no significant data or Fed speeches scheduled before the weekend, lowering the risk of anything that might materially change bets that the FOMC will start raising interest rates in March.

At the same time, the view that Omicron is unlikely to derail the global economic recovery is a weight on the counter-cyclical dollar, CBA said.

Capital Economics continues to think the dollar will strengthen again before long, "as we expect strong cyclical price pressures in the U.S. to mean the Fed tightens by more and for longer than investors currently discount."

Jerome Powell reinforced this view with comments that the FOMC wants to move interest rates "'to a place that is more neutral, and then perhaps tight,' which implies the policy rate could eventually rise above 2.5%," said Capital Economics' Joseph's Marlow.

He added that "combined with recent suggestions that quantitative tightening may start sooner than expected, this leaves us comfortable with our view that the dollar will strengthen this year."

Bonds:

Treasury yields added to gains in Asia but with U.S. bond markets closed Monday for Martin Luther King Day and as Fed officials enter a blackout period for speeches ahead of their Jan. 25-26 meeting, trading will be subdued.

On Friday, the two-year yield climbed to its highest level in almost two years, while notching a fourth straight week of gains and the 10-year note rate registered its largest one-day gain since Jan. 3, as traders adjusted to a tighter Fed policy outlook.

Demand for eurozone government bonds should return as soon as the current spike in developed market rates runs its course and volatility normalizes--at least temporarily--said Erjon Satko, rates strategist at Bank of America.

Bids and volumes have been lower at syndicated government bond issues so far this year, but it is too early to conclude that investor demand will remain weak for the remainder of the first quarter, especially for the periphery.

"The noise around the Italian race to the Presidential elections on the one hand, and the high rates volatility propelled by central bank speakers [the Fed in particular] on the other generated a challenging environment for borrowers less geared towards opportunistic issuance strategies," Satko said.

European corporate bonds are set to outperform German government bonds again this year, LBBW said.

"Credits still offer a better buffer against this drag on total return thanks to their higher initial rate of return," LBBW said, adding that the expected sustained economic recovery also suggests that default rates will continue to be low.

This indicates that credit spreads "will remain low or even fall slightly" and "implies that credits will outperform Bunds again in 2022." LBBW advises clients to overweight euro corporate bonds, or hold a larger-than-average position.

Energy:

Oil extended its rally in early Asian trade as an analyst warns the Ukraine crisis could be a 'seismic event' for the energy market.

Oil futures settled around 2% higher on Friday to post a fourth straight weekly gain, with an analyst offering a dire warning of potential supply disruptions as tensions between Russia and Ukraine intensified.

"From an energy standpoint, this could be a seismic event," said Phil Flynn, senior market analyst at The Price Futures Group. Russia is not only a major oil producer but Europe, in their rush to get off of fossil fuels, has "become more dependent on Russia as major source for their energy."

"The emerging crisis between Russian and Ukraine raises political risk premium," Manish Raj, chief financial officer at Velandera Energy Partners, told MarketWatch.

Read: Tensions between Russia and Ukraine aren't fully priced into commodities

Metals:

Gold futures edged higher in Asia, recovering some of Friday's modest falls.

Several factors, including hawkish signals from the Fed, have prompted speculators to reduce their long gold exposure, TD Securities said. However, Powell's recent comments that signaled a very measured course of action to fight inflation imply that real interest rates may rise only modestly and that the precious metal could climb on potential short-covering, the brokerage added.

Following Friday's "devastating U.S. retail sales report," prices for gold climbed, but then moved lower, pressured by "profit-taking against the news and ahead of the long weekend," said Colin Cieszynski , chief market strategist at SIA Wealth Management.

Copper prices also nudged higher on expectations that demand for the industrial metal will be lifted by the growing electric-vehicle and battery demand.

Rystad Energy expects the copper market's tightness to persist, as it forecasts long-term demand to outpace supply.

"As the energy transition continues at pace and EV adoption grows in populous nations like China and India, the copper mining industry requires significant investment to keep up with demand," Rystad said.

A copper deficit "would have wide-reaching ramifications for the energy transition as there is currently no substitute for copper in electrical applications."


TODAY'S TOP HEADLINES

China Cuts Two Key Rates to Support Slowing Economy

China's central bank on Monday cut two key interest rates that would likely translate into lower benchmark lending rates, in a bid to provide more support for the slowing economy.

The People's Bank of China lowered rates on the one-year medium-term lending facility and seven-day reverse repurchase agreements by 10 basis points each, according to an official statement.


China GDP Grew 8.1% in 2021, Though Momentum Slowed in Fourth Quarter

BEIJING-China's economy expanded 8.1% last year as a pandemic-plagued world snapped up its goods, though slowing growth in the final months of the year points to challenges ahead for its economy.

As expected, the annual gross domestic product figure easily topped Beijing's official growth target of 6% or more, as exports surged to a record high. The 8.1% growth figure for 2021, which matched economists' forecasts, adds to the country's post-pandemic recovery, after China eked out a 2.2% expansion in coronavirus-ravaged 2020.


China's Property Market Cooled in 2021 as Beijing Reined in Developers

BEIJING-Property investment and new construction starts slumped in China in 2021 as the government's move to rein in developers' debt hobbled an important pillar of growth for the country.

Overall investment in China's property sector increased 4.4% in 2021, down from the 7.0% growth rate marked in 2020, the country's National Bureau of Statistics said Monday. The result was weaker than the 6.0% year-over-year gain recorded over the first 11 months of 2021.


Big Tech Braces for a Wave of Regulation

Big tech companies are facing the biggest expansion in potential technology regulation in a generation. And while the jury is out on whether all that sound and fury will signify anything, for the first time there are signs that the big-tech backlash could have a substantive impact.

New laws under consideration in Europe, Asia and the U.S. could put sharp limits on how big tech companies can treat smaller competitors and restrict their use of artificial intelligence like facial recognition. Some proposals could ban common practices such as companies giving their own products a boost in their own rankings, something that could have an operational impact, executives and analysts say.


(MORE TO FOLLOW) Dow Jones Newswires

01-17-22 0038ET

Stocks mentioned in the article
ChangeLast1st jan.
ASHMORE GROUP PLC 1.31% 231.4 Delayed Quote.-21.51%
AUSTRALIAN DOLLAR / US DOLLAR (AUD/USD) -0.01% 0.70921 Delayed Quote.-2.18%
BANK OF AMERICA CORPORATION 0.53% 35.84 Delayed Quote.-19.44%
BANK OF CHINA LIMITED 0.33% 3.08 Delayed Quote.9.25%
BRITISH POUND / US DOLLAR (GBP/USD) 0.01% 1.25882 Delayed Quote.-7.30%
CANADIAN DOLLAR / US DOLLAR (CAD/USD) -0.01% 0.77989 Delayed Quote.-1.41%
CITIGROUP INC. 0.04% 52.7 Delayed Quote.-12.73%
COMMONWEALTH BANK OF AUSTRALIA -0.70% 105.43 Delayed Quote.5.12%
EURO / US DOLLAR (EUR/USD) 0.07% 1.06945 Delayed Quote.-5.60%
GOLD -0.42% 1846.15 Delayed Quote.2.09%
INDIAN RUPEE / US DOLLAR (INR/USD) -0.09% 0.012888 Delayed Quote.-3.88%
LONDON BRENT OIL 0.45% 114.84 Delayed Quote.45.50%
MSCI AC PACIFIC (STRD) 0.06% 156.501 Real-time Quote.-14.85%
NEW ZEALAND DOLLAR / US DOLLAR (NZD/USD) -0.03% 0.64777 Delayed Quote.-5.70%
ON SEMICONDUCTOR CORPORATION 3.19% 56.24 Delayed Quote.-17.20%
RIO TINTO PLC -0.50% 5615 Delayed Quote.15.41%
TAYLOR WIMPEY PLC 1.53% 129.25 Delayed Quote.-27.55%
US DOLLAR / RUSSIAN ROUBLE (USD/RUB) 2.99% 62 Delayed Quote.-24.77%
VONOVIA SE -0.24% 33.8 Delayed Quote.-30.16%
WTI 0.51% 111.325 Delayed Quote.45.58%
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