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EMEA Morning Briefing: Investors Brace for BOE Move After Fed's Rate Increase

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EU flash consumer confidence indicator, EU summit; U.K. Bank of England rate decision, Consumer confidence survey; trading updates from Wickes Group, Compass Group, HeidelbergCement, Fresenius SE, Siemens Gamesa Renewable Energy, ABB, Givaudan, Steinhoff International, SKF AB, Novo Nordisk, Finnair

Opening Call:

European shares may fall on Thursday ahead of the Bank of England interest-rate decision. Asian stock benchmarks were mixed; the dollar weakened; Treasury yields broadly fell; while gold rose and oil futures declined.

Equities:

Stock futures point lower in Europe, with investors taking a cautious approach to stocks, following comments by Federal Reserve Chairman Jerome Powell and Treasury Secretary Janet Yellen.

The Federal Reserve on Wednesday approved another quarter-percentage-point interest-rate increase but signaled that banking-system turmoil might end its rate-rise campaign sooner than seemed likely two weeks ago.

While Powell assured reporters and the public that U.S. banks were well-capitalized and "sound," Treasury Secretary Yellen told a Senate committee that "blanket" deposit insurance hadn't been considered or discussed by her department, helping to drive stocks lower, market strategists said.

"The Fed is saying, 'We know our actions are causing economic slippage, but we need to take them anyway because inflation is still hot,'" said Jason Pride, chief investment officer of Glenmede's private-wealth business.

With an already cloudy economic outlook now further darkened by bank distress, buying into the stock market's optimism could prove shortsighted, said Rich Weiss, chief investment officer of multi-asset strategies at American Century Investments.

"The banking issues are just confirming evidence to us that things are likely to get worse before they get better," Mr. Weiss said.

Although Powell ruled out rate cuts before the end of 2023, both Fed funds futures and Treasury yields appear to be pricing in as many as three rate cuts later this year, Interactive Brokers said.

Hopes for rate cuts benefited stocks in the recent past. But now, "investors need to be careful what they wish for," it said.

"Most scenarios that get you to that level of interest rates are not stock-market friendly," it added.

Meanwhile, the Bank of England is expected to raise its key interest rate by a quarter point later today, following in the Fed's footsteps.

"Although the banking turmoil will be front of mind, this latest snapshot and ongoing worries about a tight labor market are likely to tip the balance in favor of a rate hike," said Susannah Streeter, head of money and markets at Hargreaves Lansdown.

Forex:

The U.S. dollar edged lower early Thursday on prospect of lessened Fed tightening, after it raised rates as expected but signaled that further rate increases could be limited.

Overall, the foreign-exchange markets could be relieved that the end of more rate increases is near, and trigger more reversal of USD strength, said MUFG Bank.

Investors were questioning central-bank commitment to inflation targets in the face of recession and now financial-stability risks, Bank of America said.

Dollar trends were mixed and views remained ambivalent, it said, adding that BofA surveys showed investors reducing risk.

"Despite the risk backdrop and spike in rates volatility, it is interesting to note the continued ambivalence of benchmarked investors towards USD. Views remain mixed but are skewing weaker, and the relatively small position adjustment, with sentiment still hovering around neutral, suggests somewhat reluctant USD bulls, with only a fraction of the 4Q22 drop reversed."

Bonds:

Treasury yields were broadly lower early Thursday, as investors digest the Fed 25 bp rate increase and the signal that just one additional interest rate hike will be appropriate this year.

The Fed's decision follows a period of extreme volatility in bond markets as investors have tried to work out how much the central bank's determination to curb inflation will be compromised by a desire not to exacerbate fractures in the banking system.

Daleep Singh, chief global economist at PGIM Fixed Income said that expectations remained that the Fed's hike will likely be the last of this cycle, and that the long tail of the current banking-sector shock will force the Fed into 50-75 basis points of rate cuts by year-end.

Singh's key concern was that stress at midsize banks will remain elevated without a "clear-cut" backstop for all depositors at those lenders.

Furthermore, "the size and persistence of the shock to the real economy from the banking sector remains highly uncertain, casting doubt on any insistence that rate cuts this year won't be necessary," he said.

The Fed acted as expected "but a dovish statement acknowledged that the backdrop remains uncertain, and activity could be constrained as financial conditions tighten," Vantage market analyst Jamie Dutta said.

He noted less forward-looking language was used in the statement and a reference to ongoing hikes was removed, with the FOMC instead saying additional policy firming may be appropriate.

"The official party line is still hike and hold," said Kathy Jones, chief fixed-income strategist at Schwab Center for Financial Research.

But under the surface, she said Fed officials might not be entirely sure of that path, given that any additional blow-up at banks could change the outlook.

Furthermore, the 10-year Treasury yield falling to 3.5% on Wednesday from a 4.2% high in October telegraphs expectations of slower growth and less inflation down the road, Jones said.

Unlike the policy sensitive 2-year Treasury rate, it reflects a longer-term outlook for the economy.

Energy:

Oil futures were lower in Asia, pulling back from overnight gains.

Focus is on the impact of the Fed's 25bp hike and policy path forward.

"For crude prices, the outlook for further hikes could be a negative as it implies that inflation is still a concern, and if we see higher rates leading to meaningfully lower growth, that would weigh on oil demand," Janus Henderson Investors said.

However, global supply and demand fundamentals "remain constructive and the combination of a supportive weekly [U.S. Energy Department] report and a view that future Fed hikes will be at a modest pace are helping support prices," it said.

Oanda sees signs that the oversold oil market is stabilizing, noting that exports have surged and EIA data showed rebounding demand across crude oil, gasoline, and distillates.

ANZ also highlights strong exports in the EIA report and declining domestic fuel stockpiles.

Metals:

Gold prices were slightly higher early Thursday, supported by a weaker U.S. dollar and Treasury yields after the Fed signaled that the woes in the banking sector might bring its tightening cycle to an end earlier than expected.

"Wall Street will have to deal with further banking turmoil and that should keep safe-haven flows coming to gold," Oanda said.

It reckoned that credit conditions were tightening, which should spell trouble for stocks.

"Gold's on a mission to recapture the $2,000 level and shortly after that a possible run to record territory," it added.

"We are watching for the possibility and timing of an economic recession, and with that, a strategic allocation to gold will likely be a direction many investors will go," Joe Cavatoni, chief market strategist, North America at the World Gold Council, said.

"The question is how quickly will we move to a clearer picture with the economy."

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Copper prices were flat in Asia.

The price of the metal could remain supported in the medium term due to lower supply of the metal, ANZ analysts said.

Inventories at Shanghai Exchange warehouses fell 15% last week, while stockpiles of copper immediately available for delivery at LME warehouses are down 17% this week, ANZ added.

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Most Chinese iron-ore futures fell early Thursday.

China is considering reducing its steel production by about 2.5% this year amid its current policy to curb emissions, ING commodities strategists said, noting that the target was proposed by officials at a recent meeting.

Also, authorities in Tangshan have asked steel producers in the region to adjust their output as per the regulations, after an orange alert was issued on March 20, the strategists said.

   
 
 

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March 23, 2023 01:14 ET (05:14 GMT)

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