EMEA Morning Briefing: Stock Futures Rise Ahead of U.S. CPI as Rate Decisions Loom

MARKET WRAPS

Watch For:

Germany CPI, ZEW indicator of economic sentiment; Italy labor cost index; UK unemployment; no major corporate trading updates expected

Opening Call:

Stock futures rose amid optimism that the Fed will pause its tightening this week. In Asia, stock benchmarks were mostly higher; the dollar fell; Treasury yields were mixed; while oil and gold futures rose.

Equities:

European shares may open higher Tuesday as traders eye rate decisions by major central banks later this week.

U.S. consumer-price index data on Tuesday will provide insight into the direction of inflation, which remains well above the Federal Reserve's 2% annual target. After that, the Fed on Wednesday is widely expected to keep interest rates steady but could signal more rate increases in the future. Thursday will bring a rate decision by the European Central Bank, as well as U.S. retail sales.

"We are in a wait-and-see mode, and a lot is going to depend on the CPI report tomorrow and whether we are going to see components of inflation moderating," said Venkat Balakrishnan, head of asset allocation at MissionSquare Retirement.

"It's very hard to predict what one inflation print will show us, but we could see many components trending down, which could have an impact on rates," he said. "There's widespread expectation for a pause by the Federal Reserve on Wednesday, but it will be more important what policy makers say about the next meeting" in July.

After getting pummeled last year by a rapid rise in interest rates, stocks have recovered this year thanks in part to a stronger-than-expected economy and hopes that rates might not have much further to climb.

Some investors are skeptical that stocks can keep rising. Many have pointed to the narrowness of this year's rally as a cause for concern, noting that indexes can more easily reverse when they are relying on just a handful of winners. More recently, the broadening of the rally has struck some as encouraging but failed to convince others, who see in it more last-gasp profit-chasing than fundamental strength.

Many individual investors "like to buy those beaten-down stocks because they feel the upside is bigger," said Zhiwei Ren, a portfolio manager at Penn Mutual Asset Management. The pessimistic view of this month's surge in smaller-cap stocks is that investors are "just buying anything to catch up to the rally," he added.

Forex:

The dollar fell slightly early Tuesday. Assuming tonight's U.S. CPI data doesn't give a positive shock, USD is likely to weaken if the FOMC sounds modestly dovish to warrant their flagged "pause," Commonwealth Bank of Australia said.

The bottom line is USD could be volatile this week, with much of the currency's moves hinging on the CPI reading, CBA added.

Read: Why 'King Dollar,' benefiting from financial instability fears, can stay high this year

Bonds:

Treasury yields were mixed in Asia ahead of U.S. CPI data and the Fed decision.

"The focus this week will no doubt be on the decisions of the major central banks (the Fed on Wednesday, the ECB on Thursday, and the BoJ on Friday)," said Thierry Wizman, Macquarie global forex and interest rates strategist.

In regard to the Fed's decision, "the market has reduced its implied probability of a hike to 25%, despite the lingering inflation expected to be seen in the 'core' CPI," Wizman said.

"We think that some calm over U.S. inflation and the Fed's response makes sense. Yes, core CPI and PCE inflation remains 'sticky,' but we believe that traders have admitted a much more benign outlook for inflation in the medium term than what's reflected in the CPI and PCE inflation measures today."

Energy:

Oil futures rose early Tuesday in a likely technical rebound. On the one-hour chart for WTI crude oil futures, there are some signs the futures could be due for a bounce from around current levels, said Matt Simpson, market analyst at City Index and https://urldefense.com/v3/__http://FOREX.com__;!!F0Stn7g!EsrP4v4zqlW9qr0Qmbsim5B7x8V2bZbjE5SjXdgXQdWca_0MlFEsukn8J7SNc7yrUE2p-8dgpB1JL5q2uYusWR6_6EmefkHHDPojvCf0jrk$ .

There hasn't been any retracement since the futures attempted to break below $70/bbl, but a bullish hammer formed on high volume and prices have since failed to break the low and momentum is trying to turn higher, Simpson added.

Meanwhile, on Brent's daily technical chart, the $71.30/bbl level will likely be a crucial support to hold, where dip-buying interest was seen on previous three occasions this year, said Yeap Jun Rong, market analyst at IG.

To give any conviction to oil bulls, a rise above the $80.00/bbl level may be warranted to support a break above Ichimoku cloud resistance and its ranging pattern, IG added.

Attention this week is on the Fed decision. "Should the Fed hint at further rate hikes later in the year, as many now expect, there could be further downside for the price of the barrel. This is because crude is priced in dollars, and a stronger greenback means a lower nominal value, " said Ricardo Evangelista, senior analyst at ActivTrades.

"At the same time, U.S. monetary policy is important not just for the world's largest economy but also for thest of the world," he said. "Should the Fed continue to focus on fighting persistently high inflation through stringent monetary tightening, it will eventually achieve its objective, but the side effect will be an economic slowdown. It's this perspective of a Fed-driven decline in demand that is now being discounted by investors, creating a downside for oil prices."

Metals:

Gold futures ticked higher in Asia amid mild weakness in USD.

Gold either needs investors to become nervous about corporate earnings, disinflation trends to improve, or for the PBOC to send a strong signal that the central bank will energize growth, said Edward Moya, senior market analyst at Oanda.

The precious metal is getting dangerously close to support at $1,950/oz and, if the level doesn't hold, this could pave the way for momentum selling toward the $1,900/oz region, Moya added.

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Copper prices were a tad lower amid demand concerns. A weak economic outlook will likely weigh on base metals, although dwindling inventories of copper may continue to support prices, said ANZ.

Asian stockpiles of copper fell last week, which created tighter conditions for the physical metals market, the bank added.

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Chinese iron-ore prices rose, recovering somewhat from the previous session's loss. Analysts have warned that seasonally increased supply could squeeze prices even as demand wanes.

Iron ore prices are unlikely to increase in the short term, which is in line with long-term pessimism over fundamentals, Nanhua Futures said.

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June 13, 2023 00:15 ET (04:15 GMT)

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