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STOXX 600 broadly unchanged
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FTSE underperforms, miners lag
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China sets growth target of around 5%
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Wall Street futures steady
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REROUTING THE MONETARY POLICY PATH (1324 GMT) Last week was relatively sanguine for financial markets and investor sentiment tracked that. But this week there should be enough risk events to reinject some volatility and a potential swing in sentiment.
Index and analytics provider Qontigo notes that investor sentiment in most of the markets they track - measured by their proprietary ROOF scores - was little changed during the last week, and remained neutral in most geographies.
"Globally, sentiment remains driven by the direction of (local) interest rates," said Olivier d'Assier, Qontigo head of applied research, APAC.
The outlook for interest rates might become clearer by the end of the week, after strong data throughout February led markets to price in higher peak rates and rule out rate cuts from the Fed this year, delaying the so-called 'Fed Pivot'.
"Each unexpected revelation of strength asserts itself as an objection to the pivot thesis," d'Assier added.
Key risk events this week include Fed Chair Jerome Powell's semi-annual testimony before Congress on Tuesday and Wednesday, BOJ Governor Haruhiko Kuroda presiding over his last policy meeting, the RBA policy meeting and Friday's key nonfarm payrolls report.
"The admixture of a hawkish iron-fist-hidden-in-a-velvet-glove testimony by Fed Chair Powell in front of Congress, and a strong jobs report on Friday, will chip away at the residual courage of investors' convictions," d'Assier adds. And one place where sentiment and the market don't appear to be in sync is the UK, where the market has seen strong returns so far in 2023, but sentiment has drifted lower.
"UK investors remain non-committal to the current rally, indicating that market prices may have overshot their risk tolerance in the near term," d'Assier concludes.
(Samuel Indyk)
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BEWARE: CTAS COULD AMPLIFY SELLING AROUND POWELL (1254 GMT) Federal Reserve Chairman Jerome Powell's testimony to Congress - his last speech before the pre-Fed blackout period - will no doubt be a top market mover. With that in mind, BofA cautions that CTA (Commodity Trading Advisors) positioning could add a bearish twist to price action by amplifying any selling pressure around the event. "Powell's testimony on Tuesday could be a fundamental risk-off catalyst, if so, moves could be amplified by CTAs," it says. "Model CTA is long equities and short bonds with both positions subject to larger amounts of selling in bearish price paths". According to the U.S. bank, "unwind triggers" for the Euro STOXX 50 and Russell 2000 futures, where CTAs have the largest allocations, are within reach. BofA has identified sell triggers for these two benchmarks at 4089 and 1833 points, respectively.
(Danilo Masoni)
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UK COMPANIES: BANG FOR YOUR BUCK IN THE UNITED STATES? (1118
GMT)
Companies such as chip designer Arm and online betting
firm Flutter Entertainment in recent weeks have
sounded out plans to pursue a U.S.-listing, with Flutter saying
the benefits of an additional listing include access to much
deeper capital markets and important U.S. indices.
CEOs of UK-listed companies are seeing potential to re-list
their firms elsewhere as they face renewed calls to realize
value for their shareholders, with Citigroup noting MSCI UK
trades at a record 40% discount to the U.S. market, historically
cheap valuations compared to U.S. equities.
European energy majors such as BP and Shell trade at about 6x their 12-month forward price-to-earnings (P/E) ratio, far lower than that of their U.S. counterparts such as Exxon and Chevron which trade well over 10x their forward P/E.
Including BP and Shell, Citi identifies 23 UK-listed companies which account for roughly 44% of the FTSE 100, with high international and "meaningful" U.S. revenue exposure, that trade at a discount to peers across the Atlantic.
(Roshan Abraham)
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THE CASE FOR TELECOMS: CASHFLOW & M&A (1046 GMT) Telecoms in Europe have been serial laggards in the past two decades and their latest attempt, during the first half of 2022, to stage a recovery has already reversed with the sector back at new record lows versus the STOXX .
For JPMorgan this is an opportunity. It says balance sheet concerns could moderate, and potential M&A deals - illustrated just today by fresh newsflow over the sale of Telecom Italia's landline network - could add extra fizz. "Despite elevated capex levels, our analysts believe that the Telecom sector is on track to deliver robust FCF each year," the U.S. bank says. "The sector has seen quite a bit of interest from private equity players targeting the tower assets. Ongoing asset monetization efforts and potential consolidation support the case for further rerating". According to JPM, the sector's nearly 12% free cash flow (FCF) yield is well above the market's and FCF at incumbents is expected to climb to 30 billion euros by 2030 from 18 billion in 2022. Hence, the U.S bank is currently "overweight" telecoms.
(Danilo Masoni)
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SKY'S THE LIMIT: 'BALLOONING' FOCUS ON CHINA (0954 GMT) While markets are underwhelmed with the 5% growth target set by China for 2023 on Sunday as it kicked off its National People's Congress, the low target means the government could scale back policy support this year because a brighter outlook lowers the need for it, said Tianchen Xu, China economist at the Economist Intelligence Unit. "The fiscal strain is a bigger issue than ever, and although the nominal levels of budget deficit and special bond arrangement is higher, actual fiscal stance should be towards tightening because authorities are unlikely to introduce the extraordinary tools that they did in 2022," Xu told the Reuters Global Markets Forum (GMF). The figure was shy of last year's target of about 5.5%, and sources had recently told Reuters a range as high as 6% could be set. The lack of fiscal stimulus to consumers will preclude growth of above 6%, said Xu.
The low target is also a sign that short-term growth is not all that important this year, he stated.
"In 2021, the line of thinking was similar: while announcing a low growth target, policymakers sought to push for reform on tech, tutoring and property. This time, reform could happen in areas like population, public finance and a financial sector overhaul." Institutional reshuffling later this week will offer important clues in that regard, added Xu.
Front and center is also geopolitics, said Xu, adding that as tensions between the U.S. and China flare up and Taiwan and U.S. elections near, inter-state frictions over technology, spreading over into financial services, is a certainty.
"The Taiwanese elections will raise cross-Strait tensions, and a DPP (Democratic Progressive Party) victory with expected president elect Lai Ching-te adopting a much more pro-independence stance will also spook investors." That means investors need to be highly wary of major reform in China this month that could shape the next five years, he added.
(Anisha Sircar)
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STEADY START FOR STOXX 600 (0848 GMT) European shares have started the week in a relatively upbeat mood, with most of the major bourses trading with small gains.
The pan-European STOXX 600 is up 0.2%, while Germany's DAX , France's CAC 40 , Spain's IBEX 35 and Italy's FTSE MIB are up 0.3%-0.7%. Britain's resource-heavy FTSE 100 underperforms, trading down 0.1%, as mining shares lag in Europe after China set a modest growth target of 5% this year, towards the lower end of expectations.
In company news, Telecom Italia tops the STOXX 600 after the firm received a rival bid for its fixed-line network, while Rolls-Royce shares have gained another 2% to reach their highest level since March 2020.
Here's your opening snapshot:
(Samuel Indyk)
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EUROPE'S STOCK FUTURES TICKING HIGHER (0734 GMT) Equity futures in European are edging up on Monday after China set a modest growth target for 2023, with attention this week on Fed's Powell and nonfarm payrolls.
China set its economic growth target at around 5% at its National People's Congress, towards the lower end of expectations, although recent strong data is keeping investors optimistic on China's economic recovery. Futures on the Euro STOXX 50 are up 0.3%. Futures on Germany's DAX are up 0.2%, France's CAC 40 futures are up 0.4% and Britain's FTSE 100 futures are flat.
In Asia, China's blue-chip CSI 300 dropped 0.5% but MSCI's broadest index of Asia-Pacific shares outside Japan rose 0.7%. Wall Street futures are little changed. Eyes this week will be on Friday's payrolls report after last month's blowout number started a ripple that sent bond yields surging and caused a dramatic repricing in expectations for where the Fed's interest rate might peak.
Fed Chair Powell also holds his two-day testimony before Congress on Tuesday and Wednesday.
In company news, Credit Suisse could again be in focus after Harris Associates, one of the Swiss bank's major shareholders, announced it had sold its stake over the past few months.
(Samuel Indyk)
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HOPEFUL MARKET AWAITS POWELL TESTIMONY (0658 GMT)
Investors have found their appetite for risky assets at the start of a crucial week, shrugging off the disappointment of China setting a modest target for economic growth this year, with European stocks set to carry the momentum.
Coming off its best weekly performance since start of the year, the continent-wide STOXX might aim for another record high as traders await January retail sales data for the Eurozone later in the day. Meanwhile, the market's focus is firmly on Fed Chair Powell's two-day testimony before the U.S. congress (on Tuesday and Wednesday) and the February jobs report (due on Friday) that will likely dictate the path of the U.S. central bank for the near future.
While investors have come to accept (sort of) that the Fed will likely keep interest rates higher for longer, there are fresh fears that strong economic data will lead the central bank to go back to jumbo hikes. Hawkish rhetoric from Fed speakers continued over the weekend, with San Francisco Federal Reserve Bank President Mary Daly the latest to sound a warning on the inflationary threat.
The market largely expects Powell to be hawkish this week but given his testimony comes before the jobs report is released, he will likely aim to keep all options open. Over in China, the country's leadership set a 5% target for economic growth this year, which analysts called conservative and pragmatic, as they kicked off the annual session of the National People's Congress. In the corporate world, Italian state lender CDP has bid for the fixed-line network of former phone monopoly Telecom Italia, rivalling an offering from U.S. firm KKR.
Key developments that could influence markets on Monday:
Economic events: Eurozone January retail sales, February S&P Global PMIs for Germany, France and Eurozone Speakers: ECB Chief Economist Philip Lane
(Ankur Banerjee)
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