Live Markets: Bets remain on smaller BoE hike despite UK pay growth
13/12/2022 12:38
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STOXX 600 at one week high
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Market awaits U.S inflation figures
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BETS REMAIN ON SMALLER BOE HIKE DESPITE UK PAY GROWTH (1224 GMT)
Britain's jobless rate rose for a second month in October - a deflationary signal - but it
is the strongest rise in basic pay on record that is likely to catch the Bank of England's (BoE)
eye as it mulls its next policy decision on Thursday.
For Vasileios Gkionakis, EMEA head of CitiFX G10 Strategy at Citi Markets, the latest
numbers add a hawkish risk. But he nevertheless highlights that UK job vacancies are declining
and market tightness has fallen to its lowest since Dec 2021.
In a note, he said this will put pressure on wage growth, especially as mortgage payments
rise and negative-wealth effects have only now just started to bite.
He is therefore sticking to his guns, forecasting a 50 bps hike from the central bank this
Thursday, a smaller increase than last month's 75-bp rise.
The wider market doesn't seem as convinced, and at 1220 GMT on Tuesday was pricing in a 60%
chance of a 50-bps hike, and a 40% chance of a 75 bps hike IRPR .
Remaining very bearish on the UK economy, Citi analysts like positioning for euro/sterling
upside and also see downside in sterling/Swiss franc.
Looking to next year, according to Gkionakis, the prospect of a "sizeable house price
correction" in the first half of 2023 could prevent the MPC from hiking rates to the current
terminal rate priced in by the market of around 4.7%.
"We think the terminal rate will be 3.75%-4% and see a high risk of this being followed by
relatively rapid easing," the note read.
(Lucy Raitano)
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JP MORGAN SLASHES EQUITY ALLOCATION AS RISKS LOOM FOR 2023 (1205 GMT)
JP Morgan downgraded its equity allocation going into 2023 as it sees recession risks
growing.
"The challenging cyclical outlook for next year and also the rally into year-end prompt us
to move moderately underweight equities," said JPM strategists in a note. They were previously
overweight on equities.
MSCI's all-country world price equity index .MIWD00000PUS is down more than 17% so far
this year, more or less in line with the S&P 500 .SPX , as the Russia-Ukraine war exacerbated a
pandemic-induced inflation rise, prompting aggressive central bank tightening of monetary
policy.
JPM moderately reduces its overweight on commodities, slashing allocation by 2 percentage
points, and increased allocation to corporate bonds and cash, turning overweight on the former.
(Subhadeep Chakravarty)
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OCEAN SHIPPING TO STRUGGLE IN 2023, BUT RESILIENCE IS IN THE AIR (1038 GMT)
A decline in global trade may hit the logistics sector in 2023, with ocean transport likely
to face a stormy environment for a longer spell of time. However, air transport might see bright
skies by the second half of the year.
UBS expects global ocean carriers to deal with a gradual increase in overcapacity as it
already sees freight rates on some global routes below 2019 levels.
"In an environment of overcapacity, we see a good chance that the ocean industry may move
from excess to negative profitability in 2H23", UBS analysts say.
This contrasts with air transport, where the broker expects a recovery in the second half of
the year, with rates to reach levels 25-30% above those seen in 2019.
The main risk ocean freighters should consider is a prolonged period of a very low global
trade growth – or even no growth at all. The broker expects global trade in 2023 to decline
around 3% from 2022 with a possible recovery in 2024.
What could come to the rescue for troubled ocean carriers is another undesired congestion
event that would result in temporary price increases. But in case we need a more palatable
alternative, UBS hints at a "meaningful" capacity reduction.
(Boleslaw Lasocki)
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STOXX AWAITS U.S. INFLATION DATA (0825 GMT)
European shares are trading slightly higher, gaining some support from expectations U.S.
inflation data due later in the day will persuade the Federal Reserve and other central banks to
step back from aggressive interest rate hikes.
The pan European STOXX 600 .STOXX was about flat, with oil producers .SXEP acting as the
largest positive influence, as crude prices rose for a second day after a key pipeline that
supplies the U.S. remained shut, just as expectations build that loosening COVID restrictions in
China will boost energy demand.
Rate-sensitive tech stocks .SX8P also rose, while utilities .SX6P tumbled 1%.
In terms of single stocks, Italy's Banco BPM is up around 4% after Enasarco bought almost 2%
of its shares.
(Joice Alves)
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UNDER ARREST (0745 GMT)
The arrest of FTX's former CEO Sam Bankman-Fried in the Bahamas at the behest of U.S.
prosecutors, just a month after the cryptocurrency exchange filed for bankruptcy, is turning out
to be the headline of the day.
And for financial markets caught in a holding pattern, U.S. inflation data due later on
Tuesday is shaping up as a key event, probably more important for the outlook than tomorrow's
interest rate decision by the Federal Reserve.
Asian stocks were in a wait-and-watch mood on Tuesday while the dollar, which has been
lifted by high and rising interest rate expectations, held firm.
In Europe, markets will focus on economic sentiment data from Germany, the region's biggest
economy, where the ZEW survey will be released. Inflation data is also due out in Germany.
Investors generally remain on alert to risks of further increases in borrowing costs hurting
economies, although central banks are beginning to slow their aggressive rate rises.
Runaway inflation has forced developed economies to raise borrowing costs by a combined
25.15 percentage points this cycle, the most aggressive in decades.
The rate of price increases is beginning to slow in the United States but investors need
more evidence to underscore that trend, which could limit any policy shocks from the Fed.
Economists polled by Reuters expect U.S. core inflation to be steady at 0.3% month-on-month
USCPF=ECI but see moderation in the annual pace, with headline prices seen 7.3% higher than a
year earlier USCPNY=ECI .
The New York Fed's latest survey showed that Americans expected waning inflation pressures
over the next few years even as they expect their incomes to perk up.
Despite the double whammy of double-digit inflation and rising energy costs, travel demand
remains strong, with TUI TUIGn.DE , the world's largest holiday company, setting its sights on
strong business in the summer of 2023.
Meanwhile, Britain's National Grid NG.L cancelled standby notices for two coal units, a
few hours after issuing the requests, as a cold snap gripped the country but high nuclear output
and wind speeds reduced the chance of energy shortages.
Key developments that could influence markets on Tuesday:
Economic data: UK Oct labour market, Germany Nov inflation final, Germany Dec ZEW survey
Events: Fed starts 2-day meeting, BoE publishes Financial Stability Report
U.S. data: Nov inflation
(Anshuman Daga)
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EUROPEAN BOURSES SEEN HIGHER AHEAD OF U.S. INFLATION (0739 GMT)
European futures are pointing to a start of the day in positive territory ahead of U.S.
inflation data that many hope will persuade the Federal Reserve and other central banks to step
back from aggressive interest rate hikes.
Later this week, the Fed, European Central Bank and the Bank of England are all expected to
raise rates by 50 basis points (bps), rather than the aggressive 75 bps hikes they went with
earlier in the year.
Also supporting sentiment, a Chinese tourism-linked index .CSI930633 jumped more than 2%
as Hong Kong eased COVID-19 restrictions for inbound travellers.
(Joice Alves)
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