MARKET WRAPS

Watch For:

U.K. KPMG and REC report on jobs, Chancellor Jeremy Hunt takes questions in the House of Commons, Bank of England Deputy Governor David Ramsden and Chief Economist Huw Pill speak at U.K. Women in Economics Network launch event, Bank of England Deputy Governor Sir Jon Cunliffe speech on 'Update on Central Bank Digital Currency'; Germany Industrial Production Index; France foreign trade, balance of payments; trading updates from BP, BNP Paribas, TotalEnergies, TUI, Finnair, SAS, SSE, Impala Platinum Holdings, Micro Focus International

Opening Call:

Shares may edge higher at the open in Europe on Tuesday after the U.S. monthly jobs report beat expectations, stoking fears that interest rate increases may continue longer than expected. In Asia, stock benchmarks were higher; Treasury yields and the dollar fell; while oil and gold advanced.

Equities:

European shares are likely to rise despite Wall Street's weakness on Monday.

U.S. stocks declined Monday, continuing their decline after strong jobs data last week raised the prospect of additional interest-rate increases by the Federal Reserve.

"With a better-than-expected jobs report on Friday, good news is bad news for the market," said Mark Hackett, chief of investment research at Nationwide.

In other words, strong jobs data is bad news for stocks because it boosts expectations the Federal Reserve will need to move rates higher for longer to combat inflation.

"The selloff in the last couple of days might be some realization, particularly on the rates side of things, that the markets got carried away," said Edward Smith, co-chief investment officer at Rathbones.

Given how rapidly prices have been rising, Mr. Smith added, "We've got a long way to go. That's going to keep the Fed from delivering those rate cuts."

Fed Chairman Jerome Powell is due to give an interview Tuesday. Investors will trawl his remarks for clues about the central bank's response to the job numbers.

The focus will be on whether Mr. Powell emphasizes the central bank's view that short-term rates will peak at more than 5%, said Jim Reid, a strategist at Deutsche Bank, compared with the current range of 4.5% to 4.75%.

Forex:

The dollar weakened early Tuesday reversing course from the previous day's gains as investors adjust to Friday's surprisingly robust jobs data and its implication for the Fed's rate path.

"The declining inflation/improving growth backdrop remains intact and in favor of high beta FX, but strong payrolls have challenged market pricing for the Fed," JPMorgan analysts said.

"High beta FX has historically been resilient to a Fed re-pricing so long as growth remains robust; usually the lowest yielders are a casualty of a Fed re-think. Carry-seeking behavior continues to dominate FX," they said, referring to a strategy that trades on interest-rate differentials in a currency pair.

"A Fed re-pricing benefits carry."

Read: How the U.S. dollar could put this stock-market rally to a big test

--

The euro could extend its losses against the dollar following the European Central Bank's latest policy decision and Friday's strong U.S nonfarm payrolls data, forex broker Tickmill said.

Long euro positions, which expect it to rise, were unwound after the ECB said Thursday that it will evaluate the interest-rate path after March and take a data-dependent, meeting by meeting approach, Tickmill said.

Meanwhile, Friday's robust U.S. jobs data boosted the dollar as U.S. rate hike projections came into question, it said.

"With the risk now that USD remains well-bid near term while EUR continues to sell-off, EUR/USD looks poised for further losses."

Bonds:

Treasury bonds yields fell early Tuesday as traders digest an increased likelihood that the Federal Reserve will hike rates a few more times after January's strong jobs report.

"The January employment report does not change our view of the labor market. It's still resoundingly strong," said BofA Securities economist Michael Gapen and others.

"While one month may not make a trend, the data do suggest economic activity may be accelerating rather than slowing."

"The report gives us more confidence in our outlook for two additional 25bp rate hikes and a terminal rate of 5.0-5.25%," they said.

Markets are now baking in two 25-basis point rate increases, with a cut coming in December rather than in November, as expected before the labor data.

Energy:

Oil futures gained in Asia on supply concerns spurred by the earthquakes that struck Turkey and northern Syria.

The earthquakes forced shutdowns at a Turkish oil terminal, which has implications for Iraqi oil along with Syria's primary oil refinery.

Operations at Turkey's oil terminal in Ceyhan stopped after an earthquake struck nearby on Monday, according to an official at Tribeca Shipping, a shipping-services provider that assists vessels going to Ceyhan.

"But as long as inspections don't reveal any major damage that will keep the pipeline or port operations offline for more than a few days, the market impact should be limited," Tyler Richey, co-editor at Sevens Report Research said.

Meanwhile, the European Union on Sunday imposed a ban on Russian refined energy products, following on an earlier ban on seaborne Russian crude.

The G-7 set a price cap of $100 on so-called "high-value" Russian exports such as diesel and gasoline and $45 on "lower-value" products such as fuel oil.

The price caps are above the market price for reformulated gasoline and nearly in line with the market price for diesel, said Troy Vincent, senior market analyst at DTN.

"It is unlikely that the caps will have a material impact on global supply."

Metals:

Gold edged higher early Tuesday, buoyed by safe-haven demand.

Rising geopolitical tensions have spurred this demand, said ANZ Research analysts.

U.S.-China tensions have risen after the U.S. recently shot down a suspected Chinese spy balloon over U.S. territory, the analysts added.

Kinesis Money pointed out that prices for the precious metal had surged above $1,900 an ounce and remained there for most of January on the prospect of the Federal Reserve soon ending its policy of interest rate hikes to curb persistently high inflation.

However, the "massively positive jobs figures...delivered the shock that gold investors were fearing as the strong state of the world's largest economy gives the Fed plenty more room to continue its policy of rate hikes without fearing triggering a recession," it said.

"With more hikes now likely, gold has suffered due its lack of yield making it less attractive at times of rising interest rates."

--

Aluminum prices gained in Asia amid media reports that the U.S. could levy a 200% tariff on Russian aluminum.

If such a tariff is imposed, it could act as a de-facto ban on Russian aluminum imports by the U.S., said Citi Research analysts.

However, this would only likely affect roughly 3% of aluminum imported during 2022, they added.

Given that Russian aluminum makes up a low proportion of U.S. aluminum imports, the tariff is unlikely to be a game changer with regard to U.S. market balances, the analysts said.

---

Chinese iron-ore futures were little changed, as traders wait for the next rally amid expectations that China's economic recovery will likely lift demand for the commodity.

"Given the impact of production restrictions last year, demand is expected to be higher this year," analysts from GF Futures said, adding that prices are likely to go up as factories reopen after the Lunar New Year holiday.

   
 
 

TODAY'S TOP HEADLINES

Biden to Urge Quadrupling New 1% Tax on Stock Buybacks

WASHINGTON-President Biden plans to propose quadrupling the 1% tax on stock buybacks that took effect in January, which the White House said would encourage companies to invest in their growth instead of boosting shareholders.

Mr. Biden will discuss the proposed change during his State of the Union speech on Tuesday, the White House said in a preview of the address, in which the president will also tout economic progress since the early days of the Covid-19 pandemic. The plan to boost the buyback tax might struggle to advance through the divided Congress, where Republicans control the House.

   
 
 

Reserve Bank of Australia Delivers Ninth Consecutive Rate Increase, Stays Hawkish

SYDNEY-The Reserve Bank of Australia delivered a record ninth consecutive interest rate rise at its first policy meeting for this year, citing the stubbornness of inflation pressures and increased potential for a big jump in wages.

RBA Gov. Philip Lowe on Tuesday announced a rise in the official cash rate to 3.35% from 3.10%, saying the economy was witnessing broad demand pressures despite a rapid exit from emergency interest rate settings since May last year.

   
 
 

U.K. Regulators Are Urged to Address Pension Risks After Last Year's Crisis

British regulators failed to properly monitor the risks created by the derivatives-based investment strategy that upended the U.K.'s pension sector last year, an investment approach that poses a continuing risk to companies if changes aren't made, according to a U.K. legislative panel.

Liability-driven investments, known as LDIs, invest in derivatives that are tied to U.K. government bonds known as gilts. They help pensions match long-term liabilities they have to retirees with less capital than they would need had they owned regular long-dated gilts. That allows them to manage exposure to changes in bond yields and free the funds' balance sheets to invest in higher-returning investments such as stocks, real estate or private equity.

   
 
 

Russian Deficit Soars to $25 Billion on War Spending, Oil Embargo

Western oil sanctions and soaring battlefield costs took a heavy toll on Russia's finances last month, pushing the government budget into its deepest deficit to start the year in more than a decade.

Oil and gas revenues nearly halved, dropping 46% in January from the same month last year, according to data from the Russian Ministry of Finance published Monday. Government spending, driven by military purchases, jumped by 59% from last January.

   
 
 

Ukraine Warns Russia Is Planning Major Offensive

DNIPRO, Ukraine-Ukraine warned that Russia was completing preparations for a major new offensive this month as Kyiv signaled a reshuffle in its military leadership amid a corruption scandal that has rocked the Defense Ministry.

Serhiy Haidai, the governor of the Luhansk region in eastern Ukraine, said Russia was continuing to bolster its offensive capacity and bring in troops to front-line positions while decreasing its rate of fire in certain areas to save ammunition for the coming advance.

   
 
 

CVS Nearing $10.5 Billion Deal for Primary-Care Provider Oak Street Health

CVS Health Corp. is close to an agreement to acquire Oak Street Health Inc. for about $10.5 billion including debt, a deal that would rapidly expand the big healthcare company's footprint of primary-care doctors with a large network of senior-focused clinics, according to people with knowledge of the matter.

The companies are discussing a price of about $39 a share, the people said. The deal, if it goes through, could be announced as soon as this week, they said. CVS is scheduled to report earnings on Wednesday.

   
 
 

Google Opens ChatGPT Rival Bard for Testing, as AI War Heats Up

Google is rolling out a new conversational artificial-intelligence service to a select set of testers, and plans a broader public launch in coming weeks, part of the company's effort to play catch-up with challengers such as OpenAI, creator of the popular chatbot ChatGPT.

The new experimental service, called Bard, generates textual responses to questions posed by users, based on information drawn from the web, Sundar Pichai, chief executive of Google parent Alphabet Inc., said in a blog post published Monday.

   
 
 

Write to singaporeeditors@dowjones.com

   
 
 

Expected Major Events for Tuesday

00:01/UK: Jan BRC-KPMG Retail Sales Monitor

06:45/SWI: Jan Unemployment

07:00/NOR: Dec Industrial Production Index

07:00/UK: Jan Halifax House Price Index

07:00/GER: Dec Industrial Production Index

07:00/FIN: Dec Foreign trade

07:30/HUN: Dec Preliminary Industrial Production

07:45/FRA: Dec Foreign trade

07:45/FRA: Dec Balance of payments

08:00/SWI: Jan SNB foreign currency reserves

08:00/AUT: Jan Wholesale Price Index

08:00/AUT: Nov Foreign Trade

08:00/CZE: Dec Retail trade

08:00/SPN: Dec Industrial Production

09:00/ICE: Jan External trade, preliminary figures

10:00/GRE: Dec External Trade (provisional data)

11:00/FRA: Dec OECD CPI

11:00/IRL: Dec Industrial Production and Turnover

All times in GMT. Powered by Onclusive and Dow Jones.

Write to us at newsletters@dowjones.com

We offer an enhanced version of this briefing that is optimized for viewing on mobile devices and sent directly to your email inbox. If you would like to sign up, please go to https://newsplus.wsj.com/subscriptions.

This article is a text version of a Wall Street Journal newsletter published earlier today.

 

(END) Dow Jones Newswires

February 07, 2023 00:16 ET (05:16 GMT)

Copyright (c) 2023 Dow Jones & Company, Inc.