MARKET WRAPS
Watch For:
EU ECB bank lending survey; Germany Ifo business climate index; Bank of England asset purchase facility quarterly report; trading updates from EssilorLuxottica, Alstom, Remy Cointreau, Capgemini, Akzo Nobel, Randstad, Unilever, Croda, Sasol, Compass Group
Opening Call:
Shares may waver in opening trade in Europe on Tuesday ahead of three central bank meetings this week. In Asia, stock benchmarks were mostly higher; Treasury yields dropped; the dollar slipped; while oil and gold slightly gained.
Equities:
European stocks could extend the previous day's weakness on Tuesday, with investors waiting for the rate decisions of the U.S. Federal Reserve, European Central Bank and Bank of Japan.
U.S. central bankers expect the Fed to raise rates by another 25 basis points on Wednesday to a 5.25%-5.5% range, potentially marking the last in this cycle as its inflation fight appears to pay off.
On Thursday, the European Central Bank will deliver its decision. Another increase in borrowing costs is expected, but the ECB's hawkishness may be tempered after reports released on Monday showed that economic activity in the eurozone slumped to an eight-month low in July.
On Friday, the Bank of Japan should leave rates unchanged, but may say something about removing elements of its ultra loose policy.
Earnings season remains in full swing, with several tech heavyweights due to report in the week ahead. Alphabet and Microsoft will present their numbers on Tuesday, Meta on Wednesday and Intel on Thursday.
As Fed policy expectations stabilize, corporate performance is becoming a more important driver of the market's next leg, said Infrastructure Capital Management.
"We're playing Wednesday['s Fed meeting] as a neutral event, because they're obviously going to hike and the market has come around to the view that the Fed is going to pause in September," it said. "So, weirdly, the Fed is not quite as important this time around as it might normally be."
Forex:
The dollar weakened in Asia amid risk-on sentiment spurred by China's Politburo's pledge of more policy measures to support the country's economy.
Given that expectations for stimulus out of China had been pared back, a modest risk-positive reaction has occurred, said NAB.
While overall sentiment has been risk-positive, market movements have been fairly contained, it added.
However, the dollar could get a boost from the Fed's decision on Wednesday.
"The ongoing easing of financial conditions and still above trend longer dated inflation expectations should limit the immediacy and magnitude of easing the Fed will be willing to project, and ultimately deliver, absent a major shock," Bank of America said.
Meanwhile, a pause in the ECB's tightening cycle is warranted after July, said ANZ. The euro area economy is faltering due to a combination of high inflation, rapid rate hikes, weak global trade, geopolitical risks and energy transition, it said.
The ECB is poised to raise rates 25 bps this week, taking the deposit rate to 3.75%, but it could well be the last in the current cycle, ANZ said.
While there is a risk that the ECB could need to hike a little further, the rapid rate rises over the past 12 months must be given time to work. The interest-rate hiking cycle should no longer be on a preset course, ANZ added.
Bonds:
Treasury yields declined after previous gains on the back of bets the Fed will hike this week for the last time.
Investors have been jumping on the soft-landing bandwagon, hoping that slowing inflation will allow the Fed to turn dovish before high borrowing costs cause a recession.
But many economists caution that prices remain too hot for comfort and rate cuts may take a while to come about.
Navellier & Associates sees "a valid argument that there could actually be another 50bps in increases."
Markets are pricing in a 98.9% probability that the Fed will raise interest rates by 25 basis points to a range of 5.25%-5.5% on Wednesday, according to the CME FedWatch Tool. The chances of another 25-basis-point hike by November is seen at 31.2%.
The U.S. central bank is expected to take its fed funds rate target back down to around 5% or lower next year.
"The U.S. economy still has a lot of momentum; we pushed back our recession call and now see the Fed on hold for longer, following the 25bp hike we expect this week [on Wednesday] and another in September or November," said Barclays.
"We expect the ECB [on Thursday] to hike by 25bp and to guide that it is close to the peak, though not necessarily there yet," it said. "We think the BoJ [Bank of Japan, on Friday] will stand pat, waiting for more evidence of sticky prices before launching revisions to its Yield Curve Control policy in October."
Energy:
Oil prices edged higher in Asia, as Beijing's supportive tone for the property market buoyed investors' optimism.
China's Politburo, the country's top decision-making body, said Monday that it will adjust property policies promptly as supply-demand dynamics have changed, hinting at easing measures to rescue the struggling property sector.
"The proposed support measures in China also boosted sentiment in the crude oil market," ANZ said.
U.S. and global benchmark oil prices had marked their highest finish in three months on Monday, buoyed by "unquenched thirst for summer oil" and bets for tighter global crude supplies later this year.
"The unquenched thirst for summer oil created a snowball effect that has led to a multi-week rally" in oil prices, said Velandera Energy Partners.
Export cuts from Saudi Arabia and Russia have led to Asian buyers "looking for U.S.-sourced WTI," it said.
"The usual suspects are at play [for oil] -- continued demand growth in the American summer, handsome recovery in China and robust outlook in India, while supply remains constrained," it said.
Metals:
Gold futures nudged up in Asia after trading in a tight range overnight ahead of decisions by the Fed, BOJ and ECB.
"Gold wavered as traders brace for further rate hikes from central banks, " said ANZ.
Looking forward, investors are increasingly betting on interest rates to peak soon as signs show that inflation is abating.
Assuming the Fed follows through with a widely-expected interest-rate hike on Wednesday, investors will be watching closely for signs of how this latest data point may affect the central bank's plans going forward.
The Federal Open Market Committee meeting this week will be the "direction setter for the gold price, with the level of perceived dovishness or otherwise from the Fed likely to have a big say in whether the precious metal makes another run" toward the $2,000 level soon, said KCM Trade.
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Copper rose after China's Politburo pledged more support for the country's ailing property sector, where the base metal is typically used.
Importantly, the Politburo left out the slogan of "housing is for living, not for speculation" in its readout published Monday, a sign that it is considering easing restrictions on the property sector, ANZ Research said.
But markets will likely need more details on the latest measures before they will feel assured the worst is over, it added.
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Iron ore prices were higher, following a broad rally in the China market today after Beijing top officials pledged more policy stimulus over the coming months.
Chinese brokerage GF Futures said the government's supportive policy signal could enhance near-term trading sentiment.
However, the brokerage advises caution because of still-muted fundamentals for iron ore's supply-demand dynamics.
Port inventories are rising, a sign that supply is increasing faster than demand picks up, while worries over steel production curbs are also rising, which could hurt the outlook for iron ore demand, it said.
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