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MORNING BID-Shot across the bow

Reuters · 11/16/2022 06:00
MORNING BID-Shot across the bow

A look at the day ahead in U.S. and global markets from Mike Dolan.

The jolt to world markets from Tuesday's explosion in Poland reminded otherwise buoyant investors that geopolitics remain a major risk factor, even amid hopes of U.S. disinflation.

The incident first appeared to be a strike by Russia on a NATO member as it bombarded Ukrainian cities and civilian targets again on Tuesday - knocking world stocks and reviving a retreating dollar on fears of a direct standoff between Russia and the Western alliance.

But the tension has eased somewhat since as U.S. President Joe Biden said the strike in Poland was probably from Russia and more likely a stray Ukrainian defence missile.

Revealing for investors was the extent to which this month's 6% surge in the euro/dollar exchange rate EUR= was at least partly to do with hopes of an endgame in the Ukraine war - as much as ebbing U.S. inflation. The euro lost 1.5 cents as the from Poland unfolded but has regained all of that since.

European bourses have been less quick to rebound and remain in the red, with aerospace and defence stock outperforming. Chinese and Hong Kong shares were also down, hit further by another surge in COVID-19 cases and that home prices slumped 1.6% in the year through October - the fastest pace of decline in more than seven years.

Although the G20 summit in Indonesia was focused on the war in Ukraine, Wednesday's declaration from group members had them reaffirm commitment to avoiding excessive currency volatility. It included a phrase acknowledging that many currencies have "moved significantly this year with increased volatility."

U.S. stock futures were more upbeat ahead of the open and continued to riff off hopes for US disinflation after Tuesday's producer price report - even as the Treasury yield curve signalled recession ahead with the biggest inversion between 3-month rates and 10-year yields since 2019.

The Fed, however, continued to talk tough.

Atlanta Federal Reserve President Raphael Bostic said he sees little evidence that the U.S. central bank's aggressive monetary policy tightening is slowing inflation. "Tighter money has yet constrained business activity enough to seriously dent inflation," Bostic wrote on the Atlanta Fed's website.

And Britain shows sign yet of an end to price rises. UK inflation soared well past forecasts to hit a 41-year high of 11.1% - a day before finance minister Jeremy Hunt announces tax hikes and spending cuts to control price growth.

U.S. attention will turn to retail sales on Wednesday as October data is due for release alongside industry readings.

Walmart WMT.N stock jumped more than 6% on Tuesday after lifting its sales and profit forecast, boosting other major retailers too, including Target TGT.N, Costco COST.O and Macy's M.N. Target reports results later on Wednesday.

Significantly, Walmart said demand for groceries had held up despite higher prices, while discounts on clothing and electronics helped it cut back excess inventories ahead of the busy holiday season.

There was little market reaction on Tuesday after former U.S. President Trump formally launched a bid for the White House in 2024, with Republican rival Ron DeSantis currently the bookmaker's favourite to be the President.

Key developments that may provide direction to U.S. markets later on Wednesday:

* G20 summit in Bali, Indonesia

* U.S. Oct retail sales, Oct industrial and manufacturing production, Nov NAHB housing market index, Sept business and retail inventories, Oct import and export prices, Sept TIC data on flows in Treasury Securities.

* Canada Oct inflation

* U.S. Treasury auctions 20-year bonds

* Bank of England Governor Andrew Bailey and other BoE policymakers speak in parliament

* European Central Bank President Christine Lagarde and several senior ECB officials all speak

* Federal Reserve Board Governor Christopher Waller, Fed Vice Chair for Supervision Michael Barr, NY Fed President John Williams

* US corporate earnings: Lowe's, Target, TJX, Cisco, NVIDIA

(By Mike Dolan, editing by XXX mike.dolan@thomsonreuters.com. Twitter: @reutersMikeD)

((mike.dolan@thomsonreuters.com; +44 207 542 8488; Reuters Messaging: mike.dolan.reuters.com@thomsonreuters.))