UKX

MARKET WRAPS

Watch For:

U.K. Prime Minister Rishi Sunak questioned by Select Committee panel, Treasury Committee evidence session on Silicon Valley Bank UK with Bank of England Governor Andrew Bailey and Deputy Governors David Ramsden and Sam Woods; France business sentiment index; Italy consumer and business confidence surveys; trading updates from Sika, Commerzbank, Naturgy Energy Group, Wood Group (John), United Utilities Group, Ocado Group, SSE, Ericsson, SSAB, Maersk

Opening Call:

Shares look set to rise in Europe, as concerns over the health of the banking system ease. In Asia, stock benchmarks were higher; Treasury yields broadly declined; the dollar weakened; while oil was lower and gold advanced.

Equities:

European stock futures point higher tracking Wall Street's overnight gains, as investors continue to weigh central banks' fight to tame inflation against instability in the financial system.

On Monday, an agreement by First Citizens Banchshares Inc. to buy the deposits and loans of failed Silicon Valley Bank helped underpin sentiment as shares of European banks steadied.

"If market conditions were what they are now back in 2008, the equity market would have been under severe stress. But today, with a lot of bad news already priced into the market and greater confidence that the Fed won't tolerate large levels of stress, the equity market is showing remarkable resilience," said Mark Hackett, chief of investment research at Nationwide.

While concerns about the banking crisis have eased, the ripple effects from the financial-system strains could lead banks to keep a tighter leash on lending to households and businesses.

The impact of a tighter credit cycle and higher interest rates on consumers could bring the economy another step closer to a recession, according to Saira Malik, chief investment officer at Nuveen.

"I do think we will experience a mild recession either later this year or early next year," Ms. Malik said.

She has advised clients to focus on higher-quality assets, including companies with the ability to continue to grow their dividends and emerging-market equities.

Tom Hainlin, national investment strategist at U.S. Bank Wealth Management, said he is also looking to parse first-quarter earnings next month to see how companies are faring and their outlook for the rest of the year.

"That's one of the next big mileposts we need to see," he said.

"Our view is that corporate-earnings expectations are still a little too high. The combination of higher wages, a slowing economy and higher interest rates should ultimately weigh on those corporate profits."

Investors are looking ahead to this week's U.S. and eurozone inflation data for more clues on the path of monetary policy.

On Friday, the Commerce Department is set to release figures on U.S. household spending and income in February, a key inflation reading that is closely watched by the Federal Reserve.

Forex:

The dollar was weaker in Asia amid improving risk appetite.

Some pessimism has faded, said MUFG Bank, noting U.S. financial shares rose and Treasurys fell overnight as fears of broader contagion from the banking turmoil abated.

This has helped USD to weaken, it said.

The U.S. dollar traded on the back foot last week through the FOMC despite banking uncertainty, elevated rates volatility and a negative hit to future growth, JPMorgan analysts said.

"We maintain that banking stress shouldn't be viewed as uniformly USD bearish given its defensive properties," they said.

Goldman Sachs warned that credit tightening was dollar negative even if can be a rate-increase substitute, with the firm is looking ahead to H.8 bank-lending data due Friday.

That data "should become a more important complement to the Fed balance sheet data" as it starts to cover the banking stress period and has more direct implications for economic effects, it said.

Overall, though, Goldman expects there to be more focus on policy speeches and potential adjustments to policy tools than macro data for some time.

Bonds:

Treasury yields were broadly lower amid a calmer tone across markets as fading tensions over the banking sector reduced demand for perceived haven assets, such as government bonds.

"The relevance of the uncertainties in the banking system are difficult to ignore and will continue to set the tone for financial markets -- particularly U.S. rates," said BMO Capital Markets.

"Investors remain on guard of any evidence of a further escalation of stress in the system; a dynamic that implies the passage of time without fresh headlines from the banks will encourage selling in Treasuries," it said.

"This logic resonates only up to a point; monetary policy makers have already revealed the great extent to which systemic risk will drive a more cautious outlook."

Markets are pricing in a 51.9% probability that the Fed will leave interest rates at a range of 4.75% to 5.0% after its meeting on May 3, and a 48.1% chance of another 25 basis point rate hike, according to the CME FedWatch tool.

The central bank is expected to take its fed-funds rate target to 4.9% by May 2023, and to have cut back to 4.1% by December, according to 30-day Fed Funds futures.

Energy:

Crude oil futures were lower early Tuesday.

The focus could be on supply issues, as Russia's sea-borne crude-oil flows have fallen to 3 million barrels a day and as European natural gas prices are higher due to strikes in France, Saxo Markets said.

Meantime, Exxon Mobil said it would begin to shut down a refinery in France that represents 20% of the country's refining capacity amid widespread protests, ANZ analysts said.

"The crystal ball, which had been clouded by the banking crisis, is now showing a profit opportunity" for oil, said Manish Raj, managing director at Velandera Energy Partners.

"After the erratic selloff in mid-March, cooler heads have started to prevail as traders look at the dip in oil prices as a good entry point."

"It's been a volatile few weeks for crude, caught up in the banking storm as investors are forced to scale back their expectations for the economy which, in turn, has weighed heavily on demand prospects," Oanda said.

"It may take some time for the dust to settle and prices to fully reflect the new outlook after such a turbulent period which should ensure volatility remains for now."

Metals:

Gold prices edged higher in Asia, rebounding from losses on Monday after banking-system fears abated and yields on U.S. Treasury bonds climbed.

Gold has transformed into "a barometer for financial stress" over the past month, said Marios Hadjikyriacos, senior investment analyst at XM.

Whether the precious metal continues to climb will depend on several factors, including how the financial system fares and whether the Fed's interest rate cuts that are being priced in by futures traders actually happen, he added.

"As things stand, 'peak stress' seems to have passed, so there's a risk of a retracement after this fierce rally in gold," Hadjikyriacos said.

Still, Naeem Aslam, chief investment officer at Zaye Capital Markets, points out that while futures prices for gold have shied away from testing its all-time high after briefly rising above the key $2,000 mark last week, that doesn't mean another cycle of retracement is going to begin.

There are "strong odds" of the Federal Reserve easing its hawkish monetary policy, and "it is likely that we may have already reached the peak in terms of the interest rate cycle," said Aslam, and if not, "it is highly likely that we are not far from level now."

That "makes the case a lot stronger for the gold price to move higher as the dollar index will begin to lose steam further," he said.

Meanwhile, "the threat of a U.S. banking crisis or a European banking crisis is keeping traders very much on their toes," said Aslam.

"There is still a...lack of confidence among investors who believe that the chances are far greater for things to crash first before they recover."

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Copper prices gained in Asia after a muted session overnight as investors weighed demand concerns from continued uncertainty over the banking turmoil in Europe and the U.S.

But the commodity is unlikely to pull back significantly from current levels given falling inventories in China and overseas markets, analysts at Galaxy Futures said.

They note several supply-constraint factors, such as continuing refinery maintenance and the lingering risk of export curbs in several key producing countries.

"Before overseas supply issues are resolved, the market is likely to trade on expectations of destocking trends," they said.

---

Chinese iron-ore futures were higher, extending Monday's gains, as investor sentiment improves with concerns over a global banking crisis easing.

However, analysts expect the strong price growth to retreat as policy regulation risk remains and demands from steel mills is likely to wane due to seasonal factors, Baocheng Futures said.

TODAY'S TOP HEADLINES

Fed's Barr Calls Silicon Valley Bank a 'Textbook Case of Mismanagement'

WASHINGTON-The failure of Silicon Valley Bank demonstrates a "textbook case of mismanagement," the Federal Reserve's top banking regulator is expected to tell Senate lawmakers on Tuesday, while acknowledging there may have been shortcomings in the central bank's oversight.

"SVB failed because the bank's management did not effectively manage its interest-rate and liquidity risk, and the bank then suffered a devastating and unexpected run by its uninsured depositors," said Michael Barr, the Fed's vice chairman for supervision, in written testimony released by the central bank.

Deutsche Bank Stock Price Rebounds Even as Worries Persist

Deutsche Bank shares regained lost ground on Monday after last week's swoon. But investors remain on edge and have begun to poke at the bank's weak spots.

Shares of the German lender rose 6%. They tumbled Friday as worries about the health of the global banking system escalated in the wake of UBS Group AG's forced marriage with weaker rival Credit Suisse Group AG. The cost to insure against Deutsche Bank's default using credit-default swaps fell Monday, but remains at levels last seen during the pandemic.

U.S. and Japan Strike Deal on Minerals Used in Batteries for Electric Cars

WASHINGTON-The U.S. and Japan reached a trade agreement for minerals used in clean-energy technologies, a deal aimed at allowing Japan to meet sourcing requirements for new electric-vehicle subsidies in the U.S. and shifting energy supply chains away from China.

Under the deal, the U.S. and Japan agreed not to levy export duties on critical minerals they trade and coordinate labor standards in producing minerals, among other steps, according to a U.S. announcement. The pact builds on a limited trade accord the two countries reached in 2019, and they will review the minerals deal every two years to see if they should end or change it.

Transport Strike Brings Much of Germany to Standstill

BERLIN-A large-scale transport strike brought large parts of Germany to a standstill on Monday in one of the country's biggest walkouts in decades, part of a wave of labor unrest sparked by higher prices in Europe.

Most air, train and public transport systems ground to a halt across the country after workers joined a 24-hour walkout aimed at securing inflation-beating wage rises.

Russia Supplies Iran With Cyber Weapons as Military Cooperation Grows

Russia is helping Iran gain advanced digital-surveillance capabilities as Tehran seeks deeper cooperation on cyberwarfare, people familiar with the matter said, adding another layer to a burgeoning military alliance that the U.S. sees as a threat.

The potential for cyberwarfare collaboration comes after Iran has, according to U.S. and Iranian officials, sold Russia drones for use in Ukraine, agreed to provide short-range missiles to Moscow and shipped tank and artillery rounds to the battlefield. Tehran is seeking the cyber help along with what U.S. and Iranian officials have said are requests for dozens of elite Russian attack helicopters and jet fighters and aid with its long-range missile program.

Disney Eliminates Its Metaverse Division as Part of Company's Layoffs Plan

Mickey Mouse has left the metaverse.

Walt Disney Co. has eliminated its next-generation storytelling and consumer experiences unit, the small division that was developing metaverse strategies, according to people familiar with the situation, as part of a broader restructuring that is expected to reduce head count by around 7,000 across the company over the next two months.

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Expected Major Events for Tuesday

05:30/IRL: Feb Retail Sales Index

06:45/FRA: Mar Monthly business survey (goods-producing industries)

07:00/SVK: Feb PPI

08:00/ITA: Mar Consumer Confidence Survey

08:00/ITA: Mar Business Confidence Survey

08:00/ICE: Mar CPI

09:00/LUX: Jan Trade

12:00/HUN: Mar Hungarian interest rate decision

16:59/HUN: 4Q Balance of Payments

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(END) Dow Jones Newswires

March 28, 2023 00:15 ET (04:15 GMT)

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