Sticky inflation, weak earnings could hobble US stock surge

NEW YORK, Feb 14 (Reuters) – A rally that has lifted stocks in the early weeks of 2023 may struggle to find its next leg higher as investors face more expensive valuations, a weak earnings outlook, and an uncertain economic backdrop.

Tuesday’s closely watched inflation report on US consumer prices showed the smallest annual price increase since late 2021. But the data did little to dispel expectations that the Federal Reserve will have to continue raising rates higher and keep them elevated for longer to drive inflation lower.

Meanwhile, companies in recent weeks have reported tepid fourth-quarter earnings and analysts’ profit outlooks have grown more pessimistic, while stock valuations are at their highest level in about six months.

“What this means is that we are probably going to be a little bit more choppy at this level,” said Shawn Cruz, head trading strategist at TD Ameritrade in Chicago, Illinois. “I don’t see this being the kind of report that we can get a strong rally off of.”

After initially rising on Tuesday, the S&P 500 was last down 0.5% on the day. Through Monday, the benchmark index had climbed 7.8% in 2023, after last year posting its biggest annual percentage drop since 2008.

The CPI data continues the trend of moderating annual inflation rates that have helped propel this year’s rally in risk assets. However, a stunningly strong jobs report earlier this month has fueled expectations that the Fed will need to raise interest rates higher than expected to rein in inflation in a still-humming economy.

The latest inflation number did not alter that outlook. Futures markets on Tuesday afternoon were pricing in rates rising to a peak of 5.3% in July and inching lower to 5% in December, a steeper trajectory than traders had projected at the beginning of the year. Both rates were slightly above where they stood prior to the CPI report.

The Fed has raised its policy rate by 450 basis points since last March from near zero to a 4.50%-4.75% range.

Treasury yields, which move inversely to prices, were higher after the data, with the yield on the 10-year US Treasury note last at 3.78%, continuing a move that has seen them rebound after falling to start the year. Higher yields on Treasuries, which are seen as among the market’s safest investments, can make stocks less appealing while also reducing the allure of equities in certain valuation models.

The market “continues to be incredibly sensitive to any data that will suggest that the Fed will have to either raise rates more or keep them higher for longer,” said Michael Arone, chief investment strategist at State Street Global Advisors.

At the same time, the S&P 500’s forward price-to-earnings ratio has climbed to 18.3 times, from about 17 times to start the year, according to Refinitiv Datastream. With fourth-quarter 2022 earnings estimated to have fallen from a year ago, analysts now forecast S&P 500 earnings falling 3.7% year-over-year in the first quarter of 2023 and 3.1% in the second quarter.

“I don’t see how you can get inflation back to target without a recession, and that means equities will be disappointed either on inflation or on earnings,” said Tim Drayson, head of economics at Legal & General Investment Management.

Some have also expressed concern about investor positioning, which has grown stretched in recent weeks as market participants piled into the stock rally.

One measure of equity positioning tracked by Deutsche Bank has bounced back to its highest point in about a year, from historically low levels in 2022.

“With investor positioning now more balanced, markets are more likely to be impacted by any bad economic news,” UBS Global Wealth Management said in a note on Tuesday.

Still, not all signs were negative for stocks. Fund managers’ cash levels remained above 5%, according to BofA Global Research’s monthly survey released Tuesday. Those levels have edged lower but remain near historic highs, an indicator the bank’s strategists say is positive for stocks.

Some investors are also becoming more optimistic that the economy can avoid a recession. Goldman Sachs economists last week lowered their probability of a recession over the next twelve months from 35% to 25% following strong economic data.

Michael Farr, of Farr, Miller and Washington, said he would be a buyer of individual stocks if they met his criteria, “but certainly wouldn’t be a buyer of the stock market.”

“The risk is higher and the potential reward is much lower right now,” Farr said.

(Reporting by Lewis Krauskopf; Additional reporting by Naomi Rovnick in London; Editing by Ira Iosebashvili and Nick Zieminski)

Gold cedes gains on hawkish Fed; palladium sinks to near 4-year low

Feb 14 (Reuters) – Gold prices gave up gains accrued due to dollar weakness on Tuesday to end the session nearly unchanged as US Federal Reserve officials remained hawkish on rate hikes, while demand concerns sent auto-catalyst palladium sliding to its weakest since August 2019.

Spot gold was nearly flat at USD 1,852.94 per ounce by 2:33 p.m. ET (1933 GMT). US gold futures gained 0.1% to settle at USD 1,851.80.

Data showed US CPI rose 6.4% in the 12 months through January – the smallest gain since October 2021. Last month, CPI increased 0.5%, also in line with expectations.

Gold rose by as much as 0.8% on Tuesday after the dollar fell to a near two-week low, but the currency recovered, making gold more expensive for overseas buyers.

It is still a concern the Fed might feel the need to be more aggressive in hiking rates and fighting inflationary pressures, which will weigh on gold, said David Meger, director of metals trading at High Ridge Futures.

After the CPI data, Richmond Fed President Thomas Barkin and Dallas Federal Reserve President Lorie Logan both said the central bank would need to focus on bringing inflation down to the 2% target.

The Fed is expected to raise its policy rate at least twice more to the 5%-5.25% range, with financial markets retaining about even odds for a further quarter-point hike in the summer.

Bullion is highly sensitive to rising US interest rates, which increase the opportunity cost of holding the zero-yield asset.

Benchmark 10-year Treasury yields rose, weighing on gold.

Palladium dropped 4.2% to USD 1,500.18 per ounce, after earlier touching USD 1,468.94, its lowest since late-August 2019.

“As palladium is being increasingly substituted by platinum and the number of electric cars is growing, less palladium is likely to be needed to produce the new vehicles,” Commerzbank analysts wrote in a note.

Spot silver fell 0.6% to USD 21.84, and platinum slipped 2.3% to USD 931.61.

(Reporting by Seher Dareen and additonal reporting by Bharat Govind Gautam in Bengaluru; Editing by Barbara Lewis and Krishna Chandra Eluri)

Asia hedge funds post strongest month in January since 2016 – Goldman

HONG KONG, Feb 14 (Reuters) – After seeing record outflows in 2022, Asia-focused hedge funds posted a 5.3% gain in a January rally to mark their best monthly performance in years, bolstered mainly by a rebound in Chinese share prices, Goldman Sachs said in a note.

The funds’ performance in January, the strongest in Goldman Sachs records going back to 2016, comes as China’s economy reopens after years of COVID-19 curbs and US interest rates appear to be close to a peak.

MSCI’s Asia Pacific stocks index soared 7.8% last month, outperforming the rest of the world.

For hedge funds, the best gains in January had come from a strategy of taking long and short positions in Chinese shares based on company fundamentals, Goldman Sachs said. The strategy returned 7.7% in January. Taking the same approach to Japanese shares yielded 2.6%.

A separate gauge by Eurekahedge also showed Asian hedge funds rallied for the third consecutive month in January, with a 4.8% rise.

Asia-focused hedge funds dropped an average 8% last year, with a net outflow of USD 7.7 billion from Asia ex-Japan funds, according to Eurekahedge data from With Intelligence. Including Japan, the outflow was USD 8.5 billion.

Don Steinbrugge, founder and chief executive of Agecroft Partners, a hedge fund consulting firm based in New York, said Asia-focused hedge funds were significantly under-represented in most global investors’ portfolios. The under exposure had increased over the past years as investors had shifted assets out of Asia and into North America and Europe, Steinbrugge said.

Investors’ interest in Asia and China this year should increase due to a weakening of the US dollar and more attractive valuations of regional stocks relative to the US markets, he said.

“European and US investors view China’s change in COVID policy as positive,” he said, referring to the abandonment of pandemic controls in late 2022. But “some investors want to wait and see a stabilization of the real estate market.”

The Asia macro strategy – betting on macroeconomic and political trends – returned 6%, while Asia equity long/short gained 5% and Asia credit long/short gained 4%. The Asia multi-strategy lost 1% in January, Feb. 14 Eurekahedge data shows.

Steinbrugge expects macro strategies that have a lower correlation to market, to continue to gain momentum based on their strong performance last year, while a significant amount of assets in the equity long/short strategies could move to Asia or China.

(Reporting by Summer Zhen; Editing by Vidya Ranganathan and Bradley Perrett)

Oil settles down 1%, then drops more on hint of big US crude build

BENGALURU, Feb 14 (Reuters) – Oil prices settled 1% lower on Tuesday as traders worried about mounting supplies, and prices extended losses in post-settlement trading after sources said data from the American Petroleum Institute showed a large build in US crude oil and distillate inventories.

Sources said the industry group reported a crude oil build of 10.5 million barrels in the week ended Feb. 10.

The US Department of Energy (DOE) said on Monday that it would sell 26 million barrels of oil from the SPR, which is already at its lowest level since 1983.

Brent futures for April delivery fell USD 1.03, or 1.2%, to USD 85.58 a barrel by 1:05 p.m. EST (1805 GMT). US West Texas Intermediate crude futures for March fell by USD 1.08, or 1.4%, to USD 79.06 a barrel.

WTI futures slid by another 22 cents to USD 78.84 a barrel in post-settlement trading. Brent futures fell by 32 cents to USD 85.26 a barrel.

Official inventory figures from the Energy Information Administration are due on Wednesday. If the data shows a build in crude oil inventories, it will be the eighth straight week of rising US stocks.

Both benchmarks had sunk more than USD 2 during the session, but pared losses after data showed the slowest pace of acceleration in the U.S consumer price index since late 2021. Analysts said the data would likely keep the Federal Reserve on a moderate interest rate hiking path.

“Interest rates are now at a point where every 25 basis points matter and could be the difference between a soft landing and a recession,” OANDA analyst Craig Erlam said in a note.

Oil prices also pared losses after the Organization of the Petroleum Exporting Countries raised its 2023 oil demand forecast by 100,000 barrels per day in a monthly report, citing the reopening of the Chinese economy after COVID restrictions.

“OPEC’s monthly oil market report yielded some cautious optimism,” said Kpler analyst Matt Smith. He added that oil prices remained lower as the markets entered a risk-off sentiment

(Reporting by Shariq Khan; Additional reporting by Shadia Nasralla and Sudarshan Varadhan
Editing by Marguerita Choy, David Goodman and David Gregorio)

US backs Philippines in laser dispute with China

Feb 13 (Reuters) – The United States on Monday said it stood with the Philippines after Manila accused China’s coast guard of using a laser to try to disrupt a resupply mission to troops in the South China Sea.

“The United States stands with our Philippine allies in the face of the People’s Republic of China (PRC) Coast Guard’s reported use of laser devices against the crew of a Philippine Coast Guard ship on February 6 in the South China Sea,” State Department spokesperson Ned Price said in a statement.

China’s foreign ministry said its coast guard conducted actions according to the law.

(Reporting by Costas Pitas in Los Angeles; Editing by Sandra Maler)

China, US to participate in first meeting of new debt roundtable on Feb. 17

WASHINGTON, Feb 13 (Reuters) – Officials from China, India, Saudi Arabia and Group of Seven nations will participate in a first virtual meeting of a new sovereign debt roundtable on Friday, the International Monetary Fund said on Monday, confirming an earlier Reuters report.

The roundtable will also include officials from countries that have requested debt treatments under the Group of 20 common framework – Ethiopia, Zambia and Ghana – as well as middle-income countries such as Sri Lanka, Suriname and Ecuador, which have faced their own debt crises, three sources had earlier said.

The meeting will be co-chaired by the IMF, the World Bank and India, the current leader of the Group of 20, and comes a week before G20 finance officials are due to gather in Bengaluru, India, from Feb. 23-25. An in-person meeting of the roundtable expected on Feb. 25 and a formal launch is planned at the IMF-World Bank spring meetings in April.

Brazil, which will lead the G20 next year, is also taking part, one of the sources said.

An IMF spokesperson confirmed the first roundtable meeting would take place on Friday, and said more details would be released in the near future.

“The objective is to bring together key stakeholders involved in sovereign debt restructuring, from traditional creditors from advanced economies, to new creditors like China, Saudi Arabia, India, as well as the private sector and debt countries to address the current shortcomings,” they said.

The roundtable will include the Paris Club of official creditors and private sector participants – the Institute of International Finance (IIF), the International Capital Markets Association and two private-sector financial institutions that have asked not to be identified, one of the sources said.

Creation of the body comes amid growing frustration about the slow pace of discussions on debt relief for Zambia, which first requested help two years ago. Organizers say the roundtable could help resolve issues in principle and will not focus on Zambia or other individual cases.

Officials hope to resolve China’s concerns about cutoff dates to protect new financing from debt restructuring by the end of the year, one of the sources said.

G7, International Monetary Fund and World Bank officials have long pushed for faster and broader efforts to deliver debt relief to heavily indebted nations to avoid cuts in social services that they fear could tip off social unrest.

U.S. Treasury Secretary Janet Yellen and other G7 officials see China, now the world’s largest sovereign creditor, as the main stumbling block for quicker work on debt treatments. They are also pushing for agreement by G20 members on expanding the common framework to include middle-income countries.

Eric LeCompte, executive director of the Jubilee USA Network, a coalition of religious, development and advocacy groups, said support for the matter was growing among other countries. But China’s opposition – and that of Russia – remained significant a “stumbling block,” he said.

“The majority of countries support expanding these policies to middle-income countries, but China is the biggest challenge,” LeCompte said, adding that Europe had gone through a similar period of reluctance on debt relief in the 1990s, but eventually came around.

Also on the agenda will be China’s repeated calls for World Bank and other multilateral development banks to participate in debt reductions – a proposal firmly rejected by U.S. officials, who argue that those lenders already offer highly concessional loans and grants to countries in crisis.

(Reporting by Andrea Shalal in Washington; editing by Karin Strohecker, Chizu Nomiyama, Leslie Adler and Lincoln Feast.)

Gold prices slip as US inflation test looms

Feb 13 (Reuters) – Gold prices dipped on Monday as investors braced for much awaited US January consumer price index data that could steer the Federal Reserve’s rate-hike strategy.

Spot gold fell 0.5% to USD 1,854.79 per ounce by 1:42 p.m. ET (1842 GMT), while US gold futures settled 0.6% lower at USD 1,863.50.

Gold was “a little lower heading into tomorrow morning’s (CPI) number,” said Bob Haberkorn, senior market strategist at RJO Futures.

All eyes are on US CPI data due at 8:30 a.m. ET on Tuesday, expected to have climbed 0.4% in January. Revisions to the previous data showed consumer prices rose in December instead of falling as previously estimated.

Inflation numbers could come in a little less than what’s expected, if not in line with them, while a miss in expectations could lead to a buying opportunity for gold, highlighted Haberkron.

Markets have raised the profile for future tightening by the Fed, with rates seen peaking at around 5.15% and with cuts coming later and slower.

Fed Governor Michelle Bowman said the Fed will need to continue to raise interest rates in order to get them to a level high enough to bring inflation back down.

Gold is highly sensitive to rising US interest rates, as they increase the opportunity cost of holding non-yielding bullion.

However, the dollar index was 0.3% lower, while benchmark 10-year Treasury yields were down after they hit their highest level since early January earlier in the session, reducing the pressure on gold prices.

Spot silver fell 0.4% to USD 21.91 per ounce, platinum gained 1% to USD 954.32.

Palladium rose 1.8% to USD 1,569.53 after falling to a near three-year low earlier in the session.

“Given the downside risk to autocatalyst demand from potential recessions, the palladium price could continue lower,” said Heraeus analysts in a note.

(Reporting by Seher Dareen and additional reporting by Bharat Govind Gautam in Bengaluru; Editing by David Holmes and Shailesh Kuber)

Weighing up Ueda, investors cool on hawkish BOJ bets

SINGAPORE/TOKYO, Feb 13 (Reuters) – As surprise gives way to scrutiny of the men set to lead Japan’s central bank for the next five years, investors are dialing back bets on swift shifts away from super-easy policy settings.

Japan is likely to appoint economist and former policy board member Kazuo Ueda, as the next governor of the Bank of Japan, officials with knowledge of the matter have told Reuters, with former banking regulator Ryozo Himino and BOJ executive Shinichi Uchida as deputy governors.

The news was initially met with yen buying, short selling in the bond market and pressure on stocks as traders reckoned the choice of a candidate nobody thought likely, with two new deputies, was a signal to expect change and fresh thinking.

With inflation accelerating, Ueda could finally set Japan on a path to raise rates after the BOJ spent a decade fighting deflation risks with its unorthodox bond buying scheme costing trillions of yen.

But the reality of high costs for shorting bonds and poor returns on a low-yielding currency such as the yen while uncertainty swirls over Ueda’s intentions and timeline – took the heat out of a trade that was running white-hot a month ago.

“There are no strong convictions at the moment,” said Tareck Horchani, head of prime brokerage dealing at Maybank Securities in Singapore.

“Just fast money doing tactical trades, but without any clear strong view following the announcement,” he said, such as short-term options contracts betting the yen weakens. Ueda himself on Friday said current policy settings were appropriate, which also put a bit of a dampener on expectations of any shift.

The yen, which climbed as far as 129.80 per dollar, was back to 132.16 to the dollar by Monday while bonds and bond futures were bouncing, especially at longer tenors.

Implied volatility has also eased in the forex options market, suggesting an ebbing in bets on big shifts in the yen exchange rate.

“The initial read of the market was probably that this is a hawkish development and that doesn’t appear to be justified,” said Shafali Sachdev, head of fixed income, currencies, and commodities for Asia at BNP Paribas Wealth Management.

“It’s not very apparent that (Ueda) would take on the job and then immediately change the policy.”

Japan’s government is expected to formally nominate Ueda for the job on Tuesday.

HARD TO MANAGE

While traders scramble for detail on Ueda’s background and thinking, a changing of the guard at the BOJ comes at a pivotal moment for monetary policy and investment in Japan.

Inflation is finally arriving after decades spent delving deeper and deeper into experimental ways of loosening rates.

A surprise tweak to the BOJ’s limit on 10-year yields led foreigners to rush into short positions in Japanese government bonds in anticipation that more changes could follow quickly.

The surprise choice of Ueda makes navigating that process a bit more tricky, especially while current policy settings are making it expensive to keep short positions open.

“Shorting JGBs was always going to be the hardest trade to manage this year,” said James Malcolm, head of FX strategy at UBS in London. He expects shorts can profit, “but it’s probably going to be a rather uncomfortable ride,” he added.

To be sure, 10-year Japanese yields were untraded at the BOJ’s ceiling on Monday, indicating plenty of investors are staying short. But analysts say they are going to need to hold on for a while now.

“Even if the new governor sends a dovish message, they may not take off their short positions,” said Naka Matsuzawa, chief strategist at Nomura in Tokyo. “But it’s not going to happen in the first few meetings.”

Those who know Ueda also say he’s not the sort to rush.

“Ueda is the teacher of everybody who is anybody here in Japanese finance,” said Jesper Koll, expert director at financial services firm Monex in Tokyo, who came into contact with him while working at J.P. Morgan and Merrill Lynch.

“I can guarantee you that he’s not interested in – and he’s under no pressure to provide – quick wins, in any fashion.”

(Reporting by Tom Westbrook in Singapore and Kevin Buckland in Tokyo; Editing by Jacqueline Wong)

Oil edges higher as market weighs Russian supply cuts amid demand fears

HOUSTON, Feb 13 (Reuters) – Oil prices edged higher on Monday, rebounding from early losses, as investors weighed Russia’s plans to cut crude production and short-term demand concerns ahead of US inflation data this week.

Brent futures for April delivery rose 22 cents, or 0.3%, to USD 86.61 a barrel, while US crude rose 42 cents, or 0.5%, to USD 80.14 per barrel gain.

“The fundamental backdrop for oil is still very strong,” said Phil Flynn, analyst at Price Futures Group.

“With China reopening, we will see more demand and Russia and OPEC has the same or less supply, which is bullish.”

Oil prices rose on Friday to their highest in two weeks after Russia, the world’s third-largest oil producer, said it would cut crude production in March by 500,000 barrels per day (bpd), or about 5% of output, in retaliation against Western curbs imposed on its exports in response to the Ukraine conflict.

The United Arab Emirates’ energy minister said there was no need for the OPEC+ group of oil-producing nations to meet earlier than scheduled as the market was balanced.

Both the Brent and WTI contracts rose more than 8% last week, buoyed by optimism over demand recovery in China after COVID curbs were scrapped in December.

US main stock indexes also rose on Monday.

The US Federal Reserve has been raising interest rates to rein in inflation, leading to concerns the move would slow economic activity and demand for oil.

“It is difficult to overstate the importance of this single data point, as traders and the Fed look for confirmation of the gradual downward trend of the past few months,” said Matthew Ryan, head of market strategy at financial services firm Ebury.

Additionally, supply concerns were relieved somewhat as a cargo of Azeri crude set sail from Turkey’s Ceyhan port on Monday, the first since a devastating earthquake in the region on Feb. 6.

Ceyhan is the storage and loading point for pipelines that carry oil from Azerbaijan and Iraq.

Also on the supply side, US shale crude oil production in the seven biggest shale basins is expected to rise to its highest on record in March, the Energy Information Administration said on Monday.

(Reporting by Noah Browning; Additional reporting by Florence Tan in Singapore and Emily Chow in Kuala Lumpur; Editing by Kirsten Donovan, Mark Potter, David Gregorio and Deepa Babington)

Asia stocks ease, bonds brace for US data test

SYDNEY, Feb 13 (Reuters) – Asian shares slipped on Monday as investors hunkered down for US inflation and retail sales data that could jolt the outlook for interest rates globally, while tempering or accelerating the recent spike in bond yields.

An air of geopolitical mystery was added by news the U.S air force had shot down a flying object near the Canadian border, the fourth object downed this month.

Officials declined to say whether it resembled the large white Chinese balloon that was shot down earlier this month.

In any case, it provided an extra excuse for caution and MSCI’s broadest index of Asia-Pacific shares outside Japan eased 0.1%, after losing 2.2% last week.

Japan’s Nikkei fell 0.5%, and South Korea 0.3%. S&P 500 futures were off 0.2%, while Nasdaq futures eased 0.3%.

The near-term direction for assets could well be determined by US data on consumer prices and retail sales this week, with much resting on whether inflation continued to slow in January.

Median forecasts are for headline and core consumer prices to rise 0.4% for the month, with sales rebounding by 1.6%.

Risks could be to the upside given a re-analysis of seasonal factors released last week saw upward revisions to CPI in December and November. That lifted core inflation on a three-month annualized basis to 4.3%, from 3.1%.

There were also changes to the weightings for shelter costs and used car prices which might bias the CPI higher.

Bruce Kasman, head of economic analysis at JPMorgan, expects core CPI to rise 0.5% and sales to jump 2.2%, underlining the message of resilience from the bumper January payrolls report.

“Developed market labor markets have tightened in recent months against our expectations of easing,” says Kasman.

“The latest news reinforces conviction that we are not on a soft-landing path and that a recession will eventually be necessary to bring inflation back to central bank comfort zones.”

Markets have already sharply raised the profile for future tightening by the Federal Reserve, with rates now seen peaking up around 5.15% and cuts coming later and slower.

There is also a full slate of Fed officials speaking this week to provide a timely reaction to the data.

Yields on 10-year Treasuries are at five-week highs of 3.75%, having jumped 21 basis points last week, while two-year yields hit 4.51%.

That shift helped stabilize the dollar, especially against the euro which slipped 1.1% last week to hover at USD 1.0670, well away from its early February high of USD 1.0987.

The dollar also got a leg up on the yen on Friday when reports emerged Japan’s government was likely to appoint academic Kazuo Ueda as the next Bank of Japan governor.

The surprise news sparked speculation about an early end to the BOJ’s super-easy policies, though Ueda himself later said it was appropriate to the current stance.

The dollar was last holding at 131.50 yen, after bouncing from a low of 129.80 on Friday.

The rise in yields and the dollar has been a burden for gold prices, which was stuck at USD 1,862 an ounce compared to an early February peak of USD 1,959.

Oil prices eased a touch after jumping on Friday when Russia said it planned to cut its daily output by 5% in March after the West imposed price caps on Russian oil and oil products.

Brent dipped 36 cents USD 86.03 a barrel, while US crude fell 35 cents to USD 79.37.

(Reporting by Wayne Cole; Editing by Shri Navaratnam)

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