Morgenbud: The markets hope China chooses to surprise on the upside

April 17 (Reuters) – A look at the day ahead in European and global markets from Wayne Cole.

It’s been a cautious start to the week in Asia with shares and bonds little changed and the dollar holding on to most of Friday̵[ads1]7;s pullback. The caution is understandable given that the week features updates on Chinese economic growth and global PMIs, along with the Fed’s Beige Book and at least eight Fed speakers.

Analysts are generally upbeat on the China data given the stunning strength of recent trade numbers. House prices over the weekend also surprised with the fastest growth in 21 months, a comforting sign since housing has been a major weakness for the economy and a vulnerability for banks.

The central bank did its part by strengthening liquidity in the financial sector by rolling over maturing medium-term policy loans with higher cash offers for the fifth month.

The fund boost should help fill liquidity gaps created by upcoming tax payments from banks and companies, as politicians seek to boost activity.

Citi’s economic surprise index for China data is at a 17-year high, and the market sees upside risks to Tuesday’s releases of GDP, retail sales and industrial production.

Meanwhile, the CME Fedwatch Tool caused a brief stir this morning when it showed the probability of a Fed hike on May 3 with a 98% death certificate. It may have been a fat finger, as it is now back at a still safe bet of 83%, so it seems that investors have concluded that the banking crisis is not enough to prevent another rise.

Markets have shifted further on the ECB to price in a 46% chance that it will increase by a whopping 50 basis points on May 4. The first week of May looks set to be a dud.

Analysts at Barclays note that this week’s corporate earnings will have more macro relevance than usual, given they will provide information on how resilient corporate balance sheets are to potential future economic pressures.

“Quarterly banking results, particularly for US regional banks, should also provide a first glimpse of the fallout from the March turmoil and the associated tightening of lending conditions,” they add.

Goldman Sachs ( GS.N ) and Morgan Stanley ( MS.N ) had both been expected to report a drop in profits, although that may not be inevitable given last Friday’s upside earnings surprises.

State Street ( STT.N ), M&T Bank ( MTB.N ) and Charles Schwab ( SCHW.N ) report later today, and it will be interesting to see if the banking stress had a bigger impact on them than on the larger institutions.

Key developments that could affect markets on Monday:

– Ongoing G7 foreign ministers’ summit in Japan

– ECB’s Christine Lagarde speaks in New York

– Speeches by Bank of England Deputy Governor Jon Cunliffe and Federal Reserve Bank of Richmond President Thomas Barkin

– The, often fleeting, Empire Manufacturing Survey and the NAHB housing survey shall

Reporting by Wayne Cole; Editing by Muralikumar Anantharaman

Our standards: Thomson Reuters Trust Principles.

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