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STOXX 600 up 0.1%
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France, Spain inflation top estimates
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U.S. stock futures inch higher
EMS RUN OUT OF STEAM, TRYING TIMES IN STORE (1329 GMT)
Emerging markets had a rosy start to 2023, thanks to a trifecta of easing U.S. inflation, prospects of slower interest rate hikes by the Federal Reserve, as well as China's reopening of its borders.
The good times, unfortunately, have proven to be short-lived.
Sticky inflation and surprising resilience in major economies have doused hopes of an end to market-punishing rate hikes any time soon. Geopolitical tensions have exacerbated sentiment even further as the Russia-Ukraine war rages on and concerns about the China-Taiwan conflict linger.
That has sent investors away from risky assets and towards the dollar.
EM stocks are on track to log their biggest February percentage loss in over two decades, down 6.5%, while currencies in the region are headed for their first monthly decline in four months, down 2.3%.
"It's started to get more challenging for EMs," said William Jackson, chief emerging markets economist at Capital Economics.
"In terms of the biggest risks, a ratcheting up of political tensions is clearly a big one, as would be a significantly higher path for interest rates in the U.S.," he added.
China's reopening is the only bright spot, but the pace of recovery in its COVID-battered economy has remained a concern. And TS Lombard said consumer attitudes in China are "the biggest unknown."
Taiwan, South Korea and South Africa will be among the most vulnerable countries if China's consumer spending does not improve, Jon Harrison, managing director, EM Macro Strategy at TS Lombard wrote in a note.
China's consumer recovery, a mild U.S. recession and a soft to rangebound dollar are key for EM risk appetite and "there will be no EM safe havens if any of the above disappoint," Harrison added.
(Amruta Khandekar)
FRANCE AND SPAIN HEAT UP EUROPE'S INFLATION OUTLOOK (1158 GMT)
Traders didn't need coffee to wake them up this morning, instead getting a jolt from higher-than-expected inflation prints out of France and Spain before any action even kicked off.
French inflation rose to 7.2% year-on-year in February, up from 7% in January, while Spanish inflation is up to 6.1% year-on-year, up from 5.9% previously.
Though by just a tick, Goldman Sachs has upgraded its February euro area headline inflation forecast to 8.36% year-on-year following this morning's figures, from the previous 8.31%. The bank also increased its core inflation tracking estimate by 11bp to 5.28% year-on-year.
Meanwhile analysts at RBC Capital Markets think this type of core inflation trend could embolden ECB hawks.
"...were the strength of core inflation seen in today's releases to be repeated in Thursday's euro area wide release this could lend a hawkish tone to the upcoming March ECB meeting," RBC Capital Markets wrote in a note.
Other market players questioned whether the latest figures suggest the market has priced in a fall in global inflation prematurely.
"If this does indeed continue to be the case with persistent hotter than expected inflation prints across predominantly Europe and the US we can expect another leg up in US Dollar strength against traditionally more risk sentiment dependent currencies like Sterling and the Euro," wrote Alex Livingstone, Head of ETF and FX Trading at Titan Asset Management in a note.
(Lucy Raitano)
THE BEARS ARE BACK, BUT BULLS STILL IN CONTROL (1013 GMT)
A Citi analysis of futures market flows shows investors have turned "markedly more bearish" over the past week in the both the United States and Europe, although the bulls remain in the driving seat for now.
"Net positioning remains moderately bullish in both these markets which means a bearish turn of sentiment could run further if momentum in flows picks up," the U.S. bank says.
In Europe, over $4 billion in new Eurostoxx shorts have trebled the size of the short position, Citi says, while in the popular banking sector, bullish sentiment has receded.
In the U.S., investors have cut bullish bets, although net positioning remains positive, which Citi believes could mean either that there's more unwind ahead, or that the recent bearish turn has not convinced investors.
Reprinted with permission of Citi Research. Not to be reproduced.
(Danilo Masoni)
FED-WATCHING IS MORE SOAP OPERA THAN SCIENCE: RABOBANK (0943 GMT)
This month has seen an abrupt shift in investor sentiment. January's risk-on rally that dented the dollar and lifted stocks has given way to a reversal in February, as strong U.S. data has prompted many to assume that interest rates will rise more than expected and will stay there for longer.
Michael Every, global strategist at Rabobank, says he sees the Fed funds rate rising to 5.5% this year, with "growing risks" of even 6% - over 150 basis points higher than the current target.
Markets currently show traders expect the rate to peak around 5.4% in September, up from closer to 4.7% in early February.
"If you said that 12 months ago, when the logic was there for that too, you were ignored or called crazy … Everything we are doing will force sharp, binary choices with huge implications. Instead, we do 'jazz hands' and quietly hope it all goes away,” he told the Reuters Global Markets Forum.
Focus is now on U.S. consumer confidence data, which, like other recent data points, is likely to be closely watched for any insight into what inflation is doing.
"The Fed is hiking. Others can't follow or match. The dollar will soar. Again. They change their mind (about rates) because they are just commentating, not analysing," Every said.
He added that this approach was less driven by hard data and in fact more closely resembled a soap opera.
"This isn't science ... It's 'Gossip Girl'," he said.
(Anisha Sircar)
STOXX FALLS AS INFLATION REARS ITS HEAD (0908 GMT)
Europe's STOXX 600 is flashing red this morning, dropping 0.3% and weighed down by a raft of less-than-stellar results combined with resurfacing inflation worries.
Just before the open, data showed the 12-month inflation rate in France rose to 7.2% in February from 7.0% in January. Minutes later, Spanish CPI came in above analysts' expectations.
With inflation fears at the forefront, the market is forced to consider rates staying higher for longer, and banks are unsurprisingly faring well.
The STOXX banks index is up 0.5%, while euro zone specific banks are rising 0.7%, bucking the wider sell-off.
Results have been a mixed bag. The STOXX 600's biggest riser is Aixtron - shares are soaring 10% after the German chip equipment maker beat estimates for 2023.
Meanwhile, UK online supermarket Ocado's shares are the worst performers, down 10% after flagging rising costs and tighter customer purse strings in its annual results.
Construction and materials names are proving the biggest drag on a sector basis, falling 1% and weighed down by shares in Danish wool product manufacturer, down 7.1%.
Spain's Acciona is not helping the sector, with shares down 4.2% after full year results.
(Lucy Raitano)
FUTURES FALTER AHEAD OF FRANCE, SPAIN CPIs(0734 GMT)
Futures are hinting at a lower open for Europe, with Eurostoxx 50 futures down 0.3%% while UK FTSE futures are down 0.13%.
Despite the gloom, as of yesterday the STOXX 600 is still on track to add over 2% this month, taking its 2023 gain to 8.7%.
On Monday, the index almost pared Friday's losses that were driven by heightened expectations of more Federal Reserve interest rate hikes.
Speaking of inflation, traders will have French inflation and GDP figures to crunch as well as Spanish and Portugese February flash CPIs ahead of the market open today.
News on Monday that British Prime Minister Rishi Sunak struck a deal with the EU on post-Brexit trade rules for Northern Ireland had little impact on UK equities, but was supportive of the pound.
In company news, Swiss financial watchdog FINMA concluded on Tuesday that Credit Suisse "seriously breached its supervisory obligations" in connection with its business relationship with financier Lex Greensill and his companies.
(Lucy Raitano)
MARKET MOOD DOWNBEAT AHEAD OF RAFT OF DATA (0712 GMT)
The overarching downbeat mood among investors shows no signs of improving as markets become increasingly wary of a further rise in borrowing costs.
Although U.S. markets took a breather and rose on Monday, they ended well below the day's highs and Asian markets were back in the red on Tuesday after gaining in early trade.
Tuesday's U.S. consumer confidence data will be especially scrutinised for households' views on economic prospects and inflation expectations.
Economists polled by Reuters expect a median reading of 109.5 on the index, which unexpectedly fell in January.
European markets will deal with CPI data due from France and Spain.
Despite sharp increases in interest rates by major central banks, predictions of economies worldwide falling into recession continue to miss the mark.
While inflation has eased a bit, providing some support to markets, a barrage of economic data suggests that inflation is stickier than expected, reinforcing the "higher-for-longer" rates view.
On Tuesday, sterling gave up some gains after rising by 0.98% against the dollar a day earlier, when it recorded its biggest daily gain in more than seven weeks.
British Prime Minister Rishi Sunak struck a deal with the European Union on post-Brexit trade rules for Northern Ireland.
Sunak immediately won plaudits from business groups who welcomed the easing of trade rules.
The news comes at a time when Britain's economy, which looked likely to fall into recession in early 2023, is showing some unexpected signs of recovery, raising questions about whether the Bank of England really is about to pause its run of interest rate increases.
In Asia, incoming Bank of Japan Deputy Governor Shinichi Uchida brushed aside the chance of an immediate overhaul of ultra-loose monetary policy, suggesting that any review of its policy framework could take about a year.
Elsewhere, data showed that Japan's factory output shrank at the fastest pace in eight months in January as declining overseas demand took a heavy toll on key industries.
Key developments that could influence markets on Tuesday:
Europe economic data: France Feb prelim CPI, final Q4 GDP; Spain, Portugal Feb flash CPI; Germany Jan import prices
Europe results: Man, Abrdn, Ocado, Travis Perkins
U.S. economic data: Dec house price data, Feb Chicago PMI
U.S. earnings: Target Corp, Jones Lang LaSalle, Manchester United
