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THE FED'S BUMPY ROAD BACK TO 2% INFLATION (1012 GMT)
A rally in global stocks is now into its sixth week, but the last few days have seen risk aversion reemerge, as growth fears overshadowed any hints of a dovish Fed pivot. Concerns over weaker energy demand from China has also dented oil prices.
In light of the risk-off mood, UBS investment strategists advise investor caution and warn of a potential "bumpy" path ahead as the Fed brings inflation back to its 2% target.
"The latest market moves support our view that investors should remain cautious over the revival in risk appetite that has occurred over the past few months. Risks to growth remain a factor across asset classes, in our view," write UBS strategists in a note.
The U.S. dollar is down 6.5% from its peak, however the UBS team see a potential further burst of strength in coming months.
"The decline in US inflation may be less smooth than investors appear to be assuming, and setbacks on inflation could revive concerns over the extent of monetary tightening. Downside risks for the global economy could also cause renewed safe-haven flows into the dollar."
Equity markets have been rallying on renewed hopes that the Fed may be winning the battle with inflation, with the S&P global 500 up about 13.7% from its lowest point in mid-October, while Europe's STOXX 600 is about 15% higher today than its trough on October 13.
But UBS says the market may be priced too optimistically.
"In addition, we believe markets have been downplaying the threat posed by slowing growth to earnings. We expect S&P 500 earnings to fall 4% next year, compared to a consensus for a 5% increase in earnings based on bottom-up forecasts."
Investors therefore face continued volatility, and the strategists favor tilting exposure toward defensive parts of both the equity and fixed income markets and recommend seeking less correlated returns from certain hedge fund strategies.
NEARING THE TOP? (0900 GMT)
Support for weary Chinese property developers boosted Chinese and Asian stocks on Tuesday but inflation clearly tops the agenda for European investors this session.
German and Spanish consumer prices will set the tone for markets ahead of Wednesday's preliminary reading of euro zone inflation for November.
Though the numbers are set to show a slight cooling from the record levels hit in October, it might take a lot more to convince the European Central Bank that it can slow the pace of rate hikes.
ECB President Christine Lagarde warned on Monday that euro zone inflation had not peaked and risks turning out even higher than currently expected.
Adding to the hawkish sentiment, Bundesbank President Joachim Nagel said inflation would likely stay above 7% next year in Germany.
The double whammy of rising rates and the prospect of a recession spells bad news for European stocks as they head into next year, a Reuters poll of fund managers and strategists showed.
Money markets are pricing in more than 150 basis points of ECB interest rate increases by the end of June.
Inflation in the euro zone hit a record 10.6% on an annualised basis last month, but economists polled by Reuters expect it to ease to 10.4% in a flash reading due to be published on Wednesday.
One swing factor could be weak oil prices as concerns about China's strict COVID-19 curbs have pulled global benchmarks to their lowest levels in nearly a year.
In Britain, focus will be on Bank of England governor Andrew Bailey's address to the 'State of the Nation.'
Meanwhile, cryptocurrency lender BlockFi became the latest industry casualty as it filed for Chapter 11 bankruptcy protection, after the firm was hurt by exposure to the spectacular collapse of FTX exchange earlier this month.
Key developments that could influence markets on Tuesday:
Economic data: Germany Nov state, national inflation, Spain Nov flash CPI, UK Oct mortgage lender, Euro zone Nov sentiment index
U.S. economic data: Sept home price data
Speakers: ECB vice president Luis de Guindos, ECB board member Isabel Schnabel, Bank of England Monetary Policy Committee member Catherine Mann
COPPER-WIRED GAINS FOR EUROPE (0830 GMT)
European stocks have opened broadly higher this morning, with miners leading the way, thanks to a jump in the copper price on the back of China's decision to ramp up support for its beleaguered property sector.
The STOXX 600 is up 0.5%, led by gains on a weighted basis in Danish pharma group Novo Nordisk and oil and gas major Shell.
But it's the basic resources sector that is the stand-out performer, thanks to a lift to the likes of Rio Tinto and Anglo American - both of which are up around 3.5%, while copper focussed-producers such as Glencore and Antofagasta are up 2.3 and 2.2%, respectively.
With that in mind, it's no surprise the FTSE 100 is leading the way in the region, up 0.9%, compared with a slim 0.1% rise in the DAX and a rise of 0.3% in the CAC 40
