Marketmind: Don’t fight central banks

A look at the day ahead in European and global markets from Anshuman Daga

Judging by the improved mood in global equity markets, investors are once again having a go at central banks.

Despite a slew of data from around the world showing stronger-than-expected performance in economies and labour markets – red signals for inflation – equities are on the mend.

MSCI’s world index of global shares has recovered more than 2% this month after slipping 3% in February and erasing a huge chunk of January’s 7% gain.

On Tuesday, Asian equity markets ticked up but the main focus of investors will be Federal Reserve Chair Jerome Powell’s testimony before Congress on Tuesday and Wednesday.

Will Powell be able to send a decisive message to markets about the future pace of interest rate increases? That will be what markets zero in on.

Euro zone short-dated government bond yields extended gains and rose to their highest levels in 14 years on Monday after hawkish policy-maker Robert Holzmann called for four further 50-basis-point interest rate increases from the European Central Bank, while 10-year yields steadied.

The European Central Bank has already raised rates to 2.5%, a 3 percentage point increase since July and essentially promised another half a percentage point increase on March 16.

Investment managers are cautious on European stocks after their outperformance so far this year.

Strategists at BlackRock Investment Institute expect the trend to end as recent data pushes the European Central Bank to raise rates and keep them higher for longer.

While staying underweight on European stocks, it prefers financials, energy, healthcare and consumer discretionary sectors.

And Schroders’ analysts are in the camp of those who expect interest rates to be kept on hold by the ECB from March.

Schroders noted in a report that replenishing of gas storage levels and falling energy prices reduce the need to raise rates further but says some of the reduced demand for energy in 2022 was due to mild winter weather and there was no guarantee of a repeat this coming winter.

Adding to more pain in the technology world, thousands of job cuts are in store at Meta Platforms, Bloomberg News reported on Monday, just a few months after the Facebook-parent slashed more than 11,000 people from its workforce.

On the corporate front, Bloomberg News reported that German chemicals distributor Brenntag is considering buying back at least 5% of its shares. This comes when the company is being urged by activist investors to break up and spin off its specialties unit and launch a share buyback programme.

Meanwhile, Australia’s central bank raised its cash rate 25 basis points to the highest in more than a decade at 3.60% and said it expects further tightening will be needed to curb inflation.

Key developments that could influence markets on Tuesday:

European economic data: ECB consumer expectations survey, UK BRC Feb retail sales, Halifax house prices

Speakers: Fed chief Jerome Powell delivers semi-annual monetary policy testimony – 1500 GMT

U.S. economic data: January wholesale trade sales, consumer credit

(Reporting by Anshuman Daga; Editing by Sam Holmes)