Marketmind: Volatility stirs

A look at the day ahead in U.S. and global markets from Mike Dolan.

World markets end a rough week of confusing and competing narratives in distinctly edgy form, with peculiarly subdued volatility gauges flickering back to life.

Although still close to long-term averages, the VIX ‘fear index’ has popped back above 20 for the first time this month – with Wall St wobbling on a mix of renewed interest rate angst and wayward steers from the corporate earnings season.

Following last week’s red hot January jobs report and ahead of next week’s consumer price readout for the same month, U.S. markets ended Thursday on the back foot again – with a dour 30-year Treasury bond auction adding to the angst.

Both 10 and 30-year yields hit their highest levels in over a month early on Friday. As Federal Reserve officials continue to talk tough about keeping rates higher for longer, futures now price year-end policy rates at 4.86% – almost a quarter point above current levels and their highest level of the year so far.

The investor trepidation rattled stock markets, particularly the tech-heavy Nasdaq. The index is on course to record its first negative week of 2023. Job shedding in the digital sector continued, with Yahoo’s plans to lay off more than 20% of its total workforce.

There was little sign of recovery on Friday.

Oil prices jumped more than 2% as Russia announced plans to reduce oil production next month in response to Western price caps on the country’s crude and oil products.

That said, the year-on-year oil price trend continues to be negative, as it’s been all year and base effects from last year’s price spike around the Ukraine invasion will only deepen that and weigh on headline inflation further.

Goldman Sachs lowered its oil price forecasts for this year and next, cutting its Brent 2023 price forecast by $6 to $92 per barrel – still above current levels around $86.

And there were also few signs that China’s sudden post-COVID reopening is feeding price pressures there.

China’s factory gate prices fell more than economists expected last month and were still 0.8% lower than a year earlier. Although consumer price rises climbed above 2%, that was below forecasts too.

The dollar pushed higher too on Friday, but there was some wild gyrations in the yen on news of a potential new Bank of Japan governor.

The yen rose initially on reports Japan’s government is likely to appoint Kazuo Ueda, an academic and a former member of the central bank’s policy board, to replace outgoing BOJ chief Haruhiko Kuroda.

While the choice was initially seen as a hawkish move that may hasten the end of the BoJ’s yield-capping easy monetary policy, the currency reversed sharply as Ueda then told Nippon TV that current policy was appropriate and should continue.

The edginess of the corporate earnings season continued ro rankle in Europe and Asia.

After dropping almost 15% on Thursday following a dire readout on last year’s losses and warnings of more to come, Credit Suisse shares stabilised on Friday as the Swiss regulator said it was watching the situation ‘very closely.”

Britain’s Standard Chartered slid 5.7% and was on track for its steepest one-day fall in six months after First Abu Dhabi Bank, the United Arab Emirates’ biggest lender, said it was not currently evaluating a buyout offer.

In the Adani saga, India’s market regulator is investigating the group’s links to some of the investors in its aborted $2.5 billion share sale amid growing concern in New Delhi about a U.S. short-seller’s allegations against one of the country’s top industrial groups.

MSCI earlier said it will cut the weightings of Adani Enterprises and three other Adani firms in its indexes, reassessing the size of companies’ free floats, having determined there was “sufficient uncertainty” surrounding some investors in Adani companies.

Key developments that may provide direction to U.S. markets later on Friday:

* U.S. Feb University of Michigan consumer sentiment, Jan monthly budget statement. Canada Jan employment report

* U.S. Federal Reserve Board Governor Christopher Waller, Philadelphia Fed President Patrick Harker speak; European Central Bank board member Isabel Schnabel on Twitter; Bank of England chief economist Huw Pill speaks

* Brazil President Luiz Inacio Lula da Silva meets U.S. President Joe Biden in Washington

* U.S. corp earnings: IQVIA, Global Payments, Newell Brands etc

Graphic 1: Is U.S. inflation calming?, https://www.reuters.com/graphics/GLOBAL-MARKETS/lbpggbynzpq/Screenshot%202023-02-09%20at%2022.50.48.png

Graphic 2: China’s PPI falls in January 2023 while CPI rises, https://www.reuters.com/graphics/CHINA-ECONOMY/INFLATION/zjvqjwmezpx/chart_eikon.jpg

Graphic 3: The BOJ’s YCC faces a reckoning, https://www.reuters.com/graphics/JAPAN-ECONOMY/BOJ/zjvqjwdaqpx/chart.jpg

(By Mike Dolan, editing by Emelia Sithole-Matarise mike.dolan@thomsonreuters.com. Twitter: @reutersMikeD)