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STOXX on the rise ahead of U.S. CPI
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END OF THE "GREENIUM" [1300 GMT]
The discount offered to borrowers for issuing ESG earmarked bonds vanished in 2022 across both the U.S. dollar and euro-denominated IG markets as primary market supply continued to rise, according to a note by Goldman Sachs.
The trend of a disappearing "greenium" is a robust result using other estimation procedures as well, such as regression-based analyses that are less restrictive and look across all sectors, maturities, and ratings, Goldman Sachs added.
Nevertheless, investors remain optimistic.
Barclays expects ESG bond sales to grow by 30% this year and rebound to almost the same levels of 2021, predominantly driven by green bonds.
ESG bond volumes swelled over the past few years but dropped by 22% in 2022 as higher interest rates weighed on credit markets, along with a political backlash against the industry. (Bansari Mayur Kamdar)
CHINA, EUROPE: TOP EQUITY PICKS IN 2023 (1203 GMT)
Investors expect Chinese and European equities to outperform in 2023, a survey from Morgan Stanley shows.
38% of Morgan Stanley respondents said they see China as the best performing region in 2023, with the key most likely positive surprise being China and broader Asia re-openings, which could drive a stronger-than-expected global GDP recovery.
Europe is seen as a close second best performer with a 33% vote share, a decline from a year ago, when 58% of respondents expected Europe to be the best performing region in 2022. That "did indeed come to fruition in U.S. dollar terms," MS says.
In terms of sectors, global financials is the preferred choice, according to the survey.
"The MSCI World Financial sector has outperformed the equivalent Technology sector by over 20% to register its best relative annual return since the aftermath of the TMT bubble in the early 2000s. Our audience expects this trend to continue," they said.
EXCUSE ME, WHERE'S THE TERMINAL RATE? (1101 GMT)
It is no surprise that fixed-income markets are volatile and lack clear direction while the European Central Bank keeps investors on their toes about its monetary tightening path.
As Citi analysts put it, if "the ECB published a 'dot plot' of rate expectations of Governing Council members like the Fed, there would be significant dispersion."
ECB's Klas Knot and Isabel Schnabel have hinted at terminal rates of 4% or more, Citi analysts say in a research note. At the same time, "President Christine Lagarde's December press conference was not much lower."
However, Portugal's dovish central bank governor Mario Centeno, speaking to local lawmakers on January 10, pointed "more towards 3% as a terminal rate," they add.
Money markets, Citi and many other investment banks forecast the ECB will hike the deposit facility rate to a peak of 3.3-3.5% by this summer.
But these numbers could change depending on ECB statements and economic data, which recently showed inflation easing more than expected in December.
As Francis Yared, global head of rates research at Deutsche Bank, recently said: "We must accept that the future rate path is a discovery process for markets and central banks."
Today’s U.S. CPI data will probably provide further indications about the Federal Reserve’s next moves, at least.
STILL CLIMBING (0957 GMT)
Europe's main share benchmarks continued to climb on Thursday ahead of U.S. inflation data due at 1330 GMT, which could be a major driver for many asset classes around the world.
The regionwide Stoxx 600 rose 0.58% to a fresh near-nine-month high, as Britain's blue chip FTSE 100 gained a similar amount to reach a new three-and-a-half-year top, and German French and Spanish benchmarks were all in the green as well.
The gains were right across the board, with almost all STOXX sub-indexes up on the day. Travel and leisure and real estate, which are both up around 1.4%, are leading the charge higher.
There's plenty to talk about when it came to single stocks too. Logitech International, the Swiss-American maker of keyboards and mice, was the biggist faller among the STOXX 600, down 12.28% after it reported lower earnings and sales between October and December and cut its sales outlook.
In Britain, retailers were in focus. Online retailer ASOS shares surged 16.2% after it said operational changes would help deliver a 300 million pound benefit to its current financial year, even as it reported sales in its biggest market of Britain fell 8% in the period up to Christmas.
Supermarket chain Tesco edged up just 0.2% after it a better-than-expected sales rise ahead of the festivities, but rival Marks and Spencer lost 1.2%, even after it reported robust Christmas trading.
MORNING BID-RIP YCC?
The main surprise in Asia was provided by a Yomiuri newspaper report that the Bank of Japan will review the side effects of its yield curve control (YCC) at a policy meeting next week and may take additional steps to correct distortions in the market.
This, presumably, refers to the fact that 10-year yields have been stuck at the new YCC ceiling of 0.5% for four sessions, even while the BOJ has been busy buying bonds in bulk to get them down.
The timing of the review was a surprise given the market had thought it would wait until BOJ Governor Haruhiko Kuroda retires in April before taking any big steps. Then again, the market had thought the same last month when the central bank wrongfooted everyone by widening its YCC band.
Clearly it's hard to have a credible target for 10-year yields of zero when they are trading every day at 0.5%, and just buying yet more debt is unlikely to solve that.
The BOJ could raise the target to, say, 0.5% and lift the trading range to 0-1.0%, but markets would likely see it as capitulation and immediately take yields to the new ceiling.
This FACTBOX has some more options.
Whatever the decision, time is ticking for YCC and maybe even negative rates in Japan. That would be a seismic event for bonds given Japan has acted as an anchor for yields globally, while encouraging Japanese investors to funnel funds offshore.
Any reversal of those flows could see the yen rally further, one reason the dollar is down 0.6% so far today at 131.63.
The other major event in Asia was China's CPI for December which came in bang on expectations at 1.8% y/y, marking China as one of the very few countries in the world without an inflation dragon breathing down its neck.
Indeed, producer prices surprised on the downside with a drop of 0.7% y/y, the third month of declines and a world away from the 10.3% annual increase seen in December 2021. With reopening proceeding apace, supply bottlenecks fading and shipping costs plunging, China may yet return to being an exporter of disinflation, at least for goods prices.
As for U.S. CPI, the market is clearly priced for a dovish outcome, so there's some risk of disappointment. Median forecasts are 6.5% for headline and 5.7% for core, and this is one of those cases where a result just 0.1ppt either side could make or break the recent rally in bonds.
EARLY GAINS (0743 GMT)
Futures pointed to small gains on Thursday for Europe's main stock benchmarks, already sitting at multi-month highs, but key U.S. inflation data, due early afternoon in Europe, will hang heavy over morning trading.
Federal Reserve policymakers said this week that the CPI inflation data will help them decide whether they can slow the pace of interest rate hikes at their upcoming meeting. Such a slowdown, broadly speaking, should be good news for equities, but if inflation comes in higher than expected, that should hurt stocks by driving expectations of a further 50 basis point rate increase by the Fed next month.
Eurostoxx 50 March futures are 0.29% higher, suggesting further gains after the benchmark hit a near 11-month high on Wednesday. Dax futures are up 0.31%; and FTSE futures gained 0.25%.
As for company news, Christmas sales data from several British retailers, released early Thursday, showed a mixed picture with both M&S and Tesco reporting strong Christmas sales though online fashion retailer ASOS reported a 3% fall in revenue in the four months to the end of December. Motoring and cycling parts retailer Halfords also trimmed its annual profit outlook.
Britain's second-largest housebuilder Persimmon also warned of weak conditions in the housing market on Thursday, as a sharp rise in mortgage rates and broader economic uncertainty weigh on demand, a day after larger rival Barratt said it would build fewer homes in its current fiscal year.
In commodities news, Britain's financial watchdog is blocking the restart of London Metal Exchange nickel trade in Asian hours due to doubts about the LME's ability to run an orderly market in that time zone, Reuters reported, citing three sources with knowledge of the matter.
