World stocks began the new month on firmer ground, after a volatile January, as reassuring comments from Federal Reserve officials helped to calm rate-hike jitters even though US futures failed to extend recent gains. After closing out January with a furious two-day, dip-buying meltup thanks to a flood of inbound month-end rebalancing, US index futures briefly traded through Monday’s highs, backed by decent rally in European equities where financials outperformed, boosted by solid UBS earnings, before dipping lower as the volatility seen in past days lingered. At 7:00am ET, emini S&P futures traded 0.23%, or 10.5 points lower, Nasdaq futures were also red, some 31 points or 0.15% lower, and Dow futures dropped 0.2% as investors weighed cautious rate-hike commentary from Fed officials and awaited earnings from firms including Alphabet and General Motors. Treasuries climbed and the dollar weakened. Oil fell, but held close to seven-year highs.

Videogame makers were in focus after Sony said it will buy Bungie, the developer behind the popular Destiny and Halo game franchises, for $3.6 billion. In another busy day ahead for earnings, AMD rose in premarket trading amid expectations its results Tuesday will show market-share gains. Other notable premarket movers:

• UPS (UPS US) rose 7.3% premarket as the postal firm benefited from higher prices and rising holiday deliveries to post profit that beat analyst estimates.
• Spire (SPIR US) shares gain as much as 27% in premarket trading after the satellite-imaging and data company released preliminary 4Q numbers ahead of analysts’ targets and guided toward higher 2022 revenue.
• Harley-Davidson (HOG US) shares have valuation support at current levels, while the market appears to be pricing in an overly negative outlook, Morgan Stanley writes, upgrading stock to equal-weight. Shares up 0.8% premarket.
• Knightscope (KSCP US) declines 14% in premarket trading, set to come down from a high reached on Monday as retail investors piled into the security-camera and robotics company, tripping two trading halts along the way.

Earnings season has provided a healthy breadth of beats so far: of the 182 companies in the S&P 500 that have reported earnings so far this season, more than 82% have beaten or met,

“Investors continue to buy the dips almost everywhere this week, with market sentiment boosted by a strong earning season so far where most companies have beaten expectations,” says Pierre Veyret, technical analyst at ActivTrades. “Technically speaking, most indices have registered solid rebounds over major support zones and are now challenging key resistance levels.”

In a jawboning fest on monday, four Fed officials said they’ll back interest-rate increases at a pace that doesn’t disrupt the economy, calming markets unnerved by previous hawkish messages from the central bank. Investors are now debating whether the rally that pared the worst monthly rout in the S&P 500 since March 2020 will continue. They are also focusing on earnings releases to gauge the strength of the economic recovery.

“Good news is that some Fed officials are finally out trying to soothe investors’ nerves saying that they still want to avoid unnecessarily disrupting the U.S. economy,” Ipek Ozkardeskaya, a senior analyst at Swissquote, wrote in a note. “But what will really make the difference is the quantitative tightening and given the steep rise in Fed’s balance sheet since March 2020, even halting the growth would be an abrupt change.” 

In Europe, the Stoxx Europe 600 Index rose 1%, led by financial services and basic-resource stocks. UBS shares surged 6% after the lender beat estimates. Telecoms were the only industry group in red. European tech stocks rallied again, with the Stoxx Tech Index rising as much as 2.1%, among the top-performing sectoral gauge in Europe. Sector added to 3.5% gain Monday, lifted higher by overnight rally in the U.S., with the Nasdaq 100 Index +3.4%. Semiconductor makers and pandemic winners lead gains, with BE Semi +4.5%, Deliveroo +3%, ASMI +2.8%, ASML +2.6% and Just Eat Takeaway.com +2.8%. Here are some of the biggest European movers today:

• UBS shares gained as much as 7.5% in early European trading, the biggest intraday gain since April 2020, after the Swiss lender posted largely better-than-expected results and analysts cheered the new financial targets.
• HeidelbergCement shares rise as much as 4.7% after the company reported preliminary 4Q revenue that Stifel analyst Tobias Woerner says was “reassuring.”
• Faurecia shares rise as much as 4.4% as the shares resume trading after being suspended all of Monday ahead of the closing of the Hella acquisition. The deal is a key milestone that allows the French auto parts firm to start implementing synergies, says Citi analyst Gabriel Adler (buy).
• Ubisoft shares rise as much as 3.7% in positive readacross after Sony said it will buy U.S. video game developer Bungie for $3.6b. The acquisition indicates the sector is consolidating, says Citi (buy).
• Hexagon shares soar as much as 23%, the most since 2009, after it signs deal with a commercial truck maker to provide battery packs for electric heavy-duty vehicles.
• Shares in U.K. clothing retailer Joules plunge as much as 34%, to the lowest since April 2020, after reporting that revenue and profit before tax for the 9 weeks to Jan. 30 fell short of the board’s expectations.
• Saipem falls as much as 15%, extending Monday’s 30% plunge, as brokers including Mediobanca downgrade the oil drilling specialist after it warned on 2021 earnings and said it would hold discussions with creditors and shareholders for financing.

Earlier in the session, Asian stocks rose as the latest remarks from Federal Reserve officials helped ease fears of aggressive U.S. monetary tightening.  The MSCI Asia Pacific Index added as much as 0.5%, with the information-technology and financial sectors providing the biggest boosts. Japan’s Keyence and Murata Manufacturing contributed most to the advance, with both releasing quarterly earnings results after market closed in Tokyo. Equity gauges in New Zealand and India led gains, with many markets in the rest of Asia shut for holidays. China, Hong Kong, South Korea, Singapore and Taiwan were among bourses closed for the Lunar New Year break. “Now that markets are finding calm, buying is kicking into individual stocks of companies that have reported solid earnings or are expected to,” said Shogo Maekawa, a strategist at JP Morgan Asset Management in Tokyo.  Asian shares may extend gains if U.S. data this week on employment and ISM manufacturing don’t rattle the market, Maekawa added.   Fed officials said they want to avoid unnecessarily disrupting the economy as they prepare to start raising rates, mitigating market concern over a 50 basis-point move in March. “You always want to go gradually,” Kansas City Fed President Esther George told the Economic Club of Indiana.  Asia’s stock benchmark fell 4.4% in January, its biggest such drop since July, hit by concern that faster-than-expected U.S. rate hikes will cool the global economic recovery.

Japanese stocks pared large morning gains, with the Topix finishing little changed, as automakers slid. Chemical and machinery makers also dragged on the Topix, which wiped out a gain of as much as 1.3%. The Nikkei closed 0.3% higher, paring a 1.5% advance, with TDK and Shionogi the biggest boosts. Both gauges had risen about 3% over the previous two sessions. “There’s a lot of tussle between buyers and sellers due to month-end and month-start trading,” said Hiroshi Namioka, chief strategist at T&D Asset Management. “Shares of companies with robust earnings are being bought, but those without any specific leads to go on seem to be exposed to selling pressure.”

Indian stocks rose after the annual federal budget pledged to step up spending in a bid to support a business recovery in Asia’s third-largest economy.   The S&P BSE Sensex climbed 1.5%, its biggest advance in a month, to 58,862.57 in Mumbai. The NSE Nifty 50 Index rose 1.4%. Fifteen of the 19 sector indexes compiled by BSE Ltd. rose, led by a gauge of metal stocks that jumped the most in six months.  Finance Minister Nirmala Sitharaman’s strong push for infrastructure-led growth and investment centered around sectors like railways, roadways, logistics and energy will benefit most metal companies, according to Priyesh Ruparelia, a vice president at ICRA Ltd. A measure of capital goods companies also jumped the most in a year.  The nation plans to boost capital spending by 35% to 7.5 trillion rupees ($100 billion) in the next financial year that starts in April in a bid to sustain a recovery in growth disrupted by the pandemic. “With growth-oriented focus intact in the budget, we expect economic and capital market buoyancy to remain,” said Vijay Chandok, managing director at ICICI Securities Ltd.

Waves of volatility have swept across markets after the Fed signaled swifter monetary-policy tightening to curb inflation than many had expected. Investors need to “get used to this up and down volatility” as there’ll likely be more of it, Nancy Davis, chief investment officer at Quadratic Capital Management, said on Bloomberg Television.

In rates, Treasuries bull flattened as spreads unwound a portion of Monday’s steepening move with yields richer by up to 3.5bp across long-end of the curve. US Treasury yields were richer by 2bp to 3.5bp across the curve with 2s10s, 5s30s spreads both flatter by almost 1bp each; 10-year yields around 1.75%, with bunds lagging by 1.5bp and gilts outperforming by 1bp in the sector. In European bonds, focus remains on the front-end of the curve as rate hike premium continues to build -- German 2-year yields are cheaper by almost 4bp on the day, trading above the European Central Bank’s deposit rate for the first time since 2015.  Gilts outperform in early London session. IG dollar issuance slate includes Kommuninvest $1b 2Y SOFR; two companies priced $1.8b Monday as sales activity continues to drop off in volatile backdrop.

In FX, Bloomberg Dollar Spot index falls 0.3%. NOK, CHF and SEK outperform in G-10, CAD and euro lag. The Bloomberg Dollar Spot Index slumped as the greenback weakened against all of its Group-of-10 peers. Gains were led by the Swiss franc, which advanced a second day as it rebounded after adverse month-end flows; Scandinavian currencies were also among the top gainers amid supportive risk sentiment. The euro headed for a third day of gains, boosted by an unwind of the latest rally for downside exposure through options; the common currency rose by as much as 0.3% to 1.1269, raising questions on whether its latest weakness was more down to month-end flows rather than hawkish Fed bets. French inflation rose 3.3% from a year earlier in January, a sharper gain than the 2.9% economists estimated following December’s 3.4% advance. The pound rallied against a broadly weaker dollar, with domestic focus remaining on the Bank of England’s meeting this week. Figures showed U.K. house prices registered their strongest start to the year since 2005, before mortgage data due later Tuesday. The Aussie reversed an earlier loss after the RBA said it’s ready to be patient on interest rates even as it ceased its bond-purchase program. Overnight- indexed swaps continued to price in four rate hikes by the central bank this year. The Kiwi also advanced, in part on purchases against Aussie post RBA. Japan’s bonds extended a decline to a fourth day amid growing speculation that the central bank will step in to slow a rise in yields. The yen gained for third day.

Crypto markets were varied in which Bitcoin traded sideways around 38.5k and Ethereum gained over 2%.

In commodities, crude futures fade a sharp drop. WTI finds support near $87 before recovering back on to a $88-handle. Brent trades flat near $89.20. Most base metals trade in the green; LME nickel rises 1.3%, outperforming peers, LME lead and tin lags. Spot gold rises roughly $10 to trade near $1,807/oz

U.S. economic data slate includes January Markit manufacturing PMI (9:45am), ISM manufacturing, December construction spending and JOLTS job openings (10am); while AMD, Alphabet, Electronic Arts, Exxon, General Motors, Gilead, PayPal, Stanley Black & Decker, Starbucks and UPS are among companies reporting results.

Market Snapshot

• S&P 500 futures down 0.3% to 4,490.00
• STOXX Europe 600 up 0.8% to 472.72
• MXAP up 0.4% to 185.38
• MXAPJ up 0.3% to 606.58
• Nikkei up 0.3% to 27,078.48
• Topix little changed at 1,896.06
• Hang Seng Index up 1.1% to 23,802.26
• Shanghai Composite down 1.0% to 3,361.44
• Sensex up 1.3% to 58,793.71
• Australia S&P/ASX 200 up 0.5% to 7,006.04
• Kospi up 1.9% to 2,663.34
• Brent Futures down 0.9% to $88.45/bbl
• Gold spot up 0.5% to $1,805.93
• U.S. Dollar Index down 0.16% to 96.38
• German 10Y yield little changed at -0.01%
• Euro up 0.2% to $1.1258
• Brent Futures down 0.9% to $88.45/bbl

Top Overnight News from Bloomberg

• Money markets are wagering on the BOE raising rates five times by 25 basis points and a move of that magnitude from the ECB by December. That spurred a renewed selloff in bonds across the continent on Monday, and challenges ECB policy makers including President Christine Lagarde who have pushed back against the idea of raising borrowing costs this year
• Euro-area manufacturers are taking a more aggressive approach to price setting -- another signal that inflation won’t slow quickly after stronger- than-expected readings from the region’s biggest economies. Output prices rose at the second-fastest rate on record in January, according to a survey of purchasing managers by IHS Markit released Tuesday. While there were some signs of supply- chain problems easing, robust demand allowed firms to pass on higher costs to customers
• German joblessness fell at a much faster pace than anticipated in January as the economy comes to terms with coronavirus curbs to contain surging infections. Unemployment in Europe’s largest economy declined by 48,000, pushing the jobless rate down to 5.1%. Economists had forecast a drop of just 6,000
• European natural gas prices plunged after Russian shipments via a key route crossing Ukraine rebounded. Futures slumped as much as 9.1% as deliveries into Slovakia through the Velke Kapusany interconnection point on the border with Ukraine returned to normal levels, according to data from grid operator Eustream
• Russian President Vladimir Putin meets Tuesday with Hungarian leader Viktor Orban, his closest friend in the European Union, as Western countries continue their diplomatic press to deter Moscow from attacking Ukraine

A more detailed look at global markets courtesy of Newsquawk

Asian stocks were positive but with upside limited amid mass holiday closures for the Lunar New Year. ASX 200 (+0.5%) rose above 7,000 with the index further underpinned as the RBA stuck to a dovish tone. Nikkei 225 (+0.3%) was kept afloat after lower unemployment although retraced gains as JPY strengthened. Nifty 50 (+1.4%) outperformed as focus in India centred on earnings and the budget announcement.

Top Asian News

• Europe Is Losing Nuclear Power Just When It Really Needs Energy
• Winners and Losers in India’s Budget Aiming to Bolster Growth
• Widespread Bullying, Harassment Detailed in Rio Tinto Report
• India Plans Record Borrowing to Fund Modi’s Growth Ambitions

European bourses are firmer taking impetus from the holiday-thinned APAC handover and Monday's US close; albeit, benchmarks are off best levels, Euro Stoxx 50 +1.0%. Sectors are all in the green though Telecom lags while Basic Resources, Banks and Tech do well amid base metals, UBS (+7.0%) earnings and the NQ/NXPI read-across respectively. Stateside, US futures are relatively contained but have moved directionally with European peers, the NQ remains the current modest outperformer.

Top European News

• U.K. Mortgage Approvals Rise to 71k in Dec. Vs. Est. 66k
• Slovenia Mulls Law on Swiss-Franc Loans Slammed by Lenders, ECB
• Europe Is Losing Nuclear Power Just When It Really Needs Energy
• Putin Meets Orban Amid Diplomatic Flurry: Ukraine Update

In FX, DXY sheds more Fed rate hike premium and month end rebalancing momentum. Franc rebounds firmly as yields recede and SNB President Jordan sets sights on keeping track of inflation. Sterling underpinned by risk appetite and firm UK macro releases. Kiwi turns table on Aussie after encouraging NZ trade data and RBA pledges patience on tightening after confirming removal of QE. Rouble on front foot ahead of call between Russia’s Foreign Minister Lavrov and US Secretary of State Blinken, but Lira lurching after Turkey’s manufacturing PMI slows to the brink of stagnation. BoJ is under less pressure to shift yield target than market thinks, sources cited by Reuters say. Sources say the central bank has many tools to combat rising yields; BoJ currently prefers market operations.

In commodities, WTI and Brent are pivoting the mid-point of ~USD 1.50/bbl ranges that have seen a test of yesterday's trough for Brent at worst thus far. Total OPEC+ production was lower by 824k/BPD than the required production in December, via JTC cited by Energy Intel's Bakr; overall compliance in December was 122%. Goldman Sachs, on OPEC+, sees growing potential for a faster ramp-up, given the pace of the recent rally and likely pressures from importing nations. Spot gold/silver are firmer picking up from the pressure seen in recent sessions. Though, gold remains near the USD 1800/oz mark and as such the 200-, 100- & 50-DMAs. The German government has insisted in talks with Western partners that any sanctions on Russia would allow a loophole for it to continue buying energy from Russia, according to WSJ sources.

US Event Calendar

• 9:45am: Jan. Markit US Manufacturing PMI, est. 55.0, prior 55.0
• 10am: Dec. JOLTs Job Openings, est. 10.3m, prior 10.6m
• 10am: Dec. Construction Spending MoM, est. 0.6%, prior 0.4%
• 10am: Jan. ISM Manufacturing, est. 57.5, prior 58.7, revised 58.8
  • 10am: Jan. ISM Employment, est. 53.0, prior 54.2, revised 53.9
  • 10am: Jan. ISM New Orders, est. 58.0, prior 60.4, revised 61.0
  • 10am: Jan. ISM Prices Paid, est. 67.0, prior 68.2

DB's Jim Reid concludes the overnight wrap

Since it’s the start of February today, we’ll shortly be publishing our monthly performance review looking at various financial assets for the month just gone. Undoubtedly the main theme in January was the continued hawkish pivot by a number of central banks in light of continued and persistent inflationary pressures, which led investors to price in a much more rapid hiking cycle over the months ahead. This was particularly the case from the Fed, where futures are now pricing in around two additional 25bp hikes in 2022 relative to the start of the month. That meant that multiple asset classes including equities, credit and sovereign bonds all lost ground, though oil was a notable exception amidst rising geopolitical tensions between Russia and the West over Ukraine. Full details in the report out shortly.

That theme of growing conviction in the likelihood of tighter monetary policy was evident in yesterday’s session too, where investors continued to dial up the probability of numerous rate hikes taking place this year. In fact, we crossed a number of fresh milestones yesterday, the biggest of which was that Fed funds futures priced in 5 full hikes this year for the first time at one point in trading, although by the close that had fallen back a tad to 4.94 hikes. Bear in mind it was only 2 weeks earlier that futures had moved to price in 4 hikes by the December meeting, but they now see 4 hikes being complete by the September meeting, so you can get a sense of how quickly things are shifting here.

Speaking of the Fed, we had our first rush of post-communications blackout speakers yesterday, hearing from regional Presidents Barkin, Bostic, Daly, and George. It was a pretty good sampling of the ideological hawk-dove spectrum on the Committee, and didn’t do much to dissuade the market from its recent shift towards pricing a tighter policy path.

Without much in the way of incremental information, Treasury yields were relatively calm, as the 2yr yield rose +1.6bps, while the 10yr yield very little changed, increasing +0.7bps to 1.78%. This led to a modest flattening of the 2s10s curve yet again, which closed beneath 60bps yesterday for the first time since October 2020. So still some way from inverting, but it was less than a year ago that the slope peaked at 158bps. Plus as we’ve been writing about recently, the 2s10s has historically flattened by an average of around 80bps in the first year during Fed hiking cycles since 1955. So it’ll be interesting to see how that plays out relative to the historic playbook assuming the hikes do start in March as anticipated.

Rising expectations about rate hikes led to a fresh selloff among sovereign bonds in Europe, where yields on 10yr bunds were up +5.5bps to close in positive territory for the first time since May 2019, at 0.01%. And there was a similar move higher elsewhere, with yields on 10yr OATs (+5.7bps) at their highest since April 2019, and those on 10yr gilts (+5.8bps) at their highest since February 2019. The major outperformer were BTPs, who saw a more subdued +1.2bps rise following the move to re-appoint Sergio Mattarella as President, a move which will allow the continuity of the Draghi government.

In Asia this morning, a number of markets are closed due to the Lunar New Year holidays, including in China and South Korea. However, the Nikkei (+0.26%) is trading higher, with tech stocks leading the way following their outperformance on Wall Street. Separately, Australia’s S&P/ASX 200 (+0.49%) is up after the Reserve Bank of Australia held its cash rate at +0.1% following a monthly policy meeting. In line with the move in a more hawkish direction that we’ve been seeing globally, the central bank announced it would terminate its bond purchase program on February 10 and indicated not to raise rates until inflation is within its target band. However, the decision was a dovish one in other respects, with the RBA remaining vague about the timing of liftoff, and saying in their statement that ending bond purchases “does not imply a near-term increase in interest rates”, and reiterating their message that they won’t raise rates “until actual inflation is sustainably within the 2 to 3 per cent target range.”

In terms of other economic news, the January manufacturing PMIs have begun to come out in Asia, with Japan’s (55.4) and Australia’s (55.1) readings both in expansionary territory. Otherwise, Japan’s labour market continued to show signs of progress in December, with the unemployment rate down to 2.7% (vs. 2.8% expected), while the jobs-to-applicant ratio improved to +1.16 in December from previous month’s +1.15. Looking forward, equity futures in the US are pointing to a weak start with those on the S&P 500 (-0.27%) moving lower.

Back to yesterday, and growing expectations of tighter monetary policy failed to stop further equity advances, with the S&P 500 advancing for consecutive days for just the second time this year, up +1.89%. Before you ask, there was a late afternoon rally in the New York session, but it was much smaller than in recent sessions, and the VIX fell -2.83ppts for the second straight session, down to 24.83. Nevertheless, that still leaves the index down -5.26% over January as a whole and marks its worst monthly performance since March 2020 at the height of the initial wave of the pandemic. Tech stocks were a particular outperformer yesterday, with the NASDAQ (+3.41%) recovering to avoid a -10% negative return for the month, having been on track for its worst monthly performance since 2008 before yesterday’s rally. Those gains were led by the megacap tech stocks, with the FANG+ index (+5.83%) seeing its best daily performance in over 10 months as all 10 companies in the index moved higher on the day. European indices put in a decent performance too, with the STOXX 600 up +0.72%.

In other news, the relentless march higher in oil prices continued, with Brent Crude (+1.31%) closing above $91/bbl for the first time since 2014, although this morning it’s since fallen back beneath $90/bbl again. As it happens, Brent ends the month as the top-performing asset in the main sample of our performance review, having achieved a gain of +17.33% since the start of the year. That comes ahead of the OPEC+ group’s meeting tomorrow in which they’ll make their latest output decision.

On the data side, the first look at Euro Area GDP in Q4 showed a +0.3% expansion (vs. +0.4% expected), though Italy’s Q4 growth came in slightly stronger than expected at +0.6% (vs. +0.5% expected). That’s a notable milestone for the Euro Area economy in that it’s the first quarter where GDP has exceeded its pre-Covid peak. Separately, the German inflation data for January showed the year-on-year number subsiding to +5.1% on the EU-harmonised measure, down from +5.7% the previous month and a second consecutive decline. However, that was still higher than the +4.3% reading expected, representing a big upward surprise, and our economists have lifted their 2022 headline CPI average inflation forecast to +4.2% in response (link here).

To the day ahead now, and data releases include the global manufacturing PMIs for January and the ISM manufacturing reading from the US. On top of that, there’s US construction spending for December and the JOLTS job openings for the same month. And over in Europe, there’s Germany’s retail sales for December and unemployment for January, France’s CPI for January, the Euro Area unemployment rate for December and UK mortgage approvals for December. Finally, today’s earnings releases include ExxonMobil, Paypal, UPS, Starbucks and General Motors.