Marketmind: Markets March on China boomlet
A look at the day ahead in U.S. and global markets from Mike Dolan
If there were still doubts about a re-acceleration of the world economy into 2023, China's February business boom likely put them to rest.
And after a bruising setback for stocks and bonds in February, investors now have to assess whether the unfolding economic rebound is sustainable given the eye-watering revision that it's forcing in inflation and interest rate expectations.
March could be a messy month.
China's manufacturing activity expanded at the fastest pace in more than a decade in February, smashing expectations as production zoomed after the lifting of COVID-19 restrictions.
The abrupt lifting of COVID curbs appears to have book-ended one of the worst years for the world's second-largest economy in nearly half a century.
After its bleakest February in 40 years, Hong Kong's Hang Seng stock index roared back more than 4% on Wednesday, with Shanghai up 1% too. China's offshore yuan also surged 1% against the dollar.
And against increasingly tense geopolitics, the rebound will be a relief to Beijing as China's annual parliament opens on Sunday and President Xi Jinping tightens control with the biggest government reshuffle in a decade.
For the rest of world markets, jarred by increasingly uncomfortable inflation readings from Europe and the United States, the question is how much China's re-opening staves off recession or just spurs commodity and input prices once more.
With euro zone factory output also now expanding again for the first time since May, German state inflation readings on Wednesday appeared to tally with data showing annual price rises picking up steam again last month.
This is emboldening both the hawks at the European Central Bank and markets keen to re-price the interest rate horizon.
Goldman Sachs raised its estimate for peak ECB interest rates for the second time in as many weeks, saying it now expects rates to go up by 50 basis points at the May meeting, taking the 'terminal rate' to 3.75% by June.
Money markets have already moved beyond that and now price peak ECB rates at year-end almost 150 bps higher at 3.90%.
Even though U.S. consumer confidence and housing data on Tuesday questioned some of the reheating narrative, markets now assume peak Federal Reserve rates will be as high as 5.42% by July. Two-year Treasury yields pushing to their highest in almost four months to 4.86%.
Inflation expectations in markets are also on the rise in the United States and Europe, with 5-year, 5-year forward inflation swaps in the latter near 2.5% for the first time in at least 13 years.
The euro surged against the dollar on Wednesday.
It gained against sterling too as Britain, as so often this year, struck a gloomier note.
UK house prices last month dropped in annual terms for the first time in nearly three years, mortgage lender Nationwide said. And homebuilder Persimmon dropped almost 10% after it warned the housing slowdown and higher mortgage rates would hit profit and home-building targets.
European bourses and U.S. stock futures were marginally higher, however.
Tesla is readying a production revamp of its top-selling Model Y, according to Reuters sources. Chief Executive Elon Musk has said he will discuss the third part of the EV maker's "Master Plan" when the company holds an investor day event later on Wednesday.
Frankfurt-listed shares of COVID-19 vaccine maker Novavax fell 26% on Wednesday, after the company raised doubts the day before about its ability to remain in business.
BNP Paribas fell 2.9% after the Belgian state participation agency SFPI said the country is preparing the sale of a third of its 7.8% equity stake in the bank. Euronext has withdrawn its 5.5 billion euro ($5.9 billion)indicative offer to buy fund distribution firm Allfunds.
Key developments that may provide direction to U.S. markets later on Wednesday:
* U.S. and Global Feb manufacturing surveys, U.S. Jan construction spending
* Minneapolis Federal Reserve President Neel Kashkari speaks, Italian central bank chief Ignazio Visco speaks
* G20 foreign ministers meet in New Delhi
* U.S. corporate earnings: Salesforce, Lowe's, Dollar Tree, Snowflake, NIO etc
($1 = 0.9389 euros)
Graphic: China's factory activity at a decade high https://www.reuters.com/graphics/CHINA-ECONOMY/PMI/gdpzqmkngvw/chart.png
Graphic: First fall in almost three years https://www.reuters.com/graphics/BRITAIN-ECONOMY/HOUSEPRICES/dwpkdzkmdvm/chart.png
Graphic: Predicted 2023 best performing strategy https://www.reuters.com/graphics/GLOBAL-HEDGEFUNDS/akveqoezgvr/chart_eikon.jpg
(By Mike Dolan, editing by Emelia Sithole-Matarise; firstname.lastname@example.org. Twitter: @reutersMikeD)