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Essential IR Insights Newsletter - February 2023

Wall Street rises as US-China deal signing looms; Treasurys retreat

➤ S&P 500 gains, as markets await US-China trade deal signing this week.

➤ Pound declines as UK rate cut bets grow after surprise GDP shrink.

Yuan at 5-month high as reports suggest US, China due to revive regular talks.

➤ Treasurys retreat; dollar gains.

Wall Street opened higher, after falling from record highs on Friday, as markets awaited the U.S.-China trade deal signing this week.

The S&P 500 and Nasdaq 100 were up by 0.2% and 0.4%, respectively, around 9:35 a.m. ET. U.S. stocks retreated Friday following disappointing employment figures, showing that the U.S. jobs market added fewer jobs than expected and that annual wage growth fell to its lowest level in 17 months.

The U.S. and China reportedly plan to revive semiannual economic talks, as part of the signing of a "phase-one" trade deal between the world's two largest economies. The official announcement is due Jan. 15, with Treasury Secretary Steven Mnuchin and Chinese Vice Premier Liu He expected to head the meetings.

"We think both sides have stepped back from the brink and will be hesitant to restart the trade war," said Win Thin, global head of currency strategy at Brown Brothers Harriman.

Separately, the U.S. followed through on its threat of fresh sanctions against Iran after recent military tensions between the two countries, targeting several Iranian government officials and the nation's metals industry and other economic sectors.

Iran admitted Jan. 11 that it unintentionally shot down the Ukrainian Boeing Co. 737-800 plane, which killed 176 people onboard. "Human error at time of crisis caused by US adventurism led to disaster," Iran's Foreign Minister Mohammad Javad Zarif tweeted.

European stock markets were trading broadly lower, with France's CAC 40 slipping 0.1% and Germany's DAX index declining 0.3%. The U.K. FTSE 100 was flat.

Hong Kong's Hang Seng index climbed 1.1% and the Shanghai SE Composite rose 0.8%. Japan's Nikkei 225 was closed for a holiday.

Taiwan's benchmark equity index gained 0.7% after Tsai Ing-wen was reelected as president following the general election over the weekend. Meanwhile, financial markets in the Philippines were closed Jan. 13 because of the Taal volcano, to the south of the capital, releasing a large quantity of ash.

In the foreign exchange market, sterling depreciated 0.6% to $1.2991, having previously declined up to 0.8% to $1.2961, the lowest level since Dec. 26, 2019. The U.K. economy unexpectedly contracted in November 2019 following falls in production and services sectors as rate cut bets grew ahead of the Bank of England's upcoming monetary policy meeting.

BoE policymaker Gertjan Vlieghe told the Financial Times that he would favor an interest rate cut at the upcoming monetary policy meeting, if the U.K. economy does not rebound, joining another policymaker, Silvana Tenreyro, who has also voiced support for a rate cut if the uncertainty surrounding the post-Brexit relationship between the U.K. and EU does not wane.

Markets are now pricing in a 49% probability of a rate cut on Jan. 30, compared to a 21% likelihood of monetary policy easing from Jan. 10, according to the BoE watch tool of the CME Group.

"The U.K. rate market has been under-pricing the risk of a BoE rate cut and will need to continue to adjust to price in a higher risk as soon as at the end of this month," according to Lee Hardman, currency analyst at MUFG Bank.

The Dollar Spot Index, which measures the currency against developed market peers, rose 0.1% to 97.4620.

Elsewhere, the euro was broadly flat, while the Japanese yen depreciated 0.3% against the dollar. The offshore yuan strengthened 0.3% to slip below 6.9 per dollar for the first time since July 2019.

Among bonds, Treasurys dipped as the 10-year yield added 3 basis points to 1.852%. The 10-year yield on German Bunds added 8 basis points to negative 0.159%.

In commodities, Brent crude oil fell 0.3% to $64.80 per barrel on the ICE Futures Exchange and gold lost 0.3% to $1,555.20 per ounce.

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The day ahead:

10 a.m. ET — U.S. Fed's Eric Rosengren speaks

10:30 a.m. ET — Bank of Canada business outlook survey

12:40 p.m. ET — U.S. Fed's Raphael Bostic speaks

2 p.m. ET — U.S. Treasury budget (Econoday consensus: $15.0 billion deficit)