MARKET WRAPS
Stocks:
European stocks fell after mixed trading in Asia and a lower close on Wall Street.
Faced with the prospect of multiple interest rate increases, cooling economic growth and inflation which has soared to multidecade highs, investors have begun 2022 by reassessing the pandemic-era playbook that focused heavily on outsize gains for growth stocks, such as tech. In recent sessions, investors have rotated money out of fast-growing tech firms and into sectors expected to perform better in the coming year, such as financials and energy.
"I don't see a whole lot in the market that is really alarming me. There is no one out there saying 'run for the hills,' but there are those saying they are going to take off risk and reposition to other areas of the market," said Kara Murphy, chief investment officer of Kestra Holdings.
That has prompted tumultuous trading for major indexes. On Wednesday, the Nasdaq Composite closed more than 10% below its all-time closing high, putting it into what is considered correction territory for a stock index.
Investors are selling government bonds in anticipation of higher interest rates, pushing up bond yields and in the process, pressuring shares in tech companies, whose future earnings become less attractive when compared with bonds with rising yields.
Stocks on the move: Shares in Burberry are rising after the Chinese central bank announced that it is cutting a key mortgage rate, AJ Bell investment director Russ Mould said.
China's central bank is trying to revive a struggling property sector by relaxing monetary policy, which benefits the British luxury-goods company given its substantial exposure to the Asian giant. Other stocks such as those of mining companies also got a lift off the back of the news, Mould said.
"China's central bank continued to buck global trends," Mould adds, noting that its peers the Bank of England and Federal Reserve are in rate-hiking mode. The shares of the likes of Burberry are currently down, while Burberry's share price was up 1.1%.
Associated British Foods' Omicron-reduced footfall late in the first quarter has hit Primark sales less than Jefferies had feared. This should be the last Covid-19-related deterioration in sales momentum for the British conglomerate's fashion retail unit, Jefferies said.
"Past periods of reduced restrictions have shown Primark's ability to defend strong consumer attractions and double-digit margins," the bank said. Jefferies has a buy recommendation on the stock and a target price of 2,700 pence a share. Shares were up 1.2%.
Shares in Deliveroo were up 3.4% after the company released a year-end trading update. The numbers were in line with expectations, with both gross transaction value and orders 1% below consensus, Citi said.
U.K. order growth of 41% in the fourth quarter outpaced competitor Just Eat Takeaway, the U.S. bank noted.
"We do not expect consensus 2022 GTV or gross margin expectations to change as result of this update. As such, we expect a relatively positive share price reaction given recent weakness," Citi said.
Puma's expectation-beating revenue and earnings for 2021 are a boon for the sporting-goods market, especially in light of recent China demand concerns and supply issues, Piral Dadhania at RBC Capital Markets said.
Fourth-quarter sales growth helped the German firm notch up a 32% on-year increase, well ahead of a previous target of at least 25% growth, and operating profit also beat expectations, Dadhania notes following the preliminary results print.
The market should be pleased by the beat, "given fairly cautious sentiment on the sporting-goods sector in recent months due to China softness, Vietnam supply chain disruption and rising input costs," he said. Puma rose 2.7%.
Shares in French pharmaceutical company Valneva rose as much as 20% in opening trade Thursday after the company reported its Covid-19 vaccine could neutralize the Omicron variant.
The share reaction was expected, though it might be unjustified given there is a substantial reduction in neutralizing potency with Omicron compared with the original coronavirus strain, Kempen analysts said.
The reported 16.7-fold reduction in neutralization of Omicron that Valneva reported is steeper than that observed in other vaccines such as that from BioNTech and Pfizer, Kempen said. It adds that this Omicron update casts doubt on whether Valneva's vaccine is actually efficacious.
Stocks to Watch: LVMH is more than a proxy for the luxury-goods sector, and offers more than unmatched size, Jefferies said ahead of the French conglomerate's 2021 results due next week.
While the stock is trading high, this is justified by the group's track record and its depth of offering in luxury, as well as by its proven ability to continually increase market share, Jefferies said.
Sales growth should run slightly ahead of the sector at around 15% this year, and LVMH brands are well-placed to capitalize on emerging digital channel, the bank added, keeping a buy rating on the stock and upping the target price to EUR830.
Economic Insight: Relocating international production back to Germany would reduce German economic output by almost 10%, according to an Ifo Institute study. Bringing outsourced portions of value added back to Germany would mean that less competitive activities suddenly gain large shares in the mix of German value added and the associated drop in productivity would weaken the country's economic performance, said Lisandra Flach, director of the Ifo Center for International Economics.
"If there were a global trend toward reshoring supply chains, the stakes for the German economy would indeed be very high," Ifo researcher Andreas Baur said. Production of intermediate goods in Germany for subsequent processing abroad contributes more than $600 billion to German value added, Baur said.
Producer prices in Germany rose by 24% on year in December, the biggest increase since statistics began in 1949, Commerzbank said. The main driver remains energy prices, with electricity and gas in particular once again becoming significantly more expensive, Commerzbank's senior economist Ralph Solveen said.
However, there is no sign yet of the price surge for other goods slowing down either, he added. In view of this development at the producer level, consumer prices are also likely to continue to rise, Commerzbank said. In January, the rate of inflation is likely to be somewhat lower than in December but Commerzbank forecasts the inflation rate will remain above the 4% mark for some time to come.
Market Insight: European stocks may be a good bet for investors who are looking to reduce their exposure to assets that are vulnerable to rising bond yields, said Bank of America. European stocks have "a low historical sensitivity to swings in bond yields. Tighter monetary policy and rising bond yields are shaping up to be key drivers for the equity market in 2022," BofA said.
U.S. Markets:
Stock futures edged higher, putting indexes on course to pare some of the sharp losses that have come as investors embark on a broad repositioning of their portfolios, spooked by the prospect of tightening monetary policy and slowing growth.
Earnings were in focus again, with results due from The Travelers Companies and American Airlines Group before markets open. Netflix will be one of the first tech giants to post its fourth-quarter results, after markets close, when PPG Industries will also report.
Weekly jobless claims data are due at 8:30 a.m. ET and investors are also awaiting data on the housing market, a bright spot for the economy. The data, due at 10 a.m. ET, is expected to show that existing home sales slowed in December, but were still on track for the best year since 2006.
Forex:
Having recovered from last week's lows, the dollar could now start to edge lower ahead of next week's U.S. Federal Reserve policy meeting after the DXY dollar index failed to rise back above 96, UniCredit said.
"The dollar remains firm, but is probably now set to consolidate its recovery from lows," it said. "The inflation debate remains center stage across markets, primarily after data showed that price pressure is also rising to multi-year highs in the U.K. and Canada," it added.
The DXY dollar index was steady at 95.4780. Last week, the DXY fell to a two-month low of 94.6290.
Sterling appears little moved by the prospect of U.K. Prime Minister Boris Johnson leaving, but this could change, RBC Capital Markets said. The pound rose to a two-year high against the euro after strong inflation data and "still seems relatively insensitive" to political uncertainty, said RBC currency strategist Adam Cole.
However, "we think this sensitivity rises if and when the front-runners to replace him [Johnson] become clear," he said, adding that bookmakers' implied probability of Johnson leaving before year-end remains high at 67%. EUR/GBP fell 0.1% to 0.8326, having reached a near two-year low of 0.8312 on Wednesday after higher-than-expected U.K. inflation data fuelled expectations the Bank of England will raise interest rates further.
The Norwegian krone should strengthen this year as the Norges Bank looks set to raise interest rates for the third time in March and deliver further rate rises thereafter, ING says.
The central bank left its benchmark rate unchanged at 0.5% on Thursday but signalled it will stick to its plans to raise rates at least three more times in 2022 so monetary policy remains a "bullish factor" for the krone, ING analysts say.
"As soon as market sentiment stabilises, NOK's attractive yield and benign external drivers point towards further appreciation." ING expects EUR/NOK to fall to 9.50 by year-end, from 9.9737 currently.
Bonds:
The yield on the 10-year U.S. Treasury note rose to 1.846% Thursday from 1.826% Wednesday, after rising steadily in recent weeks. Benchmark German bund yields fell further into negative territory, a day after they briefly turned positive for the first time since 2019.
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01-20-22 0628ET
