European shares extended gains Wednesday, buoyed by Wall Street's late rally which followed Senate testimony from Jerome Powell at his confirmation hearing for a second term at the head of the Federal Reserve.
Powell's confidence in the U.S. economy and message that the Fed would act to curb high inflation has soothed investors' nerves-spurring a buying streak. His words came after recent concerns in the market about tighter monetary policy.
"The more positive tone appears to have come about as a result of the inability of Treasury yields to build on their recent gains, after Powell insisted that while the Fed was going to start the ball rolling on a normalization process, that it would be a long process from where we are now," said Michael Hewson, an analyst at broker CMC Markets.
In the day ahead, all eyes will be on U.S. consumer-price inflation data for December. Estimates are for a year-over-year increase of 7%, which would be the highest annual CPI print since 1982.
"Repeated upside surprises in the inflation data have sent the year-on-year numbers up to multidecade highs, putting significant pressure on the Fed," said Jim Reid, a strategist at Deutsche Bank. "Indeed if you look at the monthly headline CPI reading, seven of the last nine releases have come in above the consensus estimate."
Hewson said that the CPI data "could well once again spark volatility, if we get a number well north of 7%."
Stocks on the move:
JD Sports Fashion shares topped the FTSE 100 fallers, down 2.6% after the U.K. clothing retailer forecast better-than-expected annual pretax profit, but said it was wary of ongoing pandemic and supply chain-related issues.
While the update pointed to robust trading, uncertainty with regards to the pandemic cannot yet be completely dismissed, said Interactive Investor.
"Brexit and supply-chain challenges are also an issue, costs are rising, while indebted consumers globally now face potentially higher interest rates," said the trading firm's Keith Bowman. "That said, JD's track record for expansion and acquisitions is strong, with growth in the U.S. proving its most recent focus."
Stocks to Watch:
HSBC said 2022 will be a year when Biffa delivers synergies by integrating its newly acquired businesses and increases its operational leverage, reaffirming a buy rating on the stock.
The U.K. waste management company was a strong performer in 2021, but year-to-date the stock has fallen 3%, HSBC noted. The first half results in November were a snapshot of the company's performance after a year of rapid expansion, the bank added.
HSBC has raised the target price for Biffa to 460 pence from 450 pence.
Pernod Ricard is likely to have some sequential slowdown in the second quarter of its fiscal year, but there remains a lot to like in the medium term, Jefferies said.
The drinks group should see on-year growth slow to 11% from the very strong 20% increase in the first quarter, with Europe leading the pack at 15% growth, according to Jefferies's estimates.
Despite Omicron, markets remain much more open than they did last year, offering scope for top-line impetus, while further ahead, growing cost consciousness can add to sales growth to make an attractive investment case, Jefferies said.
The bank has a buy rating and a EUR235 target on Pernod stock.
UniCredit's reported interest in Russian bank Otkritie would make sense, but could raise some questions, Jefferies analysts said.
The Italian bank is interested in a potential acquisition of Otkritie, which was nationalized in 2017, according to a Bloomberg report. UniCredit didn't respond to a request for comment.
Otkritie would fit UniCredit's stated intention to consider "in-market" opportunities, Jefferies said. It is among Russia's top ten banks and has about three times the size of UniCredit's existing Russian business. However, the scale of the business--Otkritie has equity of about EUR6.5 billion--the implications for UniCredit's plans to return excess capital and the geopolitical climate could cause investors to be sceptical, Jefferies said.
U.K. GDP is expected to expand by 0.2% in the first quarter of 2022, up from zero previously expected, as Covid-19 cases in the country seem to be peaking and the government is unlikely to have to extend "Plan B" restrictions in England, said Pantheon Macroeconomics.
In addition, the confirmation that Omicron is less severe than previous covid variants prompted an upward revision in economic growth forecasts in the second and third quarters, returning them to the level envisaged before the variant emerged, said Pantheon's chief U.K. economist Samuel Tombs. Pantheon expects U.K. GDP to expand by 4.2% in 2022, up from 4% previously estimated.
Oxford Economics expects transportation bottlenecks to persist well into 2022, with problems existing throughout the supply chain, spanning from port and ship capacity to the ability of logistics networks to deliver goods to their final destination.
Container shipping rates are currently around nine times their level relative to June 2020, said Kiki Sondh, economist at Oxford Economics. Even as ports increase operating hours to ease congestion, absenteeism related to renewed increases in Covid-19 infections may scupper hopes of these pressures abating in the near term, she said.
"As a result of the transport and logistics challenges, sequential momentum in industrial activity will remain muted, but a pickup later in the year will boost 2023 prospects."
Stock futures wavered in choppy premarket trading, ahead of the key CPI data print.
Stocks have seen choppy trading this week as investors assess the potential impact of sooner-than-anticipated rate rises and await clarity on when inflation may peak.
When interest rates are low, investors tend to load up on risk assets such as stocks to generate returns. When inflation accelerates and policy makers raise rates, the value of companies' future earnings drops and investors have more alternatives for places to make money. This particularly hurts technology stocks that promise expanding future profits.
"Inflation is uncomfortably high and this has had a negative impact on growth stocks," said Luca Paolini, chief strategist at Pictet Asset Management. He is waiting to see if higher inflation weighs on profits in the coming earnings season.
The dollar continued to lose ground against most other major currencies except the yen as Powell's comments on Tuesday triggered a risk-on mood in European markets.
Powell indicated that Fed officials have afforded themselves maximum flexibility to deal with changing dynamics, while seeking to remove a belief that they are stuck on a set path, said Pepperstone. While the Fed chairman didn't really push back on market pricing around Fed rate increases, relief has certainly played out across markets, Pepperstone added.
In the wake of Powell's testimony, the dollar fell to its lowest since late November against a basket of currencies and it may take a "material upside surprise" in the U.S. inflation data to avoid further falls, said MUFG.
The dollar's falls suggest a need for "more caution in chasing the dollar higher," said MUFG. If December annual CPI is in line with expectations at 7% or weaker, then dollar selling "will gather momentum."
"The Fed's tightening and reducing of stimulus is to a large extent baked into the market now, and I think that's why the dollar stalled in December even though there was this continuous market chatter about the Fed's hawkish pivot," said Scott Petruska, chief currency strategist at Silicon Valley Bank. Likewise, the most recent Fed minutes also didn't provide the fuel dollar bulls were looking for.
Petruska said markets are really long the dollar and have been since last September, a situation that makes it tough for the dollar to strengthen more. "It's going to be a challenging year for the dollar to continue to move higher" especially when other big central banks turn more hawkish.
TD Securities said the dollar could rise before the Fed delivers its first interest rate rise but may turn lower thereafter.
"We have now seen 24% of the world's major central banks raise rates recently, which may limit how much and how long the USD can rally," said TD analysts. "The global backdrop of central bank synchronization, above-trend global growth, USD overvaluation, and friendly financial conditions means the start of the Fed cycle could start the next USD top."
TD expects the DXY dollar index to rise to 97.8 in the second quarter as it sees the first rate increase in June. It sees the DXY starting to fall in the third quarter, hitting 95.2 by year-end.
December's CPI numbers are unlikely to bring a respite to the Fed, said Amherst Pierpont's Stephen Stanley.
"I would expect that the FOMC will remain in scramble mode until there is evidence of sustained moderation in inflation. That signal is unlikely to appear in the December CPI figures."
Stanley expects the headline figure to have risen 0.4%, pushing the 12-month figure to 7%, "though the [monthly] gain could easily be 0.5%."
Sterling traders appeared to be looking past news that U.K. Prime Minister Boris Johnson faces a parliament interrogation Wednesday over claims he attended a party in Downing Street during lockdown last May, said ING.
"While arguably facing the toughest period of his tenure, markets seem very sceptical to price in any political instability in the U.K. for the moment, with the pound still scoring as the best performing currency of 2022," said ING forex strategist Francesco Pesole.
Barring any surprise political shake-up or policy remarks by Bank of England Deputy Governor Jon Cunliffe at a conference later, sterling should continue to be unmoved by domestic events, Pesole said.
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