European stocks rebounded Wednesday, with markets clawing back some losses sparked by worries over the Omicron variant and the unwinding of Federal Reserve stimulus.
The Stoxx Europe 600 rose more than 1%, led higher by shares of travel, leisure and basic-resource companies, which would all be exposed to an economic downturn in the event of renewed restrictions. Strong performers included budget airline Wizz Air, up more than 6%, Lufthansa, up 4.9%, and cruise operator Carnival, which gained 4.6%.
Winners from the stay-at-home trade fell. German food-delivery firm HelloFresh lost 4.3% and U.K.-listed takeout company Deliveroo shed 2.8%.
"European markets are on the front foot today, as markets oscillate between overwhelming fear and bouts of optimism that this recent selloff could prove the perfect pre-cursor to a Santa rally," wrote Joshua Mahony, Senior Market Analyst at IG.
One cause for concern, money managers say, is that the rapid pace of inflation could prevent the Fed and other central banks from unleashing stimulus in the event of severe disruption caused by Omicron. Jerome Powell added to those worries Tuesday when he opened the door to an interest-rate rise in the first half of 2022.
Eurozone manufacturing-sector growth stabilized in November, following a four-month slowdown from June's record expansion, the latest manufacturing purchasing managers index shows. The eurozone manufacturing PMI increased slightly to 58.4 in November from 58.3 in October.
"A strong headline PMI reading masks how tough business conditions are for manufacturers at the moment," said IHS Markit's chief business economist Chris Williamson. Although demand remains strong, supply chains continue to deteriorate at a worrying rate, Williamson added.
Looking ahead, rising Covid-19 infection rates cast a darkening cloud over the near-term outlook, threatening to further disrupt supply chains while diverting spending from consumer services to consumer goods again, worsening the imbalance of supply and demand.
Wages in Germany are likely to increase again next year, according to Commerzbank. However, the upcoming collective bargaining rounds will only play a minor role in the rise, as less than a third of employees will be affected by them, said Commmerzbank's deputy chief economist Ralph Solveen. It is wage increases and one-off payments agreed to earlier that will drive the wage growth.
"Collectively agreed wages are still likely to increase more slowly in 2022 than in the last two years before the pandemic, so the stronger increase represents a normalization rather than a sustained strengthening of wage growth caused by higher inflation rates," Solveen said.
Stock futures for the major U.S. benchmarks were higher, although investors continue to struggle to assess the implications of the Omicron variant on business and economies.
"We just don't know how much more infectious it is, how severe the symptoms are and what the impact of that is," said Sebastian Mackay, a multiasset fund manager at Invesco. "What I'd assume now is this probably isn't enough to derail the recovery that's going on."
Technology stocks headed for a strong start as futures for the Nasdaq-100 added 1.3%.
Ahead of the bell in New York, Merck shares rose 4.8% after scientific advisers recommended the Food and Drug Administration authorize the company's experimental Covid-19 oral antiviral. Salesforce.com fell 7.4% after the software company's guidance for fourth-quarter earnings fell short of expectations.
For a reading on inflationary pressures, investors will parse the Institute for Supply Management's manufacturing index. Economists expect the survey to show factories experienced another month of strong new orders in November, but also rising prices and long waiting times for materials.
Comments by Jerome Powell that the notion of 'transitory' inflation should be retired is likely to cause the dollar to strengthen into year-end, albeit dependent on how the Omicron variant of coronavirus develops, said MUFG.
"This speech from Powell certainly reflects increased concerns over inflation risks going forward and points to a faster QE taper that points to further dollar strength into year-end," said Derek Halpenny, head of research for global markets for EMEA.
For now, however, given the uncertainty over the new Covid-19 strain, investors remain unwilling to "revert completely back to pre-Omicron level of rate hike expectations."
Sterling could receive a boost if a speech by Bank of England Governor Andrew Bailey later follows Jerome Powell in acknowledging increased inflation risks, said ING, adding that Bailey "may feel emboldened" by Powell.
"Having moved to price out a December 16 BOE rate hike, investors may start to put a 15 basis points hike back into UK money market rates." Unless equities fall considerably further, which would hit the risk-sensitive pound, the theme of high inflation and monetary policy normalization should support the currency, ING said. Bailey speaks at 1400 GMT.
The Turkish lira steadied after hitting a record low earlier on renewed calls from President Recep Tayyip Erdogan to cut interest rates further.
In an interview with state broadcaster TRT that aired late Tuesday, Erdogan said he hoped rates would continue to fall until Turkey's next national election in 2023.
"Hardly anyone is likely to have betted on Erdogan taking an about-turn, " said Commerzbank analyst Antje Praefcke. It has become increasingly difficult for the central bank to perform an about-turn too, she said. That means the lira will continue to weaken, potentially at an accelerated rate.
Eurozone government bonds sold off, led by the periphery, pushing yields higher after Jerome Powell signaled a faster process of asset-purchase tapering.
Jerome Powell is striking a distinctively more hawkish tone, acknowledging that inflation might not be transitory and the Fed could thus consider wrapping up tapering sooner, said Christoph Rieger, head of rates and credit research at Commerzbank. "For Bunds, the spectre of a more aggressive Fed is also bad news."
J.P.Morgan expects the 10-year German Bund yield to trade in a -0.30% to -0.10% range in early 2022, and drift gradually higher to 0.10% by the end of the year.
The backdrop to rising Bund yields is the expected continued economic recovery in the eurozone. JPM expects eurozone growth to remain solidify above 4% pace until the end of 2022, before slowing to an above-trend 2% pace in 2023.
"Our working assumption is that governments can now rely on less restrictive measures than lockdowns thanks to vaccination campaigns which allowed to reduce the link between new infections and hospitalizations," said JPM strategists Aditya Chordia and Elisabeth Ferrari.
Italy and Greece are JPM's favorites for strategic overweight in eurozone peripheral government bonds for 2022, while Ireland and Belgium are its favorites in core. In their intra-eurozone positioning, JPM stays constructive in the first half of 2022, while it expects a mild widening pressure in the second half of next year.
For the 10-year Italian BTP-German yield spread, this means it would trough around 100 basis points by mid-2022 and widen back to around 120 bps by end-2022. "Nevertheless, expected tight ranges and potential European Central Bank delivery/political events warrant a tactical trading approach," JPM said.
Oil recovered most of Tuesday's losses, but prices are still down 11-12% over the past week, a selloff described by Goldman Sachs as overdone.
A lack of progress in Iran nuclear talks and a month-long pause from OPEC+ in its policy of easing production curbs when it meets Thursday could offset nearly half of the impact of Omicron and SPR releases, said Goldman Sachs's Damien Courvalin.
Analysts said OPEC may pause plans to pump more oil in January, or further cut output.
Gold edged higher after prices slumped following Jerome Powell's comments, but likely higher rates, a firmer dollar and strong global growth are factors why Fitch expects bullion prices to weaken in 2022.
Fitch forecasts gold averaging $1,700 a troy ounce next year. We "are now turning increasingly bearish as the balance of factors affecting the asset are now weighted to the downside. We now believe that prices are unlikely to reach once again the all-time high of $2,075 an ounce."
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