European stocks traded mixed ahead of further key earnings reports later from Wall Street tech giants.
Investors seized on strong corporate earnings last week to help markets shake off a funk that had weighed on stocks for much of the prior month.
Roughly 85% of the companies in the S&P 500 that have reported earnings beat Wall Street's expectations, compared with the five-year average of 76%, according to Jim Reid, a strategist at Deutsche Bank.
However, "a large part of the beats so far is due to loan-loss reserve releases by banks," Reid noted. "Excluding those, the aggregate S&P 500 beat is running much closer to historical average, suggesting the headline beats have not been as broad-based as they look at first glance."
A key question remaining is how global central banks will respond to rising prices. Recent trading in short-dated U.K. gilts suggests investors think the British government may raise interest rates as soon as November. Investors await comments from the European Central Bank and the Bank of Japan, which both have meetings scheduled this week. The Federal Reserve has signaled a possible rate increase next year.
Money managers are also closely watching negotiations among U.S. lawmakers about the fate of President Joe Biden's sweeping social-policy spending package. House Speaker Nancy Pelosi said Sunday that she was optimistic an agreement could be reached this week on the framework for the legislation, and a vote on a separate infrastructure funding bill.
Government spending on that scale "will continue to support growth," said Esty Dwek, chief investment officer at Swiss online bank FlowBank. "The question now is more about taxes and how they will pay for it."
S&P Global Ratings affirmed Italy's credit rating at 'BBB' and revised the outlook to positive from stable on Friday, it said.
The improved outlook reflects S&P's view that Italy's progress in implementing reforms will boost economic growth and benefit fiscal consolidation, the ratings firm said. The European Central Bank's steps since the start of the pandemic have also supported Italy's investment-led recovery, it added.
S&P forecasts Italy's budget deficit at 8.8% of GDP in 2021, below the government's 9.4% target, as revenue continues to exceed budgetary assumptions, it said.
Shares on the move:
UniCredit investors could be somewhat disappointed by the collapse of its negotiations to acquire parts of Monte dei Paschi in the short term, Citi analysts said.
"A part of the market might have included some benefit from a potential MPS deal... given the preliminary criteria set (EPS accretive, capital neutrality, risk mitigation)," Citi said.
In the medium term, however, UniCredit shares have strong potential to re-rate based on the bank's attractive capital return and its strategy to refocus on Italy and improve profitability and growth, Citi said. UniCredit shares fell 1.1%.
Darktrace fell 10.5% in London, after broker Peel Hunt initiated coverage of the cybersecurity stock with a rating of 'sell' and target price for the shares nearly half of the closing price Friday. Analysts saw a disconnect between the company's valuation and the revenue opportunities.
Data in focus:
Fiscal support in the four largest eurozone member states--Germany, France, Italy and Spain--is likely to remain elevated beyond the pandemic-related relief measures in 2020 and 2021, economists from Goldman Sachs said.
While it is expected deficits will to fall to around 4% of GDP next year before shrinking further to 3% in 2023, the positive impulse on European growth should persist until 2024, the bank said.
"The sustained fiscal impulse is a key reason why we remain constructive on the European activity outlook despite the near-term headwinds and our updated fiscal impulse points to some upside risk to our 2023-24 growth projection," GS said.
Germany's Ifo business climate index dropped in October for the fourth month in a row, showing that the growth enthusiasm of the summer months has completely gone up in smoke, ING's global head of macro Carsten Brzeski said.
Both the current assessment and the expectations component weakened, suggesting that there is very little hope for a quick turnaround from the current loss of momentum in the German economy, the economist said.
Brzeski said it could take until next summer before all supply-chain disruptions have been resolved and the same holds for energy prices. All of this means that there is the clear risk that the German economy won't reach pre-crisis levels this year, Brzeski said.
The fourth consecutive decline in the Ifo business climate index is a warning signal, Commerzbank's chief economist Joerg Kraemer said. Companies expect politicians will react to the sharp rise in Covid-19 cases with new restrictions and fear the surge in infections may lead to factory closures, especially in Asia, which will exacerbate supply shortages globally, the economist said.
Due to rising infections, the shortage of materials and the catch-up process in the services sector being almost completed, growth in the German economy is likely to slow massively in the fourth quarter.
Commerzbank forecasts 0.2% GDP growth in 4Q compared to 3Q, while inflation is likely to pick up further. "Stagflation is on the horizon for 4Q at least," Kraemer said.
Stock futures edged up ahead of a big week of earnings from major technology companies.
Facebook is scheduled to report third-quarter results Monday after markets close. Microsoft, Twitter and Alphabet, Google's parent company, are scheduled for Tuesday. Apple and Amazon.com are expected to report later in the week.
Strong earnings from banks, consumer companies and manufacturers have sent stocks higher over the past week and soothed investors' concerns that higher inflation and labor shortages could erode profits.
"One of the more notable takeaways from the earnings reports seen so far has been the ability of companies, for the most part, to pass on increases in prices onto their customers without seeing a drop in sales, " said Michael Hewson, chief markets analyst at CMC Markets.
Disappointing results last week from social-media company Snap, which warned that tougher privacy rules from Apple would likely crimp its advertising sales, could be a "canary in the coal mine for the rest of the tech sector," Mr. Hewson said. Should the tech giants reporting earnings this week also post dour outlooks, it "could see the mood sour quite quickly."
The dollar has derived little support from higher U.S. Treasury yields so far in October due to reduced safe-haven flows and a similar rise in yields in other G10 economies, MUFG Bank said.
"As a result yield spreads have not moved decisively in favor of the U.S. dollar," MUFG currency analyst Lee Hardman said. "The case for a stronger U.S. dollar is more compelling against the low yielding G10 currencies of the EUR, CHF and JPY where market participants are more comfortable that their domestic central banks will keep rates low despite higher inflation."
Bitcoin rose 1.9% Monday above its level at 5 p.m. ET Friday, trading around $61,900. The cryptocurrency has wavered after it cleared $66,000 to hit a new all-time high last week.
The Turkish lira depreciated 1.8% to its weakest level on record, trading at 9.8 lira to the dollar Monday, after President Recep Tayyip Erdogan threatened to expel the U.S. ambassador and top diplomats from nine other Western countries over the weekend.
Sterling looks set for a quieter week of trading even as the U.K.'s Treasury chief Rishi Sunak releases his fiscal spending plan on Wednesday. "After all the excitement of the re-pricing of the Bank of England cycle last week, expect GBP and rate markets to take a breather this week," ING analysts said.
That has left GBP/USD trading in a 1.3730-1.3830 range, which should hold over coming days, they said.
Sunak is unlikely to make any major announcement on fiscal consolidation strong enough to prompt the market to rein in its interest rate rise expectations, they said.
Pimco sees risks of central banks raising interest rates in the short term as economies continue to recover, said Joachim Fels, global economic advisor at the asset manager. Over a longer-term horizon, however, it expects interest rates to remain relatively low and range-bound, with lower but positive returns for core bond allocations.
"We think it makes sense to seek to maximize the opportunity in traditional fixed income strategies with flexible mandates," he said.
The ECB is likely to use this week's meeting to cast doubt on the bond market's pricing of interest-rate rises before the end of 2022, said TD Securities.
President Christine Lagarde may echo recent comments by ECB chief economist Philip Lane that the ECB's forward guidance is clear and implies that interest-rate rises remain years away, said TD Securities.
"Thus President Lagarde is likely to use her podium to push back verbally on yields to the best of her ability," TD Securities said.
The question remains how much emphasis the ECB will put on pushing back against market interest-rate expectations, however, it said.
Oil prices rose, with comments from the Saudi energy minister that oil producers shouldn't take high energy prices for granted playing a role, according to DNB Markets's Helge Andre Martinsen.
The analyst adds that similarly conservative comments from Nigeria and Azerbaijan are also having an effect, with the oil market "discounting diminishing chances of additional OPEC+ production."
On top of that Goldman Sachs said in a note that it estimates that "global oil demand has surpassed 99 million barrels a day and will shortly hit its pre-COVID level of 100 million barrels a day as Asia rebounds post the Delta wave," with gas-to-oil switching also contributing.
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