Most major European stock benchmarks, with the exception of London's FTSE 100, were moderately lower Wednesday, as investors continued to weigh the effectiveness of existing vaccines against the Omicron coronavirus variant.
"The headlong rally in global markets has stalled, but the overall outlook for equities remains firmly positive," wrote Chris Beauchamp, Chief Market Analyst at IG.
"Despite some worrying data on vaccine efficacy against the new variant the overall impression is that markets have now done their best to price in the variant and any potential new restrictions."
Bryan Garnier said that although governments are likely to enforce booster campaigns with the current versions of vaccines, it's likely that companies will initiate work on an Omicron-adapted version of the shots. Depending on regulatory processes, this could be available in the first half of 2022.
"In our view, this news underlines continuity of Covid market potential and bodes well for vaccine makers," said Bryan Garnier.
Shares on the Move:
Ceconomy shares fell almost 10% as analysts warned that coronavirus-related restrictions in key markets will weigh on the retailer's most important trading season.
At fiscal 2021 results next week, Ceconomy management is likely to indicate major headwinds to current trading from business restrictions in Germany and Austria, said Baader Helvea analysts. The current fiscal first quarter is Ceconomy's most important, Warburg said, adding that while e-commerce can to some extent offset lower sales at physical stores, the gross margin will be dragged by lower revenue from the service & solutions division.
Baader and Warburg both lowered fiscal 2022 estimates as a result, while Baader cut its rating to reduce from buy.
TUI shares fell 3.6% after the tour operator reported a worse-than-expected annual net loss and warned over the potential effects on bookings of Omicron. While TUI's revenue has recovered and it has cut debt, it's warning of weakness in sales momentum thanks to the new virus strain, said trading firm eToro.
"January and the early months of the year tend to be really important for travel firms in terms of bookings for the year ahead, so it couldn't really have come at a much worse time," said eToro analyst Adam Vettese. "To add insult to injury, booking numbers are still way behind pre-pandemic levels. TUI could find itself soon having another mountain to climb."
Umicore stock fell 5% after it warned on profits at its cathode-materials unit, overshadowing the announcement of a joint venture with Volkswagen, said ING.
The Belgian company now expects lower-than-anticipated cathode material sales for 2022 and 2023, below market growth and beyond the already negative impact from semiconductor shortages. Umicore flagged its exposure to mid-nickel platforms which is less in demand than high nickel in the auto industry's shift to e-vehicles.
Combined with increased fixed costs due to a ramp-up in new capacity, earnings at Umicore's Energy & Surface Technologies segment won't show uplift before 2023 after a strong performance in 2021, ING adds.
ING has kept its hold rating on the stock and EUR44 target price.
Valneva shares gained almost 8% after reaching a Covid-19 vaccine supply deal with Bahrain. Bryan Garnier said more countries could make deals with the French biotech.
"We believe that some countries are waiting for the approval by EMA [European Medicines Agency] before signing any agreement," the broker said. Valneva could start supplying the one million doses in the first quarter of 2022 if approved by the Bahraini health authority.
Stock futures edged higher, but the session hinted at more subdued gains following two powerful sessions driven by fading worries over Omicron.
The Dow industrials have rallied over 1,100 points in the last two sessions, as investors have cheered up and hunted for bargains in the wake of selling after the new variant in South Africa just after Thanksgiving.
"In theory, such strong gains are sign of instability and should be taken with caution, however the good news is that the volatility is easing, and the VIX index dropped 20% yesterday, meaning that the latest fears could slowly begin fading," said Ipek Ozkardeskaya, senior analyst at Swissquote in a note to clients.
Also lifting markets lately is the perception that the Federal Reserve's more hawkish tilt has been digested and priced in, said Ozkardeskaya, but the analyst and others remain wary.
"While the buy-everything trade will have its day in the sun for the rest of this week, some serious non-virus risk points are looming," Jeffrey Halley, senior market analyst at OANDA, told clients in a note. "Friday sees U.S. CPI and a print at or above 7.0% is going to raise the heat at next week's FOMC."
Economists polled by Dow Jones Newswires and The Wall Street Journal are forecasting a CPI rise of 0.7%. That data comes ahead of Wednesday's JOLTS job openings for October, which are expected to rise to 10.6 million from 10.4 million.
The dollar dipped, but UniCredit said positive sentiment, as reflected in strong global stock market gains hasn't weakened the buck as much as it has in the past, as the currency becomes less appealing as a safe haven.
"This represents an important change, which is mostly caused by the increased importance of higher interest rates in the U.S. and widening interest rate differentials with respect to the rest of the world in driving the FX market."
Poland's central bank is likely to raise interest rates further in a policy decision on Wednesday, which should lift the zloty, said ING. "Another 50-75 basis points hike should keep the zloty relatively well supported and continue to drive cross rates like PLN/HUF higher still."
ING said a rate rise is justified by high inflation pressures and a need to prevent a wage-inflation spiral, and the emergence of Omicron is unlikely to impinge on the decision. The rate decision is expected at 1200 GMT. EUR/PLN was around 0.1% higher after earlier hitting a one-month low of 4.5777.
Fitch said global interest rates may rise sooner than expected as inflation risk looms. "The scale and longevity of the global inflation shock has taken most forecasters and central banks by surprise and is bringing forward the start of global monetary policy normalization."
It now expects the Fed to raise interest rates in September 2022 and the Bank of England to do so later this month. It also thinks China's central bank will cut interest rates in 2022, but reckons the European Central Bank will hold rates steady through 2023.
Goldman Sachs said China could cut its reserve requirement ratio again in the first quarter of 2022. This would imply a total of three RRR cuts including the July and December reductions, which is on the lower end of historical precedents. It noted the 2015-2016 downturn saw five rounds of RRR cuts in total.
"Policymakers appear to be in the 'do just enough' mentality in managing the balance between cyclical growth and structural reforms," said Goldman Sachs. It said a first-quarter timing seems likely because large numbers of USD bonds are due in January and March, so there could be greater financial risks then.
Indications of a milder course of Omicron virus infections and hopes of drug treatment successes give room for a mild risk-on mood in markets, slightly reducing the need for safe-haven government bonds, said Helaba. "Increased risk appetite and rising stock markets have weighed on the bond markets, but losses have been limited."
In terms of issuance, Germany will conduct its last government bond auction this year, offering EUR3 billion in the 0% August 2031 Bund. Helaba doesn't envisage any problems with the takedown of the supply due to the low offer volume and high redemptions, but it acknowledges that the -0.37% yield--the current level in markets--doesn't seem very attractive.
Against the backdrop of restrictions in Norway in response to rising coronavirus infection rates, the spread of Omicron and pressured hospital capacity, the market reduced its expectations of an interest rate rise in Norway, said SEB.
"The market has revised its rate hiking expectations lower over the past week and now discount an 80% likelihood for a December hike [previously 100%] and a key rate at 1.10% by end-2022," said SEB's chief Norway strategist Erica Blomgren Dalsto.
This has proved supportive for the short end of the Norwegian government bond curve, while general growth uncertainties and lower international bond yields have pushed long-end Norwegian yields lower, she said.
Oil prices nudged higher after strong early week gains. "Around two thirds of the previous price slide has been corrected, a downswing that had been brought about by demand concerns sparked by the new Omicron variant," said Commerzbank.
And while concerns over the newly-discovered strain appear to be overstated and investors wait for a more solid assessment on potential risks, the market also focuses on growing fears of a Russian invasion of Ukraine.
European natural-gas prices rose after news reports that Nord Stream 2 could be shut down if Russia invades Ukraine. The controversial pipeline linking Russia and Germany had been expected to start operations in 2022, helping to ease Europe's gas shortage.
Gold edged higher, helped by a slightly weaker dollar. According to Commerzbank, the precious metal is currently benefiting from escalating Russia, Ukraine tensions. Analysts at the bank expect prices to move moderately until Friday, when the inflation data for November is released.
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