MARKET WRAPS
Stocks:
Most major European benchmarks ticked higher Friday on signs of diplomatic progress with Russia over its troop buildup on Ukraine's border-a geopolitical crisis that has shaken markets for the past week.
Sentiment in the stock market over the past week has been dominated by the threat of imminent war in Eastern Europe. Russia has built up an intense military presence on Ukraine's border as it objects to the country's possible membership in NATO.
Thursday ushered in one of the worst days for the market in 2022, amid intensifying concerns from officials in the West that an invasion of Ukraine was imminent. Some respite was delivered Friday in the form of diplomatic progress: U.S. Secretary of State Antony Blinken and Russian foreign minister Sergei Lavrov are set to meet next week.
"Geopolitics continues to be on a knife edge," said Jim Reid, a strategist at Deutsche Bank, which has led to "a sizable risk-off in markets" among multiple asset classes.
"An olive branch has been handed out this morning," Reid said, referring to Blinken's plans to meet Lavrov. "The U.S. have said they'll meet as long as there is no prior invasion. This may help avoid a de-risking ahead of the weekend as without it I suspect that few traders would have wanted to go home too long."
Stocks on the Move:
EDF's shares fell more than 4% lower after the state-controlled utility posted broadly in line earnings, although its guidance for the current year implied material downside risk to current consensus, said Jefferies.
EDF reported an Ebitda increase of roughly 11% on year, driven by increased French nuclear output, which offset nuclear-reactor outages and a decrease in U.K. nuclear output. Ebitda guidance for 2022 wasn't specific, but the company flagged a negative impact of around EUR19 billion and a positive effect of around EUR6 billion.
"These effects imply a total year-on-year negative impact of EUR13 billion, implying material downside risk to current consensus FY22 Ebitda of EUR14 billion," said Jefferies.
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Leoni stock was down more than 3%, having recovered from an opening 10% slide, after the auto supplier posted a disappointing outlook.
Leoni said it expects a number of challenges and volatile markets to weigh on performance this year, and cited the potentially negative impact of portfolio changes. A trader said an antitrust investigation into price fixing, announced in January, was also keeping investors on the sidelines.
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Expectations are set very high for U.K. banks, which helps to explain why NatWest's shares are dropping despite a return to profit, said AJ Bell. NatWest's shares were last down almost 4%.
The U.K. lender's investors might be concerned about the possibility of an increase in bad debts on the effects of inflation. An increase in bad debts could outweigh any boost to profitability from higher rates, the broker added.
"Natwest has slipped a little bit behind target on cost reduction, thanks to higher inflation, which may be adding to some investor nervousness and the company is yet to see any progress on that key measure of profitability--net interest margin." the U.K. brokerage says. Shares fall 3.7% to 231.40 pence.
Stocks to Watch:
The prospect of higher interest rates is a game changer for Spanish banks, said UBS analysts, upgrading CaixaBank and Sabadell to buy from neutral.
Spanish banks' shares are up about 40% on average year to date as markets anticipate higher rates, said UBS. It now expects the European Central Bank to raise rates by 50 basis points in 2022, 75 bps in 2023 and 25 bps in 2024.
"Any move towards tightening would strongly benefit Spanish banks' profitability levels in absolute and relative terms, being more geared to higher short-term rates than most of their European peers."
However, most Spanish bank stocks still don't price in any rate hikes, UBS said.
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Economic Insight:
If Russia invades Ukraine, there will be a price shock for oil and gas in Germany, at least temporarily, the Ifo Institute said. This would affect private households and industry in Germany in equal measure.
The Ifo forecast an inflation rate of 4% for 2022. "If war breaks out, it could be even higher." It highlighted the interdependence between Europe and Russia: Western Europe needs Russian oil and gas, while Russia relies on the money paid for those exports. It is unlikely Russia will cut off the supply of gas as it still wants to sell gas to Europe in the future.
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U.K. retail sales volumes rose 1.9% on month in January, making them 3.6% above their pre-pandemic level of February 2020, but UniCredit Research said the outlook is subdued due to an impending squeeze in real disposable incomes and low consumer confidence.
Omicron cases peaked in early January and working from home rates also eased after their December rise, and although Plan B restrictions in England weren't lifted until Jan. 26, retail footfall recovered somewhat, the bank said.
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Sweden's core inflation in January was much higher than forecast, with CPIF excluding energy jumping to 2.5% year-on-year from 1.7% in December, well above Nordea's call of 2.1% and the Riksbank's forecast of 1.9%, Nordea noted. Global inflation is high and spilling over to Sweden, and more so than expected, it added.
The Riksbank's rhetoric has been that the elevated inflation is explained by a few factors, namely energy prices, but in January the upturn broadened and that trend will continue in the coming months, Nordea said. "We see core inflation well above the Riksbank's view going forward."
Electricity prices have declined, dampening headline inflation. "Rising core inflation increases the probability for a rate hike this year."
U.S. Markets:
Futures for the Dow indicated a 130-point gains at the open after the index saw its worst day so far this year on Thursday, but all three major U.S. stock indexes were on track to notch weekly losses as of Thursday's close, with investors having struggled with mixed messages on the potential for escalation between Russia and Ukraine.
In premarket trading, Shake Shack shares slid 11% after the burger chain guided for weaker-than-expected revenue this quarter. Roku shares dropped 24% after it said supply-chain disruptions continued to affect its growth and TV sales. Earnings are due ahead of the market open from Deere.
On the data front, home sales for January, due out at 1500 GMT will show a slight drop from December, according to economists surveyed by The Wall Street Journal.
Forex:
The dollar, Japanese yen and Swiss franc all fell in European trade, as the prospect of a Russia-U.S. meeting reduced demand for safe havens.
Russian foreign minister Sergei Lavrov agreed to meet Secretary of State Antony Blinken for talks next week, provided Russia doesn't invade Ukraine. That has helped "restore some market calm," said MUFG Bank analysts but cautioned that the ebb and flow of increased and reduced fears over a possible conflict could continue for some time.
The potential meeting "may mean market conditions remain stable into the weekend but the appetite for risk will likely be contained until that meeting takes place," the analysts said.
Other Currency News:
The euro is unlikely to rise materially versus the dollar as the European Central Bank adopts a cautious approach to raising interest rates, said MUFG Bank.
A speech by ECB chief economist Philip Lane on Thursday highlighted that "eurozone inflation looks less of a risk than in the U.K. or the U.S. and hence the scope for any sustained move higher in EUR/USD is limited from here given the ECB will likely prove more cautious than the markets are currently priced," said MUFG analysts.
The impact of energy prices on inflation is more significant in the eurozone compared to the U.K. and U.S., while eurozone wage pressures are more muted, they added.
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The positive impact of Sweden's latest inflation data on the krona is likely to be brief, said ING.
The currency's gains likely reflect the fact that the data showed inflation excluding energy prices jumped to an annual rate of 2.5% in January from 1.7% in December, said ING analysts.
"Still, the FX impact of inflation figures should be very short-lived both because the Prospera inflation expectation survey continued to show how CPIF inflation expectations remained anchored below 2.5% for the next year--therefore implying a significant easing of price pressures later in 2022 and no Riksbank tightening--and because geopolitical risks are too big of a driver for SEK at the moment."
Bonds:
Santander Asset Management has maintained its underweight position in eurozone inflation-linked debt, saying that German break-even inflation might be below its peak but remains at the top end of its range over the past decade, pricing inflation just under the European Central Bank's 2% target over the next 10 years. Although real yields have climbed, they remain near historic lows, it said.
"Given that inflation is expected to moderate from its record high as growth slows and bottlenecks ease, we expect real yields to rise while breakeven rates ease a little lower."
Commerzbank's strategists have turned tactically neutral on the 10-year Italian BTP-German Bund yield spread as it has hit their 170 basis point target. However, they expect the spread level to rise to 200 basis points later in the year.
Spread dynamics over recent weeks underscore that markets trade quantitative easing anticipations, rather than eventual policy announcements in the eurozone, the strategists said. Ever since markets started to discount a policy rate increase in 2022, Italian BTP and French OAT spreads versus Bunds have been grinding wider despite still-sizable net QE purchases by the European Central Bank, they added.
Commodities:
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02-18-22 0613ET
