MARKET WRAPS
Stocks:
European stocks were back in the red Friday, erasing early gains and largely ignoring a likely positive start on Wall Street, as investors continued to weigh a possible policy shift by the European Central Bank
"With inflation running hot in the euro zone, Christine Lagarde has opened the door to a change in guidance at the March meeting, which may see earlier-than-expected tightening by the ECB; a prospect that has triggered an immediate reaction in the markets," said ActivTrades analyst Ricardo Evangelista.
U.S. nonfarm payrolls for January will swing into focus later Friday, in what could be the worst jobs report in more than a year.
"The consensus is for just 150,000 jobs to have been added, following a disappointing 199,000 the previous month, which would confirm the status of near full employment in the U.S. and would also serve as a reminder that interest-rate rises are imminent," said Richard Hunter, head of markets at Interactive Investor, in a note to clients.
"Of additional interest this month will be the wage growth number, where job shortages in some sectors may well be driving wage inflation, itself underlining the Federal Reserve's hardening stance," said Hunter.
Stocks on the Move:
TomTom shares fell 14% after the company warned that it expected to report flat revenue for the year ahead as supply chain constraints in the automotive industry continued to hurt its performance.
ING said TomTom enjoyed a strong fourth-quarter order intake but the company's estimated revenue growth for the coming years is below market expectations. The navigation and digital mapping company expects supply problems to continue this year, with 2022 revenue at the midpoint of EUR470-EUR510 million and 2023 revenue at the midpoint of EUR500-EUR550 million--both below consensus, said ING.
From the fourth-quarter of 2022 onward, enterprise revenue will be hurt by the decision of a major client to use less TomTom data, ING said. TomTom will increase investments to further automatize the map-building process, but given the lower topline, this will hurt free cash flow, ING added, which has a hold rating on the stock and a EUR7.50 target price.
Stocks to Watch:
Investors are overly cautious over Carrefour's double offer: underlying cash generation and the likelihood of a tie-up with peer Auchan this year, said Jefferies.
The lack of share-price gains suggest the market is focusing on political impediments, with an Auchan deal unlikely before spring's presidential elections in France, and on complications regarding the nature of the bid, but there is common ground for a tie-up and the resultant synergies mean it makes sense, Jefferies added.
This month's release of 2021 results may be the last chance Carrefour has to outline cash-flow prospects ahead of a deal, and should build on another strong year despite a volatile backdrop, the bank said, raising its target price on the stock to EUR21.75 and maintaining its buy rating.
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Dassault Systemes is expected to return to a net cash position in the third quarter of 2022, said Citi, meaning the software maker will be more likely to pursue a transformational M&A.
Dassault Systemes' net financial debt fell by EUR1.15 billion to EUR889 million at the end of 2021.
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Shell has accelerated its buyback program following the unification of the share classes, and all signs point to a further increase in the second half of the year, said RBC Capital Markets.
With the balance sheet quickly de-leveraging, RBC said it wouldn't be surprised to see the energy giant look for additional ways to reward shareholders as it benefits from the strong commodity cycle.
"Alongside improving macro conditions and a turnaround in Shell's communication, shares have moved higher, however we believe the current share price still poorly reflects the underlying value of the businesses within the conglomerate."
RBC raised the target price 8% and reiterated an outperform rating.
Economic Data:
The order boom seen in German manufacturing up to the middle of the year has weakened noticeably, said Commerzbank's senior economist Ralph Solveen. Despite the stronger-than-expected 2.8% increase in orders in December, the fourth quarter as a whole showed a decline of 4%, Solveen said.
The reasons for the decline may be weaker demand from China, where economic momentum weakened significantly in the course of last year, as well as supply bottlenecks for many intermediate products.
"However, the decisive factor for the development of industrial production this year is unlikely to be whether orders rise or fall in any given month," Solveen said. Much more important will be whether the supply bottlenecks are overcome.
Pantheon Macroeconomics said manufacturing orders remained well below their peak at the start of the third quarter, but the solid rebound at the end of the fourth quarter was encouraging.
Through the final quarter as a whole, new orders fell by 4.2%, after a 1.3% increase in the previous three months, but this was mainly due to base effects from a significant overshoot in July lifting the third quarter number, Vistesen said.
Post-ECB Comments:
The ECB "comfortably beat hawkish expectations" by seemingly pre-announcing that it would throw the playbook of the December meeting out of the window in March with a faster taper that would allow it to consider lift-off this year, said Citi's rates strategist Jamie Searle.
Citi's economists suggest it is plausible that asset purchases end by September, opening the door to at least one interest rate rise by end-2022. However, pricing an ECB interest rate hike for June or July is "a step too far," Searle said, adding that the fourth quarter is more plausible as the earliest possible timing of an interest rate rise.
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The probability of a recalibration of corporate bond purchases by the ECB has increased following Thursday's policy meeting, said UniCredit.
"A downsizing of corporate bond purchases would obviously add to adverse spread ramifications going forward." This is likely to prompt investors in the market for new bonds to demand more generous new-issue premiums amid weaker demand.
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It is clear that the ECB's policy meeting was "hawkish," with a "clear change in the overall tone toward tightening," said Dirk Schumacher, head of European macro research at Natixis.
The emergency phase of the pandemic seems to be over, he said, adding that the world has learned to live with the virus.
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Yield volatility after the ECB meeting is likely to weigh on euro corporate bonds, said UniCredit. "By stating that risks to the inflation outlook were tilted to the upside, the ECB did not reduce uncertainty about the next policy steps, and volatility of yields is likely to remain elevated."
This is likely to adversely affect European corporate credit in the coming weeks, said UniCredit.
U.S. Markets:
Wall Street was poised for a mixed start ahead of key employment data, with tech futures in particularly climbing after well-received results from Amazon.com, Snap and Pinterest.
That higher start comes a day after weak earnings and a warning from Meta Platforms sent those shares tumbling and dragged the broader market lower.
Stock futures pared some sharply higher gains earlier. Inspiring the bounce were Amazon's blow-out results late Thursday, which pushed shares more than 14% in late trade. That, along with a 59% surge in shares of Snap, which reported its first-ever profit late Thursday, and positive results from Pinterest, were also lifting the mood.
Forex:
The euro hovered near three-week highs versus the dollar after Christine Lagarde's comments on inflation fuelled expectations for an earlier ECB interest rate rise.
UniCredit doesn't expect this shift in ECB rhetoric will be enough to "call for a complete EUR/USD trend reversal, not least because the Fed's tightening is set to remain more intense than in the eurozone."
Interest rate differentials are also likely to widen further in favor of the dollar, although the ECB may begin rate normalization before the end of the year, UniCredit said.
ING said the euro should trade in a higher range of $1.13 to $1.15 leading up to the ECB's March meeting as markets bet on an interest rate rise during 2022.
Speculation that the ECB could change its forward guidance in March to signal the chance of a 2022 rate rise should support EUR/USD ahead of the meeting, said ING analysts.
However, market expectations for a 10 basis points rate rise in June and about 50bps by year-end appear "too aggressive," meaning EUR/USD gains over the medium-term will be limited, they said. "We favor a flattish profile around 1.12-1.13 for the remainder of the year."
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The dollar could remain under pressure given the prospect of a weak nonfarm payrolls report, said ING.
"The dollar underperformance and risks of a negative read today mean that a rebound in currency may have to wait for next week," said ING analysts. The market expects a "rather unexciting" 40,000 rise in nonfarm payrolls in January, they said.
While that suggests a negative dollar reaction may only be triggered by a headline number below zero, the dollar tends to underperform after nonfarm payrolls releases, the analysts added.
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Sterling was lower after the BOE's Andrew Bailey tried to dampen interest rate rise expectations.
Sterling initially rose after the BOE raised its key rate by 25 basis points Thursday but four out of the nine-member Monetary Policy Committee preferred a 50 basis-point rise.
Following the announcement, Bailey told reporters it would be a "mistake to extrapolate simplistically from what we have done today and assume that rates are now on an inevitable long march upwards."
Bonds:
Franklin Templeton expects eurozone government bond yields to keep rising, led by Italian bonds, in expectation of a change in policy from the ECB in March, said David Zahn, head of European fixed income.
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02-04-22 0613ET
