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EUROPEAN MIDDAY BRIEFING : Lockdown Worries Continue to Drag on Stocks

11/24/2021 | 06:02am EST

MARKET WRAPS

Stocks:

European stocks struggled for momentum on Wednesday, with most major benchmarks paring early gains as lockdown concerns continued to dampen sentiment.

"The DAX is lagging behind U.K. stocks once again today, with mainland European equities expected to continue on a bumpy road thanks to an uncertain outlook for the weeks ahead," wrote Joshua Mahony, Senior Market Analyst at IG.

"Rising [Covid] cases throughout some of the main European nations bring the potential for further economic disruption at a time that is traditionally associated with heightened consumer spending."

Shares on the move:

Shares in Johnson Matthey fell 0.5% after the chemicals and technology company reported Ebit of GBP293 million, which was 2% above consensus expectations, Jefferies said. In addition, full-year guidance was unchanged.

Jefferies noted the company's Advanced Glass Technologies business is to be sold for GBP178 million and that a GBP200 million share buyback will be launched, but said it expected a muted share-price response to these announcements.

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Valneva stock rose 0,4% on the news it signed an agreement with the European Commission to provide 24.3 million doses of French pharma's Covid-19 vaccine in the second and third quarters of 2022, with an option to increase the amount to up to 60 million doses.

As rapporteurs have been appointed at the European Medicines Agency to review the vaccine in view of marketing authorization, an approval should occur by the end of the year or early next year, Bryan Garnier said.

"We may expect some orders from countries outside [the] EU, in Asia or South America for example, when the vaccine will be approved by EMA," Bryan Garnier said. Such potential additional orders could be delivered in 2023.

Economic news:

A leap in new orders, mainly to export markets, propelled the headline figure for France's manufacturing index higher midway through the fourth quarter, Claus Vistesen, chief eurozone economist at Pantheon Macroeconomics said. Manufacturing sentiment climbed to 109 in November from 107 in October.

"Supply-side constraints are now easing, which should feed through to input and output price expectations eventually, probably in the first quarter," Vistesen said.

Judging by the details of the indicator, the latest reported fall in production in September will give way to more robust data for the fourth quarter in due course, Vistesen added. On the other hand, he warned that the numbers don't fully reflect the most recent surge in Covid-19 cases and the risk of new restrictions.

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The boom in online sales continued in Germany after shops reopened following lockdowns, according to the latest government statistics. Online shopping orders were 8.8% higher from May to September this year than in the corresponding period in 2020. Online sales increased 36% in the months of May to September 2021 compared with May to September 2019.

However, retail sales in stores haven't benefited from the reopening after the first lockdown. Sales from May to September 2021 were 0.2% below the level in the same period the previous year. Compared with sales from May to September 2019, there was a 2.9% increase--significantly lower than the increase in online retail.

Economic Insight:

Oxford Economics's eurozone recovery tracker recorded a sizeable drop over the two weeks ended Nov. 7, mainly driven by worsening conditions in health and mobility.

"After a few weeks of resilience, the slump in the eurozone recovery tracker highlights the gloom that is affecting the eurozone economy in the last stage of the year," Nicola Nobile, chief Italian economist said.

With Covid-19 cases on the rise in almost all eurozone countries, governments are introducing new restrictions that are likely to become increasingly tough, Nobile said and as a result, Oxford Economics expects to revise down forecasts for eurozone fourth-quarter GDP growth.

U.S. Markets:

Stock futures paused as investors awaited a busy day of economic data releases ahead of the Thanksgiving holiday, plus minutes from the Federal Reserve's latest meeting.

Stock markets' gains have been tempered in recent weeks by concerns over fresh coronavirus lockdowns in parts of the world, and inflation that is proving longer lasting than many had anticipated. The robust earnings season, which had been a major boost to markets, is drawing to a close and investors are looking for fresh drivers.

"We have had fantastic earnings, the bond market is behaving itself, inflation is up but rates are very low. As I sit here with five to six weeks left to the year I have a hard time not being optimistic," said Tim Holland, chief investment officer at Orion Advisor Solutions. "As long as rates are low and earnings are growing I think it's very difficult not to lean into stocks."

A slate of economic data is due Wednesday, including some releases brought forward because of Thanksgiving. Durable goods orders, jobless claims and a second reading of third-quarter gross domestic product are due before data on consumer confidence, and new home sales.

Data on personal spending is also due, a release that includes the Fed's preferred measure of inflation-the core personal-consumption expenditures price index-which is forecast to show its biggest annual rise since the early 1990s.

Forex:

The dollar was slightly firmer against a basket of major currencies and CBA said another set of strong inflation figures may spur higher market pricing for FOMC interest-rate increases and help the USD Index reach a fresh 2021 high. CBA said both the headline and core PCE deflator for October could post a strong reading as signaled by the recent sharp rise in the CPI.

EUR/USD has steadied to around 1.1250 but "remains intrinsically weak" despite Tuesday's strong eurozone purchasing managers' surveys, UniCredit said. A long list of economic data Wednesday represents "a valid test of the EUR/USD's ability to remain above the 1.12 baseline."

Wider U.S.-EUR rates spreads point to a bearish outlook for EUR/USD in 2022, said BNP Paribas Markets 360. It has forecast EUR/USD at 1.13 in the first quarter of 2022, then 1.12, 1.11 and 1.09 in the subsequent quarters.

The euro is expected to stabilize in 2023, as the European Central Bank starts tightening at a time when the Fed's cycle of interest-rate rises will be well under way. In the fourth quarter of 2023, BNP Paribas Markets 360 expects the EUR/USD at 1.09.

Bonds:

The European debt market remains "quite sensitive" to any signals concerning the outlook for central-bank policy, especially regarding the destiny of the European Central Bank's asset purchase programs, Dario Messi, fixed-income analyst at Julius Baer, said.

After turbulent sessions in October, related to the recalibration of interest rate expectations and then a following calm period, renewed nervousness is observable in European bond markets, he said.

"Newly introduced Covid-related restrictions overshadow the positive read-across from the November flash PMIs as we approach the crucial ECB meeting mid-December," Messi added. Julius Baer expects the ECB to retain some flexibility on the asset purchase programs well into next year, which should keep the probability for a major spread widening limited.

The gravitational value of the 10-year German Bund yield is expected to climb above 0% in 2022, Helaba said.

"The stronger economic momentum combined with declining but still elevated inflation and the increase in government debt provide the framework for a steepening yield curve."

Helaba forecasts the 10-year Bund yield to rise to 0% in the first quarter 2022, followed by rises to 0.10%, 0.15% and 0.20% in the proceeding quarters through the year.

For the 10-year Treasury yield, Helaba forecasts an increase to 1.70% in the first quarter, with the yield rising to 1.80%, 1.90% and 2% in the subsequent quarters of 2022.

French presidential elections in the spring of 2022 are likely to put widening pressure on French-German government bond yield spreads in the run-up to the vote, BNP Paribas Markets 360 said.

Elsewhere, the expected slowing in asset purchases by the European Central Bank is likely to outweigh improving fundamentals. Nevertheless, it expects Italian government bonds to slightly outperform Spanish ones in the second half of 2022 on diverging credit outlooks, BNP Paribas Markets 360 said.

Commodities:

Oil prices gained, but their post-SPR rally slowed, with investors' attention turning to OPEC+ when it meets next month.

DNB Markets' Helge Andre Martinsen said investors had expected more than 100 million barrels of oil to be tapped from the strategic petroleum reserves after of major oil-consuming nations, considerably more than the 67 million barrels released. The move had been a "classic 'sell the rumor buy the fact' dynamic."

Gold edged higher ahead of a bumper day of economic data releases, while the FOMC meeting minutes should offer bullion investors insight into the central bank's inflation views and outlook for interest rates.

DOW JONES NEWSPLUS

EMEA HEADLINES

Germany's Olaf Scholz on Track to Succeed Angela Merkel as Chancellor

BERLIN-Germany's Olaf Scholz is on course to succeed Angela Merkel as chancellor after the victors of the September election reached a policy agreement to form the country's first three-party coalition, people involved in the negotiations said.

The policy program, which Mr. Scholz's center-left Social Democrats, the environmentalist Greens and the pro-business Free Democratic Party are set to unveil on Wednesday afternoon, aims to overhaul the German economy with a focus on combating climate change and updating the country's patchy digital infrastructure.

U.N. Nuclear Chief Leaves Iran Without Deal on Access to Nuclear Plant, Diplomats Say

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