European stocks fell more than 1% Tuesday, as downbeat comments on coronavirus variants from vaccine manufacturer Moderna unsettled investors. Oil- and travel-related stocks were among the biggest fallers.
"It only took one comment from the boss of drug firm Moderna to derail markets once again. Stephane Bancel said he believed existing vaccines would struggle with the Omicron variant, leading to a renewed selloff in shares and oil," AJ Bell investment director Russ Mould said. "Markets hate uncertainty and this is precisely what we have now."
Shares on the move:
Air France-KLM shares were down 4%, with other stocks in the sector also weaker. HSBC has downgraded the Franco-Dutch airline to reduce from hold on the back of the Omicron news.
The bank said Air France-KLM has a large amount of debt and was planning to further restructure its balance sheet before the emergence of Omicron, which could make a recapitalization more dilutive than it would have been otherwise.
"In practical terms, we believe there is a risk that the balance sheet restructuring could be more dilutive than we previously anticipated" due to a more depressed trading environment, HSBC said.
Schneider Electric stock rose 1.1% and Berenberg said the company's new medium-term forecasts, issued ahead of its capital markets day, are bullish.
Targets to 2024 guide for organic-revenue growth of 5%-8% on average, ahead of company-compiled consensus forecasting 5.4% and 4.9% for FY 2022 and FY 2023, respectively, Berenberg said. Longer-term ambitions are for organic-revenue growth of 5% across the economic cycle, though something closer to around 3% is priced in, according to Berenberg.
Since the company delivered on its 2019 objectives 18 months ahead of schedule, estimates shouldn't need to move much higher for shares to perform, the bank added. Berenberg has kept its buy rating on the stock, with a EUR175 target price.
Markets are set to face increased volatility in 2022, even as central banks will probably approach the tapering of asset purchases and changes to interest rates in a controlled and prudent manner, said Christel Rendu de Lint, deputy head of investment at Vontobel.
"Indeed, taking a controlled and prudent approach to bond purchases and interest rates will play a central role in ensuring that the economy has a soft landing without an abrupt end to growth," she said. For central banks, this will be a "tightrope act." The Federal Reserve, which has a dual mandate of price stability and maximum sustainable employment, is probably the best-positioned among central banks to perform this balancing act, she said.
In the favorable scenario in which existing vaccines are effective against the new Omicron variant, the travel recovery in Europe should only be delayed by a quarter due to the renewed restrictions put in place to fight the more contagious Covid-19 strain, HSBC has forecast.
"The current outlook for aviation stocks will likely be shaped by the effectiveness of vaccines against the new Omicron variant." Less favorable scenarios on vaccines effectiveness could mean that recovery could be delayed by up to one full year, HSBC said.
Eurozone inflation rose by 4.9% year-on-year in November, driven mainly by higher energy prices, even when all components saw marked accelerations, said Oxford Economics.
There isn't much the European Central Bank can do about higher energy prices and supply bottlenecks in the short-term, but the latest data will add to the debate on the appropriate level of policy support, said Oxford Economics' economist Katharina Koenz.
Oxford Economics still expects energy and goods price pressures to ease next year thanks to supply constraints fading. Therefore, the economic research group sticks to its view that inflation will slow meaningfully over the course of 2022.
Germany's labor-market recovery continued in the fourth quarter, consistent with the headline business survey data, and despite clear evidence that GDP growth is now slowing sharply, Pantheon Macroeconomics' senior Europe economist Melanie Debono said.
Jobless claims fell by 34,000 on month after declining by 40,000 in October. The fall in jobless claims is positive, especially given softening leading labor market indicators, Debono added. The smoothed trend in claims is now weakening, however, and Debono says she doubts jobless claims will continue to fall by 35,000 to 40,000 per month through the rest of the fourth quarter.
Pantheon forecasts a slowdown in the pace of decline in jobless claims, to between 15,000 to 20,000 a month.
Stock futures fell and investors sheltered in government bonds after drugmakers raised concerns that Covid-19 vaccines won't work as well against the new Omicron strain.
Investors awaited testimony from Jerome Powell for clues on how the new variant might impact the outlook for inflation and interest-rate rises. Powell is expected to say that the new strain could intensify the supply-chain issues that have fueled a spike in inflation.
Should the Omicron strain prompt fresh lockdowns it would put the central bank in a difficult position by worsening inflation and strengthening calls for rate rises just as the economy and markets take a hit, said Seema Shah, chief strategist at Principal Global Investors.
"We had been starting to see this glimmer of hope that some of the supply-side constraints were starting to ease," she said. "If we go back into fear mode you would be looking at those supply-side bottlenecks being exacerbated."
Also in focus will be data on house prices and consumer confidence. Earnings from Salesforce.com and Hewlett Packard Enterprise are due after markets close.
Swings in market sentiment related to the Omicron coronavirus variant are likely to be the main driver of the euro Tuesday, ING said.
"A popular funding currency before the Omicron-induced correction, it is likely that we need to see some confidence being re-built into risk trades to see the EUR depreciate across the board," ING forex strategist Francesco Pesole said. The low-yielding euro is used to fund the purchase of more risky currencies with higher yields in so-called carry trades.
The dollar was lower, particularly against the euro, yen and Swiss franc, as market sentiment was jolted by renewed concern about the Omicron variant. The buck's fall was exacerbated by Jerome Powell's comments that the variant could exacerbate inflation uncertainty and slow labor-market progress.
"Omicron fears have prompted market participants to scale back expectations for tighter Fed policy, which is also helping to trigger the correction lower in U.S. yields and USD/JPY," said MUFG currency analyst Lee Hardman.
ING said Omicron poses a threat to the pound's outlook. "A worsening of the virus situation globally and specifically in the U.K. may not only put upward pressure on EUR/GBP due to the pound's higher sensitivity to risk sentiment but may also mean markets could increasingly price out a December [interest] rate hike by the Bank of England."
While it's too early to draw conclusions on that, a "choppy risk environment" may lift EUR/GBP on Tuesday, ING forex strategist Francesco Pesole said.
Eurozone 10-year government bond yields were lower as the market shifted into a risk-off mood.
"Relief sentiment faded on sobering vaccine news," Michael Leister, head of interest rates strategy at Commerzbank, said.
Deutsche Bank said the 10-year German Bund yield is set to turn into positive territory for the first time in years in 2022, forecasting the end-2022 level at 0.20%.
Long-term Treasury yields should continue to be driven by the continuing recovery in economic indicators, particularly on the labor side, Deutsche added.
Ulrich Stephan, chief investment strategist for private and corporate clients sees the yield on the 10-year Treasury yield at 2% by the end of 2022, but he doesn't rule out an overshooting of that level in the first half of the year.
Oil fell sharply in Europe, with prices now around flat for the week so far after volatility Friday and Monday over the feared effects of the Omicron coronavirus variant.
However "it is still too early to sensibly assess the risk that Omicron poses and this uncertainty is likely to add further volatility to the oil market," said ING's Warren Patterson. "The uncertainty of this latest variant will also make the job of OPEC+ more difficult."
OPEC's preliminary meetings have been delayed to later in the week, and with the full meeting going ahead Thursday "we would not rule out the group pausing its supply increases over January," Patterson said.
Copper prices also fell, with ING saying that while the severity of Omicron remains a big uncertainty, it casts a shadow over demand growth in the near future and further complicates the supply chain.
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