MARKET WRAPS
Stocks:
European stocks posted solid gains with testimony from Jerome Powell later Tuesday the focus of investors' attention.
Investors are looking to comments from Mr. Powell, when Senate lawmakers will decide on his nomination for a second term as Fed Chair. While his confirmation is expected, Mr. Powell is likely to face tough questioning about his pivot on inflation and interest rates, which has spooked investors and driven volatility in markets.
"There is more of a risk now that rate rises are going to coincide with falling growth and that is obviously a bad combination," said Altaf Kassam, head of investment strategy for State Street Global Advisors in Europe.
In the U.K., miners and oil stocks advanced as crude prices rose more than 1%.
"As well as equities, oil is catching a bid on the back of firmer risk appetite after a challenging start to the year," said Victoria Scholar, head of investment at Interactive Investor.
U.K. retailers were also higher after industry data showed retail sales rose last month, albeit at a notably slower rate than in November.
Year-on-year growth in total sales declined to 2.1% in December, from 5% in November, according to figures from the British Retail Consortium.
"Retail sales were strong in November 2021 partly because households purchased Christmas gifts earlier than normal due to concerns about product availability and the possible intensification of the pandemic closer to Christmas," said Pantheon economist Samuel Tombs.
"This strength clearly has come at the expense of December sales. We continue to expect retail sales simply to hover at the fourth quarter level in the first and second quarters."
Stocks on the move:
Darktrace shares rose by almost a quarter after the U.K. cybersecurity company raised its full-year guidasnce following a strong first half trading performance. Berenberg said the company continues to deliver strong customer growth and increasing annualized recurring revenue per customer.
The brokerage said that over the past few months it has conducted a survey of businesses that have trialed, used or currently use Darktrace's products, and this showed that customers were satisfied and that the majority said they anticipate spending more with Darktrace.
"Darktrace's shares have clearly been caught in a web of misinformation, which we think today's update and our survey will serve to break. We think the share price is unlikely to stay at current levels for long," Berenberg said. It has a buy rating on the stock with a 1,000 pence price target.
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Flutter Entertainment shares rose 4% after Citigroup raised its recommendation on the bookmaker to buy from sell, citing U.S. market opportunities. Citi also upgraded Swedish gaming group Evolution to buy from neutral. Its shares rose 5%.
"We're increasingly bullish on the size of the U.S. prize," said Citi analysts. "We now forecast a long-term Ebitda opportunity of $9.3 billion, double what we expected this time last year. Further, we expect Flutter and Entain's dominance to continue, while Evolution's product quality will drive its strong U.S. positioning."
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Pandora shares traded 1.9% higher after the Danish jeweler pre-released 2021 earnings, with fourth-quarter sales of DKK9 billion, 7% above consensus estimates, said Citi.
While U.S. growth normalised from the third quarter as expected and China deteriorated quarter-on-quarter, this was more than offset by improvements in key markets such as the U.K., Italy, Australia and France, Citi said.
On the profit side, fourth-quarter Ebit of DKK2.7 billion came in 9% above consensus. "We expect low single-digit upgrades to consensus FY22/FY23 Ebit/EPS," said Citi, adding that Pandora's shares have underperformed in the past three months and offer good value for around 15% EPS compound annual growth rate from 2021-23.
Citi has retained a buy rating and DKK962 target price on the stock.
Stocks to Watch:
Vaccine revenues in 2022 will be supported by booster shots as new Covid-19 variants spur breakthrough infections, said Fitch Solutions' Beau Noafshar.
The increase in demand for first and second shots and boosters will benefit manufacturers of mRNA vaccines in particular, he said. This will be another strong year for Pfizer-BioNTech and Moderna in revenue terms as production is ramped up.
"Some of the weaker technologies, which haven't held up so well in terms of variants, aren't going to see this same maintaining of prices," said Noafshar. Prices are expected to fall across other vaccine technologies as supply rises and begins to outweigh demand toward the second half.
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Continental's auto EBIT margin will continue to be fragile in 2022 due to increasing cost pressures, showing only a modest recovery, said Citi, as the bank cut its rating for the German car-parts supplier to neutral from buy and lowered its target price to EUR105 from EUR115.
"The strength of the rubber business however will not be sufficient to drive the shares higher in our view, unless the auto division also performs better than expected," said Citi, adding that Continental doesn't show re-rating catalysts in the near term.
"Regarding 2021, we expect group sales of EUR33.4 billion, at the upper end of the EUR32.5-33.5 billion guidance range, and EBIT margin of 6.1% above the guidance of 5.2-5.6%," said Citi.
U.S. Markets:
Stock futures were little changed ahead of Powell's confirmation hearing, where he is expected to face questions over his plans to contend with inflation.
Investors are also gearing up for the start of earnings season this week. The reports will be particularly important for technology firms who will need to post strong growth to justify their rich valuations, said State Street's Kassam.
Results more broadly will need to be robust to support U.S. stocks, which are increasingly looking less attractive than their European counterparts, he added. "For the U.S. to keep its top-of-the-world stance it needs across the board earnings to come in strong."
Grocery chain Albertsons Companies is set to be among the first major firms to report earnings, ahead of the opening bell Tuesday. Reports later in the week will be dominated by financial firms, with BlackRock, Citigroup, JPMorgan Chase and Wells Fargo set to report Friday.
Forex:
The dollar stalled in Europe against a basket of currencies, with the US Dollar Index remaining below the 96.00 level.
ING said the dollar has tracked a drop in the 10-year Treasury yield after it stalled around the 1.80% level, but testimony in the Senate later by Jerome Powell could help the currency rebound.
An acknowledgement by Powell that faster interest-rate rises are needed "could be enough to offer more support to the dollar...as investors cement expectations around 100bp of tightening in 2022." ING expects any dips in the dollar to be short-lived as the prospect of rate rises "continues to offer a very positive undercurrent."
Sterling was higher despite the spread of Omicron in the U.K. and post-Brexit issues, as investors focused on the prospect the Bank of England will raise interest rates again, said Commerzbank.
The forex market hasn't considered Brexit a problem for some time and Omicron is expected to have a limited economic impact, meaning a BOE rate rise in February would be quite likely, said Commerzbank's You-Na Park-Heger. However, sterling's rally could soon "run out of steam" as rate-rise bets are probably largely priced in, she said.
Bonds:
JPMorgan has recommended investors go long in five-year German government bonds versus U.S. peers to position on monetary policy divergence and valuations after recent moves.
Strategists Aditya Chordia and Elisabetta Ferrara said the dynamics of bond supply versus European Central Bank purchase dynamics is "quite favorable" for Germany in the first quarter of 2022, "a supportive flow argument for the German overweight."
Separately, the strategists said JPMorgan expects upgrades will be more likely than downgrades for eurozone sovereigns in 2022. This reflects "our optimistic global macro and regional political outlook, and our view of range-bound intra-EMU spreads in 2022 despite declining ECB support."
They see a high likelihood of further upgrades for low-rated countries such as Cyprus, and mainly Greece. They also see a 50% or higher probability of an upgrade of Ireland by Moody's. Italy also has the potential for upgrade in 2022, due to its "strong ongoing reform agenda and our base case of stable political environment."
In addition, the strategists said the pressure on the ECB to normalize monetary policy seems much milder than the pressure facing the Fed.
Developed market central banks have set the path for some policy normalization and less stimulus, although with some differentiation among them. Relative to that path, risks are biased for an earlier and faster pace of policy normalization by the Fed, with quantitative tightening expected after the second interest rate rise, the strategists said.
Commodities:
Oil prices gained more than 1% in Europe as risk assets rebounded following volatile trading on Monday and as supply remained constrained.
While major oil producers in OPEC have pledged to gradually increase supply, production has been lower than promised, something which is also supporting prices, noted ANZ.
Gold added to Monday's gains, with futures above the key $1,800 level. However, OANDA said there is a lack of momentum to drive the precious metal in either direction and expects bullion to trade around $1,775-$1,815.00 this week.
Gold remains vulnerable to dollar strength and that "any meaningful rally will continue to be unwound aggressively at the first sign of trouble."
However, TD Securities said working in gold's favor are concerns about persistently high inflation. "Markets are increasingly considering whether supply-side inflation is here to stay. This could potentially help to explain the resilience in gold prices in the face of aggressively higher real yields."
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01-11-22 0559ET
