MARKET WRAPS
Stocks:
European stocks struggled for direction on Wednesday as investors reacted to results from some of the region's biggest companies.
Global concerns on rising inflation were in focus, with Germany reporting a 14.2% surge in annual producer prices for September, the highest annual gain since October 1974, said statistics office Destatis.
The mining sector was among the weakest in Europe, with shares of Antofagasta dropping over 3% after the mining group reported weak copper production for the third quarter and forecast lower output for next year, due to drought conditions in Chile.
In other news, Jens Weidmann, the president of the Bundesbank and one of the more hawkish European Central Bank voters, announced his resignation on Wednesday, which he said was for personal reasons.
Weidmann said he will leave at the end of the year. "I have come to the conclusion that more than 10 years is a good measure of time to turn over a new leaf - for the Bundesbank, but also for me personally," Weidmann said.
Shares on the move:
Among a raft of companies reporting financial results, Nestle was a leading gainer with a rise of over 3% as the Swiss food and drink conglomerate reported higher sales for the first nine months of the year that also beat forecasts. Nestle also lifted its full-year guidance for organic sales growth.
"Nestle appears well-positioned to weather the current environment of rising input costs," said a team of analysts at Morgan Stanley. The company's valuation of 22 times 2022 earnings, excluding its L'Oréal holding, "looks undemanding to us."
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Another gainer was Deliveroo, with shares of the delivery service also rising above 3% after reporting a rise in third quarter orders and gross transaction value and lifting guidance on the latter for the year.
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Vinci stock rose 2.9% after it delivered a solid top-line third-quarter update, according to Deutsche Bank, with revenue at EUR13.24 billion, a slight beat to the bank's expectations.
The French infrastructure company confirmed its full-year guidance for its energies and contracting businesses to grow above 2019's levels and now guided for its autoroutes segment to reach close to last year's levels, Deutsche Bank said.
But the biggest surprise is Vinci's falling net debt, which dropped to EUR16.9 billion in the third quarter from EUR18.6 billion in the first half. The results show why Vinci remains a top infrastructure pick for Deutsche Bank, which confirmed its buy rating and a EUR107 target price.
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On the downside, shares of ASML fell over 1% even after the Dutch chip equipment maker reported a 64% gain in third-quarter net profit that beat forecasts. Amid a continuing industry chip shortage, ASML said it would need to boost capacity to meet demand for memory and logic modes.
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Akzo Nobel shares also fell over 1% after the Dutch paints and coating company reported a third-quarter fall in net profit, missing consensus and said its performance was hit by high raw-material costs and supply-chain disruptions.
"Despite the well flagged near-term raw mat headwinds, the underlying demand across the division remains strong and Akzo continues to benefit from the strong coatings demand as many of the end-markets move toward normalization, said Citi analysts.
"Sustainability of volume and measures to combat impacts of raw material headwinds into 2022 should be a key debate point going forwards; however, shareholder returns and significant balance sheet firepower support our positive stance on the name, said Citi, which has a buy rating on the Akzo Nobel.
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Kering stock fell over 3% after the French luxury goods group reported late Tuesday third-quarter revenue above expectations, but a miss at its flagship Gucci label.
Equita analyst Paola Carboni said in a note that any negative share reaction was "an opportunity in view of the acceleration from the fourth quarter" and considering such factors as momentum of other brands, and discounted valuation.
Read a roundup of analysts' comments here.
Stocks to watch:
Barclays, NatWest Group and Lloyds Banking should be the U.K. banks to benefit the most from a benign backdrop when posting their results for the third quarter, said Jefferies.
The FTSE 100 lenders are not expected to bring material negative margin surprises, Jefferies added, noting that updates on rate sensitivity should show scope for positive earnings revisions.
Material credit write backs also create capacity for buybacks, which could be announced either at the third quarter or at the end of 2021, said Jefferies. Barclays and Lloyds are the top buys among the major U.K. lenders, Jefferies added.
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Southern European banks face a short-term negative risk from a possible non-extension of the European Central Bank's bonus rate on targeted long-term refinancing operations funds, said Jefferies analysts.
France's central bank governor recently suggested the ECB shouldn't extend the measures past June 2022. The current measures contribute about 10% to Southern European banks' domestic profits, so a non-extension would be a downside in the near term.
"However, a step towards policy normalization from the ECB [and associated implications for rates/EURIBOR] should still be seen as more positive than negative medium-term." Jefferies sees Sabadell as most at risk from a non-extension of the measure and prefers UniCredit for its good risk-reward balance.
U.S. Markets:
Stock futures wobbled ahead of corporate results that will provide insight into the effects on the technology industry of inflation and supply-chain disruptions, including from the global chip shortage.
Telecommunications giant Verizon is scheduled to post earnings before the opening bell. Tesla and IBM are expected to report after markets close.
Stocks have climbed in recent days as investors parsed strong earnings. Major companies have said that labor shortages, higher raw-materials prices and supply-chain issues haven't eroded profits substantially, reassuring investors.
For tech companies like the ones reporting Wednesday, investors will be watching for an update on disruptions in the semiconductor space and the ability of large firms to increase prices to consumers, according to Kiran Ganesh, a multiasset strategist at UBS Global Wealth Management.
"Markets are taking a bit of a breather after a very strong run. Earnings are very good so far, across a pretty broad range. We're looking out for margins, and comments on input costs, and we haven't really seen too much concern on that," he said. "This is what's really been supporting the rally."
Netflix shares slipped 1.3% in after hours trading. The company said it added more new users than expected in the last quarter, but its co-chief executive also apologized for defending a controversial comedy special by Dave Chappelle.
Investors are awaiting a Federal Reserve report about economic conditions known as the Beige Book.
Forex:
Sterling steadied after briefly edging lower following data that showed U.K. annual CPI slowed slightly to 3.1% in September from 3.2% in August. This fall shouldn't alter the likelihood that interest rates will rise soon, analysts said.
"The bigger picture emains that inflation is causing the Bank of England a headache, especially coupled with no sign of an easing in the energy price surge," said Richard Carter, head of fixed-interest research at Quilter Cheviot. It looks likely an interest rate increase will happen soon, although the BOE will avoid tightening too aggressively, he added.
Pantheon Macroeconomics said the slight decline in inflation won't settle the debate on when the BOE should raise interest rates.
"Hawks will be able to continue to warn of the dangers that high inflation poses to inflation expectations, while the doves will be able to point out that the above-target rate is primarily due to rising prices for oil and some goods affected by global supply chain problems," said Pantheon's chief U.K. economist Samuel Tombs.
Looking ahead, the recent surge in energy prices looks set to drive up U.K. inflation to a peak of about 4.7% in April, Pantheon forecasts.
Track the views of the analysts and the market's reaction to inflation dip here.
The dollar was little changed, despite the slightly weaker sentiment in most stock markets.
Healthier risk conditions and the repricing of expectations for central banks' monetary policies worldwide could send the dollar lower in coming days, although any losses might ultimately prove modest, said Westpac.
The European Central Bank is likely to underscore its dovish guidance next week, while the Federal Reserve is expected to announce QE tapering at its Nov. 2-3 meeting, a backdrop that should underpin the dollar, Westpac added.
Commerzbank said the dollar is unlikely to suffer a sustained downward correction in the near term as elevated U.S. inflation forecasts support the market's expectations for interest-rate rises by the Fed.
The foundation for the dollar's strength is "anything but secure" as inflation could fall more rapidly and sharply than the market expects next year, said Commerzbank currency analyst Thu Lan Nguyen.
"But there is still no reason for the market to massively revise its inflation and thus interest rate expectations--at least as long as there are no clear signs that the global supply bottlenecks are starting to ease."
Bonds:
Eurozone government bond yields rose in early trade as inflation fears continued to weigh on market sentiment, said analysts.
"It appears that market participants are getting cold feet as the European Central Bank's determination to look through current inflation pressures appears half-hearted," said Christoph Rieger, head of rates and credit research at Commerzbank.
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10-20-21 0552ET
