MARKET WRAPS
Stocks:
European shares made modest gains Wednesday as investors awaited minutes from the Federal Reserve's recent policy meeting in the hope of gleaning fresh clues about plans to wean markets off pandemic-era stimulus measures.
Markets have largely begun 2022 on a strong footing, lifted by easing concerns about the Omicron Covid-19 variant. Signs that the variant is less likely to cause severe disease means investors are betting it won't derail strong growth for the economy and corporate earnings.
"We essentially have been seeing earlier signs that Omicron is probably not as problematic as we initially feared," said Hani Redha, a portfolio manager at PineBridge Investments. "Markets are very good at sniffing these things out, at identifying what things we should look through."
Investors' focus is shifting away from the new variant to moves by global central banks to tighten monetary policy as economies recover further.
"We expect growth to deflate as we go through the year. That will happen naturally. As the monetary, fiscal support fades, markets will have to stand on their own two feet," said Mr. Redha. "It's not a disaster but it is a headwind at the same time that central banks are on the move."
Stocks on the move:
BASF shares rose 1.9% after it made good on its commitment to buy back stock with news of a EUR3 billion share repurchase, said UBS. The announcement is clearly positive from a capital-allocation standpoint, especially alongside the already solid dividend yield of 5.1%, UBS said.
The German chemical giant got authorization to buy back the stock at its annual general meeting in May 2017, but hadn't followed through with a formal program until now, UBS added. The buyback equates to around 2.6% of share capital a year if all the EUR3 billion is used and provided that it is split equally between 2022 and 2023.
UBS has kept its neutral rating on the stock and EUR62 target price.
Stocks to watch:
Nestle is set to lose out in some business areas as the pandemic eases and consumer patterns shift, said Jefferies, cutting its rating on the Swiss consumer-goods major to underperform from hold.
With the world normalizing in 2022, Nestle is unlikely to see the sharp sales acceleration booked last year, which was primarily due to two main categories--coffee and pet--said Jefferies.
The former category will suffer from a return to out-of-home consumption, and the latter from an end to the boom in pet adoption seen during the pandemic, suggesting that current 2022 sales-growth consensus is too high, the bank said, cutting its target price to CHF110 from CHF118.
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Industrial software will play a bigger role in 2022, with the sector in Europe expected to post low-double-digit growth this year, said Bernstein. It expects electrification to remain an important theme, but software and domain data should have more sway this year.
"On this lens, we find the investment case is strengthened for Hexagon, Dassault Systemes, Aveva, Siemens, ABB and Schneider Electric, and weakened for Atlas Copco and Legrand," Bernstein said.
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UniCredit's new capital returns policy centers around preparing for M&A while keeping shareholders happy, said Deutsche Bank analyst Giovanni Razzoli. The Italian bank's recently revealed plan includes at least EUR16 billion in dividends and buybacks.
"[This] is designed, in our view, to deliberately grant management significant flexibility in order to maximize the returns of a possible M&A strategy," Razzoli said.
UniCredit could leverage the shares it plans to buy back in order to launch a takeover bid. A potential deal to acquire Banco BPM would strengthen UniCredit's foothold in its home market, making it more competitive, and could accelerate the annual compound growth rate of its earnings per share by about two percentage points a year, the analyst said.
U.S. Markets:
The Dow was headed for a new all-time high Wednesday, with Nasdaq poised to fall again amid pressure from higher bond yields.
Strong economic signals in recent days have supported stocks making up the Dow, while simultaneously helping to lift bond yields. This, in turn, has added weight to many of the technology stocks that make up the Nasdaq--which underperformed the Dow Tuesday by nearly 2 percentage points.
"Seemingly, the sharp rise in U.S. yields this week has sparked a move from growth to value, or as I put it, from the Nasdaq to the Dow Jones," said Jeffrey Halley, an analyst at broker Oanda. "Whether it lasts is another thing altogether, with such rotations running out of steam over the past 18 months, without really ever gathering momentum."
Forex:
The dollar was a fraction weaker in Europe and its overall directionality could still be diffused in near term, with risk dynamics appearing to be main driver for now, said OCBC.
The release of the FOMC minutes and a couple of Fed speakers commenting on monetary policy before the weekend may refocus market attention on Fed-led, U.S.-centric drivers, OCBC added.
Goldman Sachs has an out-of-consensus view that the broad dollar is more likely to fall than rise this year, "although that will require that Fed rate hikes remain gradual, and risks to the dollar are skewed to the upside early in the year."
MUFG Bank said today's meeting minutes should confirm the Fed's plans to withdraw support, lifting Treasury yields and the dollar.
"Given the momentum for higher rates we'd be surprised to see these minutes resulting in a reversal given how clear the Fed was in shifting to focusing on inflation risks," said MUFG's Derek Halpenny.
The euro is likely to fall versus the dollar in the first half of the year on expectations the Fed will raise interest rates, but it should recover in the second half, said ING.
EUR/USD has been trading between 1.1180-1.1380 since late November but should break below that range if U.S. data are strong enough to convince investors of three Fed rate rises this year and a bigger multi-year monetary policy tightening cycle, ING analysts say.
"We favour the break lower coming in the early part of the year since through 2H22 the market will start to shift its focus to the first European Central Bank rate hike, probably coming in March 2023."
Sterling's resilience to the dollar's recent strength probably reflects the lack of further U.K. coronavirus restrictions, said Unicredit.
It also reminds investors that the prospect of the Bank of England raising interest rates further means sterling still has room to fight a firmer dollar, driven by expectations the Federal Reserve will soon lift rates. Sterling may appreciate more versus the euro given the European Central Bank's reluctance to start raising rates, Unicredit said.
"The major risk for sterling, however, is that the U.K. forward curve already incorporates bold tightening by the BOE, i.e., a full 100 basis points this year, which may prove too aggressive."
Bonds:
Eurozone government bond yields were marginally higher in cautiously-better risk sentiment, with analysts expecting any rise in yields to be contained.
"Cautious risk sentiment and softening euro area data should keep 10-year Bund yields inside the range below -0.1%," said Commerzbank rates strategist Rainer Guntermann.
Long-dated bond issuance will be significant with Germany launching a new 10-year Bund offering of EUR4 billion, while Spain will sell a total of EUR4.75 billion-EUR6.25 billion in 2024-, 2028- and 2037-dated nominal and 2027-dated inflation-linked bonds. Italy is set to syndicate a new 30-year BTP, while Slovenia plans to issue four- and 40-year bonds.
UniCredit estimates the fair value yield of the new February 2032-dated Bund due to be launched later Wednesday at -0.08%. This fair value estimate implies a yield about 4 basis points above that of the August 2031 Bund, the current 10-year benchmark.
UniCredit's rates strategists said that Bunds, along with other eurozone government bonds, performed poorly in the last few weeks of 2021, "a period characterized by thin liquidity and portfolio rebalancing."
Trading at around -0.12%, the 10-year benchmark Bund yield is almost 20 basis points higher than its six-month average, UniCredit said, expecting this level to hold in the coming months as improving economic data and pandemic-related concerns will probably offset each other.
Mizuho's fair-value estimate for Italy's new September 2052 BTP is 5 basis points above the yield of the 1.70% September 2051 BTP.
Ahead of the syndicated transaction expected for Wednesday, Mizuho's strategists expect the initial price talk to be 8 basis points above the yield of the September 2051 BTP. They anticipate a deal size in the range of EUR6 billion to EUR8 billion.
Commodities:
Oil prices were slightly lower in Europe after mixed data on U.S. stockpiles that were tilted to the bearish side, according to analysts at DNB Markets.
Tuesday's API stats showed "crude being bullish and [oil] products bearish, but overall the numbers are tilted in the bearish direction," said Helge Andre Martinsen, senior analyst at DNB Markets.
Copper prices weakened around 0.6% ahead of the Fed minutes, with the metal held back the generally stronger dollar which is being supported by expectations for interest rate rises. Meantime, gold was little changed.
DOW JONES NEWSPLUS
EMEA HEADLINES
Eurozone Economic Growth Eases to Nine-Month Low Due to Omicron Spread, PMIs Show
Following a brief acceleration in November, economic growth in the eurozone eased to a nine-month low in December, resuming a slowdown trend amid a resurgence of coronavirus infections, IHS Markit said Wednesday.
The eurozone composite purchasing managers index fell to 53.3 in December from 55.4 in November, signaling the softest expansion in combined manufacturing and services output since March.
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