Losses picked up for European stocks on Tuesday after Wall Street's late-day paring and following a mixed performance in Asia.
Market sentiment was dented by the renomination of Jerome Powell as Federal Reserve chairman, which is seen as justifying expectations for U.S. interest-rate rises next year. President Biden's choice to approve Powell for a second term signals the likelihood of two rate hikes in 2022, starting in June, IG said.
Oil-linked stocks weakened as the price of a barrel of Brent crude fell.
"Talk of a multi-national release of strategic petroleum reserves from the likes of the U.S., China, India, and Japan provides a focus on the energy markets Tuesday," IG said.
Shares on the move:
Thyssenkrupp fell more than 5% after Cevian Capital trimmed its stake in the German conglomerate. A spokesman from the Swedish investment firm confirmed to the Wall Street Journal that Cevian has reduced its stake from roughly 15% to 7.9% after media reports that it was placing shares.
"Cevian built its position in Thyssenkrupp in 2013/14 and this is the first sell-down of its interest, which could create some overhang on the shares, absent a public comment by Cevian on its intention with regard to its remaining interest," Jefferies said.
The eurozone economy has shown decent growth momentum in November, according to the PMI survey data, but activity will be hit by new restrictive measures to curb the rise of Covid-19 cases across the region, said ING's senior economist Bert Colijn.
"With the survey conducted before the resurgence of the coronavirus became particularly troubling, it mainly paints a picture of a healthy economy before new virus-related restrictions will curb the growth rate."
Survey data also pointed to mounting warning signs on inflation, with companies passing on higher costs to customers, meaning core inflation will continue to face upward pressures in the coming months, Colijn said.
Credit Suisse said after two years of extraordinary market performance, investors shouldn't expect double-digit returns next year. During a presentation of its 2022 investment outlook, CS said returns from equities and real assets should remain attractive, though they should be more moderate than this year.
Fixed-income investors should be particularly cautious from now on, according to the bank, which expects returns to be meager for this asset class. Generally, assets that are in unlimited supply, such as government bonds, won't be very well rewarded, said Michael Strobaek, global chief investment officer of Credit Suisse. The bank highlighted diversification as key to mitigating portfolio volatility.
Stock futures edged down and bond yields rose in the wake of Powell's nomination and ahead of fresh economic data and retail and technology earnings.
Surveys of purchasing managers in the U.S. are set to be released later Tuesday. Economists are expecting the data to show a pickup in manufacturing and services activity after a slowdown in the third quarter.
Earnings season is ongoing. Zoom tumbled over 6% in out-of-hours trading overnight after the videoconferencing company reported a slowdown in sales growth. Best Buy, Medtronic and Dollar Tree are set to post results ahead of the opening bell Tuesday, while earnings from Dell Technologies, Nordstrom and Gap are due after markets close.
The nomination of Powell for a second term has reinforced the market's expectations for interest rates to rise next year and provided fresh reason to buy the dollar, with the DXY hitting another 16-month high.
MUFG expects the dollar and Treasury yields to continue to rise in the near term as U.S. economic activity and inflation remain strong. "The removal of uncertainty over the Fed leadership has encouraged the U.S. rate market to intensify its focus on the building likelihood of the Fed adopting a faster pace of tightening."
However, DBS said the dollar's latest rally could be short-lived. The Fed's favorite inflation gauge, the PCE deflator, might disappoint when the October data are released on Wednesday given that it hasn't risen as fast as CPI since May, DBS said. Also, DBS remains wary of potential profit-taking by market participants on long dollar positions ahead of the upcoming U.S. holiday weekend.
DBS added that policy normalization will be a strong theme over the coming quarters, noting that Powell has turned incrementally hawkish since June's FOMC meeting, and upcoming minutes will likely reveal that policy flexibility will continue, providing leeway for an accelerated taper if needed. Nonetheless, DBS said the market is only factoring in a partial normalization for the time
Credit Suisse expects the euro to start next year "rather softly" against the dollar but stabilize and recover later in the year, contingent on the policy actions of the European Central Bank.
The Turkish lira sank to new depths against the dollar, after President Tayyip Erdogan vowed his country would win an "economic war of independence." The lira fell to as low as 12.47 against the greenback, before pulling back to 12.08, a 6.2% drop.
On Monday, Erdogan reportedly framed Turkey's weak currency as competitive, saying it would usher in jobs and growth. "We see the games being played on the exchange rate and interest rates. We came out of every struggle we entered honorably by taking a strong stance. With the help of Allah and the support of our nation, we will emerge from this economic war of independence with victory," he said.
Better-than-forecast preliminary French and German purchasing managers data for November added fuel to selloff in eurozone government bonds already prevailing before the data release.
HSBC said early interest-rate rises by the European Central Bank have already been priced in and therefore expectations of rate hikes in 2022 can't be used as grounds for rising Bund yield forecasts next year.
"In fact, unless we assume a higher terminal rate than anything inferred by the market in 2021, we don't think fair value for Bund yields should get above zero," strategists Chris Attfield and Melissa McCallum said.
HSBC's 2021 year-end forecast for the 10-year Bund yield is -0.30%, which it said reflected "a blend of early and cautious hiking scenarios." HSBC's end-2022 forecast for the 10-year Bund yield is -0.50%.
Nearly half of investors surveyed in J.P.Morgan's 2022 outlook expect the 10-year German Bund yield spread to trade below 120 basis points in the second quarter of 2022.
Around two thirds of those expecting a sub-120 basis point 10-year BTP-Bund spread forecast a range of 100-119 basis points, while the remaining third envisage a spread of below 100 basis points, according to the survey.
A total of 24% of surveyed investors forecast the BTP-Bund spread between 120 and 139 basis points; 21% expect a range of 140 to 159 basis points, while 8% sees a spread widening above 160 basis points in 2Q 2022. JPM estimates the average expectation for 10-year BTP-Bund spread at 125 basis points in 2Q 2022.
Oil futures were more than 1% lower in Europe, with "a U.S. announcement of an oil release from the strategic petroleum reserves [appearing] to be imminent," according to ING's Warren Patterson.
With China, Japan, India and South Korea all potentially joining a coordinated release, various media reports suggest the U.S. would make up the majority of any release by freeing up as much as 35 million barrels.
While "action from the U.S. and other key consumers has been priced in by markets to a certain extent," Patterson said, the uncertainty of the size of the release means a surprise might move prices.
Copper prices edged higher despite bearish data from the International Copper Study Group that showed a building surplus of the metal.
The ICSG said the refined copper market swung to a 52,000 ton surplus in August compared with a 39,000 ton deficit the previous month. The figures seem to confirm that waning demand and reviving supply were relieving the tightness in the market. Global demand for refined copper dropped over 3% from July to August while production grew by 1%, the ICSG said. Though small, the changes were enough to push the market into a surplus.
Goldman Sachs said copper and Brent oil prices are likely to rise amid a tight market. "As demand recoveries met restrained supply due to structural under-investment, inventories have depleted, reaching multi-year lows in energy, base metals and agriculture."
Goldman Sachs said to go long on December 2023 Brent and copper contracts, forecasting "Brent at $90/bbl in three months with upside risk of $110/bbl by 2Q 2022 with colder weather and restrained supply". It targeted copper at $10,500 a ton, with upside risk of $12,000 a ton should inventories shrink further.
DOW JONES NEWSPLUS
Orange in Talks to Buy Majority Stake in Belgian Cable Operator
Orange Belgium SA said Tuesday that it is in talks with peer Nethys over the acquisition of a majority stake in telecommunications operator VOO.
The Belgian subsidiary of French telecom Orange SA said it had been chosen by Nethys from a competitive selection process to enter negotiations for 75% minus one share of VOO, with an enterprise value of 1.8 billion euros ($2 billion) for the company as a whole. According to this value, the stake in question would be worth around EUR1.28 billion.
Thyssenkrupp Trades Lower After Cevian Capital Cuts Stake
Thyssenkrupp AG is trading lower on Tuesday after Cevian Capital trimmed its stake in the German conglomerate.
At 0905 GMT, shares at Thyssenkrupp were down 5.4% at EUR10.68.
Turkish Lira Sinks 6% As Erdogan Defends Weak Currency As Competitive
The Turkish lira sank to new depths against the U.S. dollar on Tuesday, after President Tayyip Erdogan vowed his country would win an "economic war of independence."
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