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EUROPEAN MIDDAY BRIEFING - Stocks Gain as Traders Shrug Off Asia, US Losses

01/19/2022 | 06:53am EDT

MARKET WRAPS

Stocks:

European stocks were higher Wednesday as investors continue to grapple with elevated bond yields and the likelihood of multiple interest-rate increases in the year ahead.

Investors have stepped up bets that the Federal Reserve and other major central banks will tighten monetary policy in the coming months, withdrawing a pillar of support for markets. Mounting expectations of interest-rate rises follow evidence that the drivers of inflation have broadened beyond the supply-chain shock that fueled price gains for much of 2021.

Recent volatility is "really all about inflation and how aggressive central banks are going to be to counteract it," said Brian O'Reilly, head of market strategy at Mediolanum Asset Management, adding that inflation could also curtail economic growth by knocking consumption. "Certainly, the market is nervous at the moment."

Stocks on the Move: Many luxury stocks rose Wednesday after Swiss group Richemont and U.K. fashion firm Burberry posted consensus-beating sales for their third quarters, demonstrating continued strong demand for the sector's products.

Richemont sales rose 38% organically compared with the same period of 2019, before the pandemic, showing a sharp trajectory in luxury demand as the new year gets underway, brokerage Bernstein said following the print. Track the analysts' views on Richemont's third-quarter update here [https://newsplus.wsj.com/search/realtime/company/?searchParts=[%7B%22t%22:%22symbol%22,%22q%22:%22djn:djnabout:CFR.EB%22,%22c%22:%22CH:CFR%22,%22n%22:%22Compagnie%20Financiere%20Richemont%20S.A.%22,%22cs%22:%22STOCK/CH/XSWX/CFR%22,%22ds%22:%22CFR.EB%22%7D, %7B%22t%22:%22operator%22,%22q%22:%22and%22,%22n%22:%22and%22%7D, %7B%22t%22:%22freetext%22,%22q%22:%22market%20talk%22,%22n%22:%22market%20talk%22%7D]&searchFilterState=open&includeDefaultFilter=true].

Burberry meanwhile raised FY 2022 earnings guidance following the results.

Richemont surges 8.6% and Burberry advances 5.9% in early trade, while Swiss watchmaker Swatch rises more than 4% and Italian luxury-fashion firm Prada, which itself booked strong preliminary 2021 revenue Tuesday, is up almost as much. French luxury players Kering, LVMH and Hermes rose 3.7%, 3.3% and 3%, respectively, while Italy's Moncler climbed 2.8%.

Microsoft's $75 billion deal to buy Activision Blizzard is positive for French videogames maker Ubisoft Entertainment, Citi said, a day after the company's shares jumped more than 10% on news of the deal.

"As a scale player with multiple established franchises as well as significant future optionality for growth/margins from both free-to-play and further development of in-game monetization, we think it is impossible to dismiss the risk of M&A interest," Citi said. Still, the U.S. bank notes there's no indication that Ubisoft is an M&A target at this stage. Ubisoft shares trade 1% higher.

Stocks to Watch: Commerzbank's positives are underappreciated by the market, Deutsche Bank analysts said, raising the stock to buy from hold. The German bank has improved its top-line momentum, continues to deliver on cost control and continues to post low loan losses, DB said.

Improving profitability should be the main positive theme in 2022 for Commerzbank, and it should allow for attractive dividends and share buybacks from next year, DB said.

Plus, Commerzbank stands to benefit significantly from rising long-term interest rates, DB added. Commerzbank's 4Q earnings and upcoming capital markets day should inspire more confidence in its story and could act as a catalyst for shares, DB said, raising its target price on the stock to EUR10 from EUR7.

Siltronic's takeover by GlobalWafers may hang in the balance, but the German chip maker's future still looks bright, Jefferies analysts said, upgrading the stock to buy from hold. Siltronic shares dropped sharply Monday after news that the German government hadn't approved the takeover, with just weeks remaining until the lapse of the offer period.

If the deal falls through--which Citi sees as likely--they could drop even further. This creates an attractive entry point, Citi said. Demand for semiconductors is expected to stay strong this year and should remain ahead of supply in the medium term, Citi said. This should support higher prices, sales growth and further profitability improvements for Siltronic, Citi said, raising its price target to EUR160 from EUR150.

While countries have reintroduced more severe travel restrictions since the advent of Omicron, this should only be a brief step back with European airlines remaining on the road to recovery, Liberum said.

"Prior to the emergence of the Omicron variant in November 2021, these restrictions were being steadily relaxed worldwide," the brokerage said. European airlines are facing near-term financial challenges because of Omicron but important markets such as the U.S. are still open and signs show that Omicron-related travel restrictions are already starting to be eased, it said.

"We believe the end destination of a recovery in air travel activity is unchanged," Liberum said.

Economic Insight: In the U.K., data showed consumer prices rising at 5.4% in December, the fastest rate since March 1992-shortly before the country was compelled to leave the European Exchange Rate Mechanism on 'Black Wednesday.'

The pace of price growth was far above the 2% target set by the Bank of England, which in December became the first major central bank to raise rates since the start of the pandemic. Read a selection of comments here .

Accelerated inflation in food and core goods was the main driver of the slightly higher inflation rate in Germany at the end of last year, Pantheon Macroeconomics said.

Pantheon said core inflation will decelerate sharply in January because of base effects. This will show up primarily in core goods as base effects from the temporary VAT cut in the second half of 2020 drop out of the data, Pantheon Macroeconomics' chief eurozone economist Claus Vistesen said.

Pantheon is also penciling in a decline in the rate of services inflation. "They will both rebound quickly towards the end of the first quarter, though, lifting core inflation significantly through 2Q and 3Q, " Vistesen said.

German consumers and companies should prepare for further price increases, the Ifo Institute said. In December, the Ifo price expectations fell only slightly to 44.6 points from their all-time high of 44.9 in November. For these price expectations, the Ifo Institute asks companies about their plans for price increases in the next three months.

"Such increases will filter down to consumer prices," said Timo Wollmershaeuser, head of Ifo economic forecasts. Inflation will decline in 2022, but slowly, he said.

In the coming months, monthly rates will still exceed 4% and will approach the 2% mark only gradually toward the end of 2022, according to Ifo's estimates. Ifo expects a rate of inflation of 3.5% for the year as a whole.

U.S. Markets:

U.S. stocks were poised for muted opening moves following Tuesday's selloff, and government-bond yields extended their advance, as investors prepare for central banks globally to raise interest rates.

Companies due to report earnings before the opening bell in New York include Morgan Stanley, Bank of America and U.S. Bancorp, and household names UnitedHealth Group and Procter & Gamble. United Airlines and Alcoa are set to post results after markets close.

Investors will get a glimpse of the health of the U.S. housing market at 8:30 a.m. ET. Construction of new homes is forecast to have slowed in December as builders contended with shortages of materials and workers.

Forex:

Firm energy prices are contributing to ramped-up monetary policy tightening expectations including for the Fed and this should lift the dollar, ING said. Energy prices rise as crude supply increases in December failed to live up to what was agreed by OPEC+, ING analysts said.

Higher energy prices may linger and delay any easing of inflation, they said. "This environment is seeing the scale of expected tightening cycles increase around the world, including in the U.S.

"The market now expects the Fed's terminal rate, the level at which rates stop rising, will reach 1.80%, compared to last week's bets of 1.60%, the analysts say. ING expects the DXY dollar index to rise to around 96.40-96.50, from 95.6140 currently.

Sterling was little moved even after data showed U.K. inflation accelerated to its highest level in almost 30 years in December. The data bolsters the case for the BOE to raise interest rates further, Silicon Valley Bank's Sam Cooper said.

"Sterling is largely unchanged post-release as today's data is only confirming current market expectations that inflation needs to be addressed in the coming months."

U.K. consumer prices rose 5.4% year-on-year in December --the highest since March 1992--following a 5.1% increase in November, leaving it well above the BOE's 2% target.

Bonds:

Investors kept selling government bonds, pushing up yields. Yields on benchmark 10-year Treasury notes rose to 1.893%, compared with 1.866% Tuesday, which was their highest level since January 2020. Yields on interest rate-sensitive two-year notes rose to 1.063% from 1.038% Tuesday.

Europe's most closely watched government bond yield turned positive for the first time since 2019. The yield on 10-year German bonds rose to 0.008% after trading in negative territory for over 30 months. Ten-year U.K. yields, meanwhile, rose to their highest level since March 2019 after data showed inflation in the country hitting a 30-year high.

The 10-year German Bund yield turns positive on Wednesday for the first time since May 2019, driven in particular by the trend in the U.S. Treasury market, Elmar Voelker, senior fixed-income analyst at LBBW, said.

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01-19-22 0652ET

Stocks mentioned in the article
ChangeLast1st jan.
ACTIVISION BLIZZARD, INC. 0.06% 77.74 Delayed Quote.16.80%
ALCOA CORPORATION 2.03% 62.14 Delayed Quote.2.28%
AUSTRALIAN DOLLAR / BRITISH POUND (AUD/GBP) 0.04% 0.5633 Delayed Quote.5.60%
AUSTRALIAN DOLLAR / US DOLLAR (AUD/USD) -0.07% 0.70841 Delayed Quote.-2.18%
BANK OF AMERICA CORPORATION 2.27% 36.65 Delayed Quote.-19.44%
BRITISH POUND / US DOLLAR (GBP/USD) -0.10% 1.25732 Delayed Quote.-7.30%
BURBERRY GROUP PLC 4.59% 1641 Delayed Quote.-13.67%
CANADIAN DOLLAR / BRITISH POUND (CAD/GBP) 0.35% 0.622003 Delayed Quote.6.31%
CANADIAN DOLLAR / US DOLLAR (CAD/USD) 0.26% 0.78195 Delayed Quote.-1.41%
COMMERZBANK AG 3.29% 8.03 Delayed Quote.16.22%
COMPAGNIE FINANCIÈRE RICHEMONT SA 1.96% 94.8 Delayed Quote.-30.78%
DEUTSCHE BANK AG 1.54% 10.414 Delayed Quote.-6.92%
DOW JONES FXCM DOLLAR INDEX -0.07% 12649.11 Real-time Quote.4.07%
EURO / BRITISH POUND (EUR/GBP) 0.26% 0.85125 Delayed Quote.1.85%
EURO / US DOLLAR (EUR/USD) 0.15% 1.07038 Delayed Quote.-5.60%
GLOBALWAFERS CO., LTD. -1.65% 538 End-of-day quote.-39.41%
INDIAN RUPEE / BRITISH POUND (INR/GBP) -0.20% 0.010237 Delayed Quote.3.70%
INDIAN RUPEE / US DOLLAR (INR/USD) -0.17% 0.012878 Delayed Quote.-3.88%
KERING 3.45% 467.7 Real-time Quote.-36.04%
LVMH MOËT HENNESSY LOUIS VUITTON SE 3.67% 571.2 Real-time Quote.-24.21%
MORGAN STANLEY 3.55% 85.15 Delayed Quote.-16.23%
NEW ZEALAND DOLLAR / US DOLLAR (NZD/USD) -0.25% 0.646 Delayed Quote.-5.70%
ON SEMICONDUCTOR CORPORATION 4.16% 58.61 Delayed Quote.-17.20%
PRADA S.P.A. -2.35% 43.55 Delayed Quote.-10.62%
SILTRONIC AG 1.65% 86.5 Delayed Quote.-39.84%
THE SWATCH GROUP AG 0.31% 226 Delayed Quote.-19.00%
UBISOFT ENTERTAINMENT 0.87% 48.47 Real-time Quote.11.56%
UNITED AIRLINES HOLDINGS, INC. 7.27% 46.19 Delayed Quote.-1.60%
UNITEDHEALTH GROUP 1.41% 505.25 Delayed Quote.-0.91%
US DOLLAR / BRITISH POUND (USD/GBP) 0.09% 0.795406 Delayed Quote.7.88%
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