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EUROPEAN MIDDAY BRIEFING - Stocks Hit with Fed Tightening in Prospect

01/24/2022 | 06:03am EDT



European stocks fell more than 1.5% Monday as investors braced for the Federal Reserve's meeting this week that could confirm it will soon start raising interest rates.

"The current consensus is for an initial [rate] hike in March, followed by a further two or three rises which could take the rate to 1% by year-end," Interactive Investor analyst Richard Hunter said.

"While the moves are increasingly necessary given relatively rampant inflation, they also bring the likelihood of dampening earnings prospects."

Stocks on the move:

Philips shares were down around 1.7% after its fourth-quarter results and Citi said the stock should trade sideways in the short term although the company has significant potential mid term given solid end-market demand.

Citi said the company's 2022 guidance of 3%-5% group comparable sales growth was in focus. "We do not expect 2022 consensus to change much despite potential upside implied by the top end of the guidance as investors will likely remain in 'wait and see' mode given recent execution challenges, especially given that 2022 will be second-half-weighted," Citi said.

It has a neutral rating on the stock with a target price of EUR34.50.

Jefferies said Philips's 2022 profitability will be in focus given the headwinds the Dutch health-technology company is facing and the uncertainty surrounding its Sleep Care recall.

The field action provision for the recall has been increased by EUR225 million due to higher volume of remediation and increased supply costs. Jefferies has a hold rating on the stock with a target price of EUR32.


Unilever shares were 5.2% higher on news that Nelson Peltz's Trian hedge fund has acquired a stake, which Jefferies said should increase debate over asset disposals at the packaged food and consumer goods giant.

Jefferies said Trian's thesis is to unlock value by disposals at Unilever's slow-growing foods businesses, or by a split between the foods and the Home & Personal Care businesses, via a sale or spinoff. "Particularly as Unilever's recent further derating...has widened the potential gap between a holistic and sum-of-the-parts valuation."

Stocks to Watch:

Richemont is well-placed to benefit from a favorable luxury-goods environment as the pandemic eases, Bernstein said, upping full-year forecasts for the Swiss group.

Following consensus-beating results last week, Richemont should now book full-year sales of close to EUR19 billion, implying some 46% organic growth on the year for the mainstay jewelry division, according to Bernstein's forecasts, the brokerage pointing to tailwinds from an end to lockdown in Japan, a better environment in China and the recovery of international travel among U.S. and European consumers.

Higher growth also means better operating leverage, Bernstein said, upping its fiscal 2022 operating-margin estimate to 21% and its target price to CHF160


A tie-up in Italy between Vodafone and Iliad could ease competition in the country but the impact on Telecom Italia would probably be fairly limited, Thomas Coudry at Bryan Garnier said.

Press reports suggest the two telecommunications companies are in talks over merging their Italian operations, but given that retail mobile markets are a minor part of TIM's business, the upside to earnings would be low, Coudry added. The transaction could also face antitrust obstacles, he said.

Nevertheless, a prospective deal between two competitors should entail a higher bid for TIM from private-equity firm KKR. Vodafone and Iliad didn't immediately respond to a request for confirmation of the reports.

Economic Insight:

The eurozone flash composite purchasing managers index registered a second consecutive drop in January to 52.4 from 53.3, due to a deterioration in the services PMI, with the manufacturing PMI rising over the month, Oxford Economics said.

Omicron's impact has been felt primarily in contact-intensive services, with high case rates leading to new restrictions on activity, economist Rory Fennessy said. The rise in the manufacturing PMI offers further reassurance that the region has passed the peak of supply-chain disruptions, but the recovery from now on should only be gradual, Fennessy added.

After a slowdown in growth in the first quarter, Oxford Economics expects economic activity to pick up later in the year.

U.S. Markets:

Stocks were poised to regain some lost ground as investors prepared for the Fed meeting and earnings from big technology companies.

The central bank is set to gather for a two-day meeting Tuesday and at its conclusion on Wednesday, Jerome Powell is expected to signal that rates will likely rise as soon as March.

The central bank is concerned fast-rising consumer prices will become self-reinforcing by feeding into expectations of higher inflation, said Lyn Graham-Taylor, senior rates strategist at Rabobank. "It is talking about tightening aggressively to get on top of that."

Mr. Graham-Taylor said he thinks inflation will fall this year and that the Fed won't raise rates as many times as the market expects, pulling down 10-year government-bond yields.

Earnings season continues, with results due from Halliburton, IBM and Steel Dynamics on Monday, followed by General Electric, Microsoft, Apple and Tesla later in the week. About a fifth of companies on the S&P 500 have filed results, and 82% have beaten analysts' expectations for earnings per share, according to FactSet.

Kohl's shares rose more than 28% in premarket trading following reports the retailer could be fielding takeover offers from two suitors.

The Wall Street Journal reported over the weekend that activist hedge fund Starboard Value was behind a group that made a $9 billion bid for Kohl's.

The bidding group was led by Starboard-backed Acacia Research, which told Kohl's that it was assured by bankers that it could get financing for a bid that values the retailer at $64 a share.


The dollar edged higher in Europe, boosted by the prospect of Fed interest rate rises and safe-haven flows on concerns over Russia-Ukraine tensions.

The Fed's January meeting is set to be the last before it starts lifting rates in March as part of four rate rises this year, Deutsche Bank analysts said. However, there is a "tail risk of an even bigger hawkish surprise over the months ahead, with the possibility that the Fed raises rates in March and then goes onto raise rates six or seven times this year."


Sterling could extend its losses versus the dollar if global equities continue to fall amid widespread risk aversion, MUFG Bank said.

The 30-day correlation between GBP/USD and the MSCI's ACWI index--a global benchmark for equity performance--rose to +0.65 from a recent low of +0.12 on Dec. 10, and compares to an average correlation of +0.5 over the past six months, MUFG currency analyst Lee Hardman said.

"It has been the strongest sustained period of positive correlation between cable and global equity market performance since 2013, and highlights that the pound is vulnerable to further near-term weakness if equity market weakness extends."


The Russian ruble fell to the lowest level since Nov. 2020 on concerns the country will invade Ukraine and trigger U.S. sanctions. One ruble fetched as low as 0.012774 dollars, down from $0.012888.


Italian Election:

Italy's presidential elections, which start Monday, could be a drawn-out process or a really quick one, said Societe Generale. For Italian government bonds, the key is whether Mario Draghi is able to ensure continuity in his reform plan, either as Prime Minister or President.

"A BTP mini rally is more likely than a large sell-off, with unlikely prospects of new parliamentary elections as a result of political wrangling," Societe Generale said.

Edmond de Rothschild Asset Management said the ECB's reduction of asset purchases this year is likely to hit Italian government bond spreads over Bunds, and Mario Draghi staying in his position instead of becoming President is the best scenario to stabilize Italian bond spreads.

"With the ECB planning to taper its asset purchases in 2022, a move that should logically hit Italian bond spreads against the German Bund, we think the only scenario that could stabilise spreads is to keep Mario Draghi as prime minister and elect a pro-Europe president," said Francois Raynaud, fund manager for multiasset & overlay.

Other Bond News:

If the 10-year German Bund yield manages to rise sustainably above the psychologically crucial 0% level, it could give further momentum to the bond bears, said LBBW's senior fixed-income analyst Elmar Voelker.

As an opposite force, geopolitical risks, in particular those related to the Ukraine crisis, could serve as the starting point for a price recovery in Bunds, he added.

"We believe that risk aversion in financial markets will most likely increase considerably in the near term, as will demand for the safety of U.S. Treasuries and Bunds," Voelker said, adding that major exchanges, apart from energy markets, haven't seemed particularly sensitive to these geopolitical risks thus far.


Euro-denominated hybrid corporate bonds, which blend debt- and equity-like characteristics, and risky high-yield debt face market volatility this week as big tech companies start releasing their earnings reports, UniCredit said.

Both types of debt are highly correlated to equities and hence "face volatility risk" as earnings reports from big tech companies start Tuesday, analysts at the bank said. By contrast, euro senior corporate bonds are set to move sideways ahead of the Federal Reserve rate decision on Wednesday.


Oil futures were higher as traders focused on tensions in the Middle East and Eastern Europe that threaten to crimp global energy supplies.

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01-24-22 0602ET

Stocks mentioned in the article
ChangeLast1st jan.
STEEL DYNAMICS, INC. 1.32% 84.65 Delayed Quote.36.38%
US DOLLAR / RUSSIAN ROUBLE (USD/RUB) 0.01% 61.4872 Delayed Quote.-17.93%
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