MARKET WRAPS
Stocks:
European stocks were mixed Tuesday as traders took a breather while waiting for the latest Federal Reserve monetary policy decision.
The Fed's two-day policy meeting will be a key focus of investors this week who have grown increasingly concerned that a period of rising prices could last longer and weigh more on the economy than central bank officials have suggested. Major central banks elsewhere in the world, concerned about stubbornly high inflation, have been moving forward plans to raise rates.
"Virtually every policy taken has been inflationary in nature and the market has been very blasé about it all," said Tim Courtney, chief investment officer at Exencial Wealth Advisors. "The market will disagree, but I think the biggest risk is that the Fed doesn't move fast enough" in raising rates, he said.
Economists expected the Fed on Wednesday to begin winding down its asset-buying program but leave interest rates unchanged. Officials are unlikely to suggest any major changes to their pathway for interest-rate increases, said Mr. Courtney.
While inflation concerns have dragged on investor sentiment, strong earnings for the third quarter have had the opposite effect and helped lift indexes to their record levels. Strong earnings were particularly important to justify a run-up in company valuations, said Mr. Courtney.
"The market had run up so much from the bottom but we had no earnings to show for it. The earnings had to come in to back fill those price moves, " he said.
Shares on the move:
Fresenius shares traded higher after 3Q results were a touch ahead of expectations, Jefferies analysts said.
The German healthcare company improved its 2021 sales guidance--to mid-single-digit growth from low- to mid-single-digit growth previously. Given that the Fresenius Medical Care business said it expects results to come in at the low end of its guidance, Jefferies analysts wonder how much of the parent company's guidance upgrade comes from underlying improvements versus cost savings.
The company backed its savings target of EUR100 million after tax and minorities in 2023, though it will have to book significant costs first in order to achieve them, Jefferies said. Shares in Fresenius rose 4.6%.
HelloFresh's third revenue guidance upgrade for the year sends a positive signal ahead of the German meal-kit maker's capital-markets day later this year, Bryan Garnier said.
HelloFresh now targets 2021 revenue growth at constant currency between 57% and 62%, implying a 2% estimates upgrade, Bryan Garnier said.
"The extent of the guidance upgrade looks quite limited at 2%, but the message sent is positive and bodes well for the CMD in early December. With HelloFresh's share price recently falling from circa EUR80/share to circa EUR70/share, we believe it is a clear buy opportunity," Bryan Garnier said. HelloFresh shares traded 14% higher.
Data in focus:
The eurozone manufacturing sector lost further momentum in October, as supply-side issues interrupted production schedules and dented order books, causing growth of both metrics to slow, the latest purchasing managers index data showed. The eurozone manufacturing PMI fell to 58.3 in October from 58.6 in September.
"Eurozone manufacturers reported a worsening of the supply chain situation in October, which curbed production growth sharply during the month," IHS Markit's chief business economist Chris Williamson said. Read what the analysts are saying here .
Bank of America has upwardly revised its eurozone GDP growth forecasts to 5.1% in 2021, up 30 basis points, while it has cut the forecast for 2022 to 3.6%, down 10 basis points. Higher energy inflation and weakness in foreign demand made the bank cut the forecasts for the fourth quarter of 2021 and 1Q 2022 to 0.7% and 0.6%, respectively.
"While the recovery should remain strong, its pace will likely slow quite abruptly now that mechanical reopening is complete," economists at Bank of America said.
The eurozone is expected to reach the pre-crisis GDP level by year-end, Bank of America said. For 2023, the American bank expects 2.0% GDP growth, up 10 basis points.
Supply bottlenecks remained a major hindrance to Germany's manufacturers at the start of the fourth quarter, latest purchasing managers index data showed. Germany's manufacturing PMI fell to 57.8 in October from 58.4 in September.
Material shortages were a restraining factor for both output and new orders, while at the same time they underpinned a record increase in factory gate charges as firms looked to pass on sharply rising costs to customers, IHS Markit said.
"Manufacturers lost further confidence that these issues will be resolved sooner rather than later, with business expectations now at their lowest since August 2020," IHS Markit's associate economics director Phil Smith said.
U.S. Markets:
Stock futures paused after all three major indexes closed at record highs, as the Federal Reserve was set to begin its two-day policy meeting against a backdrop of sharpening inflation concerns.
Pfizer, KKR and Apollo Global Management are among the companies set to report earnings ahead of the opening bell. T-Mobile US, Mondelez International and Lyft will release earnings after markets close.
Tesla will be in the spotlight as CEO Elon Musk questioned whether a rally for the electric vehicle maker was driven by an announcement that Hertz would buy 100,000 cars, an order Musk pointed out has not been signed.
Forex:
The dollar is expected to stay stuck in a tight range ahead of a Federal Reserve policy announcement due Wednesday, said UniCredit.
"The return of interest in the USD that emerged abruptly on Friday--with investors looking at the Fed meeting for more information about the first rate hike, while the kick-off of the tapering program is taken for granted at this point--was partially reversed yesterday," it said.
With the Fed's meeting starting on Tuesday, major currencies are likely to be "stuck within tight trading ranges and in 'wait-and-see' mode" after the recent heavy swings, with the DXY dollar index struggling close to 94, the Italian bank said.
The pound could weaken after the Bank of England's policy decision on Thursday as there is a high bar for the central bank to exceed the market's expectations for interest rate rises, MUFG Bank said.
"The BOE would either have to outline plans for more front loaded tightening to keep inflation expectations in check and/or provide a stronger signal that rates could raise much further beyond 1.00% in the coming years," MUFG currency analyst Lee Hardman said.
Interest rate expectations have gone "too far" with the overnight index swap forward market implying 45 basis points of rate rises at the next two meetings and 60bps beyond February, he said.
Bonds:
NatWest Markets expects the FOMC to announce tapering of its asset purchases at this week's meeting, with tapering beginning later this month, it said.
NatWest Markets looks for a reduction of $15 billion of the monthly asset purchases, including $10 billion in Treasurys and $5 billion in agency mortgage-backed securities, with the taper concluding in the middle of 2022, it says ahead of the coming Fed meeting.
Fed Chair Jerome Powell is likely to emphasize how tapering allows the Fed flexibility in responding if the economy evolves in a way that deviates from the committee's outlook, NatWest Markets said, which expects the market to take the reduction in asset purchases in stride.
Climbing two-year U.S. Treasury yields in the past month reflect investors' worry that the pace of interest rate rises necessary to mitigate inflation might have to come at a swifter pace than the Fed's current guidance, Morgan Stanley Wealth Management said.
The two-year UST yield almost doubled to over 0.50% in the past month, the highest level since March 2020, it says. Another sign of the market's weakening faith in the Fed's inflation stance is the flattening of the two-year/10-year yield curve, which indicates skepticism about economic growth prospects, it said.
"This is where we think bond investor pessimism is excessive," Morgan Stanley Wealth Management said.
Eurozone government bond yields fell, reversing some of the recent selloff which might have been excessive. The rise in eurozone government bond yields is exaggerated, DZ Bank said, expecting the recent selloff on the bond market unlikely to continue.
"Although the European Central Bank will probably buy significantly fewer bonds in 2022 than in 2021, we do not expect 10-year Bund yields to rise significantly on a twelve-month horizon," DZ Bank analyst Birgit Henseler said.
DZ Bank expects inflation and monetary policy to be the primary drivers of Bund performance in the weeks ahead.
Commerzbank sees the market's focus increasingly shifting to yield spreads in eurozone government bond markets after the repricing in rates and bond yield curves looks very advanced, said Christoph Rieger, head of rates and credit research at the German bank.
Eurozone government bond yields drop and yield spreads tighten early Tuesday, led by the periphery which was sold off heavily in recent days. Rieger points to Italy, whose government bonds were hardest hit in the recent selloff, saying that the 30-year BTP-Bund spread was close to 180 basis points, the widest level in a year and with yields approaching 2%.
Tuesday morning's strengthening, however, sees the 30-year BTP-Bund spread near 7 basis points narrower at just below 173 basis points, according to Tradeweb.
Commodities:
Oil prices rose with it seeming increasingly likely that OPEC+ will stick to its output policy at Thursday's OPEC+ meeting--raising production by 400,000 barrels a day--"despite mounting pressure from the world's biggest oil consumers," DNB Markets' Helge Andre Martinsen said.
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11-02-21 0714ET
