MARKET WRAPS
Stocks:
European stocks were mixed Wednesday as global inflation concerns remain.
The FTSE 100 fell in London, underperforming other European indexes after U.K. consumer-price index data showed year-over-year inflation at 4.2%-above both expectations and the Bank of England's target.
The high inflation print raised the prospect of an interest-rate increase soon, strengthening the pound and hitting shares in U.K. multinationals that do business in foreign currencies.
Inflation concerns remain front and center, though better-than-expected U.S. retail sales figures Thursday provided a break from inflationary fears as investors cheered signs of a strong economy and the resilience of the U.S. consumer.
"Central banks are heavily in focus on Wednesday as we get a bunch of inflation data from across the globe and hear from a number of policy makers whose views on the trend will set the tone for the markets," said Craig Erlam, an analyst at broker Oanda.
"Stock markets have been struggling to build on a strong earnings season recently as inflation and interest rates have topped the list of investors concerns over the coming months. Given how long that list has become and the other risks on it, that's saying something," Erlam added.
Shares on the move: South European banks stand to benefit from a potential loosening of fiscal policy next year, Jefferies analysts said. Although the European Central Bank should keep a dovish policy stance at its meeting next month, the debate around inflation and interest rates will likely persist into 2022, the U.S. bank said.
The market is focused on the downside for banks if the ECB doesn't extend its targeted longer-term refinancing operations program, Jefferies said, noting that the measure contributes about 10% to South European banks' domestic profit.
However, Jefferies thinks such a move toward policy normalization would improve sentiment, and calculates that a 25 basis-point increase to the Euribor rate could boost banks' domestic profits by about 15%. Jefferies likes BBVA and UniCredit best among southern Europe's bank stocks.
U.K. enterprise software group Sage jumped in London despite posting a 10% drop in operating profit as its cloud business squeezed margins. But the company said its cloud business had grown 19% so far this year.
Siemens Healthineers surged 5.6% in Frankfurt, after the health-technology company set upbeat revenue and earnings targets for fiscal years 2023 to 2025. The company expects revenue growth of 6% to 8% annually.
Data in focus: The big upside surprise in October's U.K. consumer prices data highlights the uncertainties as well as significant upside risks to the inflation outlook, Berenberg's senior economist Kallum Pickering said.
Increasing producer prices due to supply-chain bottlenecks and rising energy costs haven't yet fully passed through into consumer prices, while surveys and high-frequency data suggest that global supply pressures won't abate soon, he said.
"Following persistent upside surprises in inflation data over the course of 2021 so far, the peak and length of the current inflation spike remains highly uncertain," Pickering said.
Berenberg expects U.K. annual inflation rates to peak above 5% early next year before easing at around 2.5%-3.0% by the end of the year and through 2023.
The Bank of England is unlikely to ignore the rise in U.K.'s inflation rate to 4.2% on year in October from 3.1% in September, Capital Economics' chief U.K. economist Paul Dales said.
"When coupled with yesterday's [Tuesday] decent labor-market release, the bigger-than-expected leap in CPI inflation in October makes an interest-rate hike in December even more likely," he said.
The BoE is likely to raise rates to 0.25% from 0.1% in December, and then to 0.5% perhaps in February, Dales said. CPI inflation is expected to fall back sharply to around 2.2% by the end of 2022, so it is unlikely that rates are raised above 0.5% next year, he said.
U.S. Markets:
Stock futures were muted ahead of earnings from retailers Lowe's, Target and TJX ahead of the opening bell.
A strong earnings season has propelled stocks to fresh highs in recent weeks, offsetting investors' concerns that supply-chain issues and higher-than-anticipated inflation would weigh on profits. Cisco Systems, Bath & Body Works and Nvidia are slated to release earnings after the market closes. Low returns on government bonds have also driven investors to buy stocks.
"Equities are incrementally earning significantly more than bonds," said Edward Park, chief investment officer at U.K. investment firm Brooks Macdonald. "There is still a fear of missing out in markets at the moment driven by that relative valuation."
Shares of Tesla rose 1.4% in premarket trading. Chief executive Elon Musk sold another 934,000 shares Tuesday for roughly $973 million, continuing a recent selling spree, forms filed with the Securities and Exchange Commission showed.
La-Z-Boy shares gained 3.9% premarket after the furniture maker said its fiscal second-quarter sales hit a record high, with the company able to increase its capacity to meet heightened demand.
Home builders have been caught between strong demand for housing, and rising material costs and supply and labor shortages. That has left new-home construction data choppy in recent months, though economists surveyed by The Wall Street Journal are forecasting a slight pickup in housing starts for October when figures are released at 8:30 a.m. ET.
Forex:
The euro's brief drop below the key $1.13 level earlier was driven by a strong dollar but a surge in European gas prices didn't help either, ING said.
"Negative terms of trade effects from higher energy prices are depressing the fair value of the EUR," ING analysts say. European gas prices jumped after a German court delayed the certification of the Nord Stream 2 gas pipeline on Tuesday.
The dollar extended its rise against the low-yielding euro after stronger-than-expected U.S. retail sales data Tuesday, which pushed EUR/USD to a 16-month low of 1.1264 overnight, according to FactSet, while the DXY dollar index hit a 16-month high of 96.2410.
MUFG global markets analyst Derek Halpenny said the data "will inevitably reinforce the positive momentum for the U.S. dollar over the short term." MUFG sees scope for the market to fully price in three U.S. interest-rate increases in 2022, allowing the dollar to advance further.
However, the speed of EUR/USD declines in recent days suggests some consolidation "may be imminent," Halpenny said.
The pound rose to its strongest against the euro since February 2020 after data showed U.K. annual CPI inflation accelerated to 4.2% in October, from 3.1% in September and above the consensus forecast in a WSJ poll of 4.0%.
The data points to persistent inflationary pressures and supports the case for the Bank of England to raise interest rates in December, said Sam Cooper, vice president of market risk solutions at Silicon Valley Bank.
"Sterling has welcomed the release," he said, but notes "a degree of caution" after the BOE unexpectedly left rates unchanged in November.
Bitcoin's dollar value edged down 1.9% from its 5 p.m. ET level Tuesday to $59,435.94 Wednesday. The move adds to a recent decline as the cryptocurrency has come off record highs.
The Turkish lira hit a fresh record low against the dollar on worries about higher energy prices and expectations for another interest rate cut by Turkey's central bank on Thursday, ING said.
The Central Bank of Turkey (CBT) could deliver a 100 basis points rate cut on Thursday as it focuses on economic growth over inflation, ING analysts said.
"The CBT's move is at odds with the rest of the central bank community who are trying to rein in negative real rates to prevent current high inflation from becoming embedded in inflation expectations."
Bitcoin's dollar value edged down 1.9% from its 5 p.m. ET level Tuesday to $59,435.94 Wednesday. The move adds to a recent decline as the cryptocurrency has come off record highs.
Bonds:
BNP Paribas Asset Management closed its short position in eurozone sovereign debt because yields rose near to their target, it said. The asset manager, however, remains short in U.S. government debt which it sees as a funding leg for their equity exposure, it said.
Being underweight duration is a strategic position in government bonds given the favourable economic outlook, the current low level of yields and the prospects of a normalization of monetary policies, "even if only gradually and cautiously," it said. Duration is a measure of the sensitivity of a bond to changes in interest rates.
Ten-year German Bund yields could trend upward in the next three months, boosted by the gradual reduction of the pandemic-related support programs, DZ Bank analyst Birgit Henseler said.
"The gradual slowing of the European Central Bank's pandemic asset purchases will in our view drive up longer-term yields moderately in the spring," she said.
DZ Bank forecasts the 10-year Bund yield to rise to -0.10% on a three-month time horizon and 0% on a 12-month horizon.
Commodities:
Oil prices weakened following reports that the U.S. asked China to release oil stockpiles and API data showed a rise in inventories.
Prices were edging lower after reports that President Biden asked China to release oil from inventories to help stabilize the oil market. President Biden is reported to have made the request at a virtual meeting with China's President Xi Jinping on Tuesday.
The U.S. itself has been considering whether to tap supplies from its Strategic Petroleum Reserve. Meanwhile, the American Petroleum Institute said Tuesday that U.S. oil inventories rose by 700,000 barrels.
Gold prices rose as investors look to the precious metal as an inflation hedge. Gold is rising in spite of a higher dollar. But the prospect of central banks raising interest rates is a risk for the metal, said TD Securities.
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11-17-21 0627ET
