MARKET WRAPS
Stocks:
European stocks climbed Thursday for a two-day winning streak, ahead of policy decisions by the European Central Bank and Bank of England, which follow the Federal Reserve's pivot toward higher interest rates.
Stocks rallied when the central bank completed that pivot Wednesday, approving plans to end a program of asset purchases by March and penciling in three rate rises in 2022. Investors said the change of stance-ending months in which the Fed said higher inflation would fade-removed the risk of runaway growth in consumer prices.
"There's a goldilocks interpretation," said Edward Park, chief investment officer at Brooks Macdonald, referring to a situation in which the Fed tames inflation but doesn't push rates high enough to kill the economic recovery.
Mr. Park said stocks are likely to keep rising through to year end. "You have people saying, you know, it's painful being in fixed income or cash."
Like the U.S., the eurozone and the U.K. are experiencing their highest inflation in years. Central banks there are also contending with waves of coronavirus infections that complicate the outlook for consumer prices and economic growth.
The BOE, which will publish its decision at 7 a.m. ET, was until recently expected to raise interest rates Thursday. However, a jump in Covid-19 cases driven by the Omicron variant might encourage the central bank to keep policy on hold, Mr. Park said.
The ECB, meanwhile, is expected to signal that it will continue buying bonds for some time, and that it won't increase interest rates next year. The central bank is due to publish its decision at 7:45 a.m.
The Turkish central bank cut its benchmark rate for the fourth consecutive month even as inflation has surged and the lira has slid to fresh all-time lows, defying warnings that such a move would increase economic instability.
The bank slashed the rate to 14% from 15% on Thursday, continuing an easing cycle that began in September under the orders of President Recep Tayyip Erdogan, but gave no explicit forward guidance on the course it plans to take next year.
Shares on the move: Novartis's planned buyback should be welcomed since it leaves room for M&A activity, analysts at Jefferies said. The Swiss pharmaceutical company is to buy back up to $15 billion in own shares by the end of 2023, using part of the proceeds from the recent sale of its stake in peer Roche.
The cash return to shareholders nevertheless leaves Novartis with cash for bolt-on acquisitions over the same period, Jefferies said, pointing to cardiovascular and oncology players as among the likely targets. The investment bank has a buy rating and a CHF95 target on the stock, which traded 3.5% higher at CHF77.61 following the news.
Boohoo Group's update for 3Q was weak and disappointing, Jefferies said. The London-listed, online fashion retailer's revenue growth of 10% is well below the guided 2H run-rate of 20% and 30%, Jefferies said.
Boohoo's full-year Ebitda guidance has been cut to GBP128 million at the mid-point, the U.S. bank notes, 35% below its estimates. Jefferies has a buy recommendation on the stock and a target price of 430 pence. Shares were down 15% at 117.30 pence.
Current consensus might be too pessimistic on Inditex's 4Q sales performance, Bryan Garnier's Cedric Rossi said after the Spanish fashion company's 3Q update. Current full-year forecasts imply 28% on-year growth in Inditex's final quarter to end-January.
At 2% growth over two years, this would represent a sharp deceleration from the 10% in 3Q and to date this quarter, Rossi noted. While this was achieved with all stores open, it also came amid a more volatile wider market as the Omicron coronavirus variant spreads rapidly, Rossi said. Bryan Garnier raises its estimates for full-year sales to reflect strong current performance.
Sequential acceleration is feasible given easier 4Q comparatives, Rossi said. Inditex climbed 2.2% to EUR28.03.
Data in focus: Data from a purchasing managers survey signal that the eurozone's services sector weakened in December, but GDP growth for the last three months of the year should still be satisfactory, ING's senior economist Bert Colijn said. The data point to rising divergence among countries, with France being more resilient and Germany stagnating, he said.
The question is what will happen in 1Q 2022 as a further increase in virus cases due to the Omicron variant could hit the services sector even more, Colijn said. For the ECB, the PMI data confirm a very complicated outlook for the economy, he said. "Strong recoveries are being dampened by the latest wave of the virus, but the medium-term economic outlook remains relatively benign."
The German economic recovery came to a halt in December due to the resurgence of the pandemic, as renewed restrictions and increased uncertainty dampened activity across the service sector, the latest flash purchasing managers indexes showed. Business activity in the service sector declined for the first time in eight months, while there was support to overall output from an uptick in manufacturing growth, IHS Markit said.
Germany's flash composite PMI fell to 50.0 in December from 52.2 in November, posting its lowest reading in 18 months. "Despite the somewhat gloomy headline number, there were a number of more positive takeaways from December's flash survey, including an uptick in manufacturing growth and resilient business confidence," IHS Markit economics associate director Phil Smith said.
Norges Bank's rate increase shows that it stuck to "Plan A" in the face of Omicron-related uncertainty, and while policymakers acknowledged considerable uncertainty about the pandemic, they clearly intend to continue the tightening cycle in March, said Capital Economics.
The emergence of Omicron means that today's announcement was not as nailed on as it seemed a few weeks ago, but the bank judged it prudent to continue its tightening cycle having made no secret of its desire to raise rates to limit financial stability risks from high levels of household debt and house prices. "We are sticking to our hawkish view that interest rates will be raised back to their pre-virus level (1.50%) by end-2022."
U.S. Markets:
U.S. stock futures pointed to further gains, extending the rise that was seen after the Fed decision.
Analysts said the Fed was, if anything, hawkish in its forecasts for interest-rate hikes in 2022 and 2023 as it increased the pace of the bond purchase taper.
"Based on asset price moves during the meeting and after, fear ahead of the FOMC meeting was probably even more exaggerated than we thought," said Steve Englander, head of global G10 currency research and North America macro strategy at Standard Chartered.
"The initial market reaction does not always stick, but we suspect that both the Fed and investors are satisfied that the Fed is aware of and responding to inflation risks, while taking a measured, data-dependent approach in responding," said Englander.
Mike Kramer of Mott Capital Management attributed the stock-market rise to the decline in volatility. "The rally in stocks was purely driven by the move lower in the VIX as implied volatility levels drop. We see this often these days," he said.
Forex:
The dollar fell despite the Fed signaling three rate increases in 2022 and accelerating tapering of bond purchases so they end in March, suggesting the market was already expecting a lot, Commerzbank said.
"It's not enough for the Fed to announce what the market already expected it to do," strategist Ulrich Leuchtmann said. He concludes that "the dollar can only rise further if the Fed appears even more hawkish than it was expected to be."
Interest rates are unlikely to rise faster than the Fed projected, but if inflation falls faster than expected next year and the Fed continues raising rates, the dollar could appreciate, he said. However, "that will not happen overnight."
The Fed signaled three rate increases in 2022 and accelerated bond-purchase tapering, but the ECB is likely to signal a much slower timeframe for scaling back QE in its decision Thursday.
This ECB-Fed divergence should cause EUR/USD to fall, potentially toward 1.1200, ING said. The ECB is expected to say that its Pandemic Emergency Purchase Programme will end in March, and that it will either increase its existing Asset Purchase Programme or, as ING expects, introduce a third program.
A new program would allow greater flexibility and would be more negative for the euro, it said.
Sterling stayed higher even after a key survey showed growth in manufacturing and services activity slowed in December due to tighter restrictions to contain coronavirus infections.
The IHS Markit/CIPS U.K. services purchasing managers' index fell to a 10-month low of 53.2 in December from 58.5 in November and the manufacturing PMI dropped to a three-month low of 57.6 from 58.1 in November. A level above 50 signals an expansion in sector activity. Economists polled by the WSJ expected a services PMI of 56.0 and a manufacturing PMI of 57.5.
The Norwegian krone rose after the Norges Bank raised its benchmark interest rate by 25 basis points to 0.5%. The rise was in line with many economists' forecasts, although there was some speculation that the emergence of the Omicron coronavirus variant could prompt the Norges Bank to leave rates on hold.
The central bank said Omicron is creating "considerable uncertainty" but its forward guidance is little changed and indicates the policy rate will rise to about 1.75% in the "course of the coming years." It expects to raise the rate again in March.
The Swiss franc edged lower as the Swiss National Bank keeps its policy rate and interest on sight deposits at 0.75%, as expected, and reiterates that the Swiss franc is highly valued. The SNB said it remains willing to intervene in the foreign-exchange market "in order to counter upward pressure on the Swiss franc."
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12-16-21 0632ET
