EUROPEAN MIDDAY BRIEFING - Stocks Rise as Euro Falls, FTSE Treads Water

November 16, 2021 at 06:38 am EST

MARKET WRAPS

Stocks:

European stocks mostly rose as the euro fell against the dollar, though the FTSE 100 was flat as sterling got a boost from speculation about higher U.K. interest rates.

"A lack of really heavyweight news for the week so far has thrown the spotlight back on the central bank and inflation outlook, with some trimming of earnings forecasts going on as everyone attempts to peer ahead into 2022," IG analyst Chris Beauchamp said]'.

"Euro weakness continues to provide fuel for gains in European indices, which have outpaced the U.K. market this morning," Beauchamp said.

Shares on the move: Shares in Vodafone Group top the FTSE 100 risers, up 5% after the mobile-phone operator reported lower first-half pretax profit, but raised its full-year guidance. ING described the results as strong and above expectations, with good revenue and earnings progress.

"Note that revenues are still declining in Italy and Spain, where market conditions are tough," ING analysts said. "Although cash flow from operations is up by 7.4% compared to 1H21, leverage and cash flow figures for the first half are a bit disappointing."

Deutsche Telekom is enjoying strong commercial and financial momentum as shown by its third guidance upgrade this year and a dividend increase, but the German telecommunications company's stock is increasingly affected by its U.S. exposure through T-Mobile US, Citi said.

"Given Deutsche Telekom's ever higher exposure to the U.S., its share price is increasingly driven by what is happening in the U.S., where the picture is more complicated." Citi said.

Deutsche Telekom in September struck a deal with Japan's SoftBank to increase its stake in T-Mobile US to 48.4%.

U.S. Markets:

Stocks were poised for muted opening moves as investors awaited data that will show how consumers, a key driver of the economy, are responding to higher inflation.

Markets have lost the momentum that propelled stocks to a series of records earlier in the fall. Investors are preparing for the Federal Reserve to raise interest rates by next summer to check the pace of consumer-price growth, which is running at a three-decade high. Higher rates could knock stocks and other riskier assets that have benefited from 18 months of stimulus from the central bank.

"We're moving towards a period now of maybe a bit more volatility," said Frank Øland Winther, global chief strategist at Danske Bank, pointing to Covid-19 cases in Europe, trouble in China's property sector and inflation in the U.S. as potential challenges for the market. "The returns we have seen this year so far just cannot continue."

Another concern for money managers is that inflation will cool the economy of its own accord by acting as a brake on consumers. A bevvy of reports due Tuesday will help investors assess whether Americans stepped up spending again this fall or pulled back.

Walmart and Home Depot are scheduled to file earnings for the third quarter before the opening bell.

Then, at 8:30 a.m. ET, data are expected to show retail sales rose in October, boosted in part by a rebound in auto sales.

"Of course, with this elevated inflation, we see an impact on people's purchasing power," said Mr. Winther. Danske is considering trimming its holdings of U.S. stocks and shifting some of the money into investment-grade corporate bonds, he said.

Forex:

Mounting concern over the pickup in Covid-19 cases in Europe has been weighing on many of the region's currencies, MUFG Bank said.

"The fear that the situation could escalate and result in a more significant tightening of restrictions in the coming months is hurting sentiment towards European currencies," MUFG's Lee Hardman says.

The worst-performing G-10 European currencies over the past week are the Swedish krona, Norwegian krone and the euro, while emerging-market currencies including the Hungarian forint and the Polish zloty have also underperformed, he said.

The developments support MUFG's recommendation to sell EUR/USD, targeting 1.1300 with a stop loss of 1.1850, he said.

ING expects the dollar to rise further against low-yielding currencies such as the euro, but said its models show the U.S. currency is expensive versus the Canadian dollar, Norwegian krone and Australian dollar, all commodity-linked currencies.

"A potential U.S. intervention in the oil market to ease energy costs continue to pose downside risks for crude prices, although commodity currencies remain quite shielded thanks to their positive correlation with the steepening of the U.S. yield curve," ING said.

The dollar rose to a 16-month high late Monday but its rally "isn't overdone," said ING. Investors are buying dollars as they anticipate faster monetary-policy tightening by the Federal Reserve after last week's strong U.S. inflation figures.

These expectations were boosted by Monday's above-forecast New York Empire manufacturing index, ING said. "We see little reason for the Fed narrative to turn any less supportive for now," it said, adding that U.S. retail sales data at 1330 GMT are also likely to be strong.

The pound rose after data showed U.K. unemployment falling to 4.3% in the three months to September, alongside still-high wage growth, supporting the case for the Bank of England to raise interest rates in December, said ING.

The figures suggest the end of the government's wage-subsidy, or furlough, program didn't push up joblessness. Fears of a slowdown in the jobs market were a major factor in the BOE leaving rates on hold, ING said.

"Given the lack of evidence of a slowdown in today's strong jobs data, the case for a December 15 basis-point hike is now stronger."

In one sign that riskier assets are losing momentum, cryptocurrencies retreated. Bitcoin fell 5.4% to $60,405.99 and ether lost 6.4% to trade at $4,278.78.

Bonds:

The European Central Bank could keep its current -0.50% deposit rate until around 2025 and interpret above-target inflation as "transient" even if it lasts for well over a year, said Jack Allen-Reynolds, senior European economist at Capital Economics.

He expects the ECB to leave its policy very loose longer than the market currently anticipates. The Pandemic Emergency Purchase Programme will end in March, but the ECB is likely to increase the Asset Purchase Programme to EUR40 billion per month from EUR20 billion, he said.

The ECB could reduce the APP in 2023 "partly because we expect eurozone governments' budget deficits and net bond issuance to decline, meaning that a slower pace of QE should be sufficient to keep monetary policy conditions accommodative."

Five-year U.S. Treasury yields already largely reflect expectations for interest-rate increases and therefore offer good value, said Craig Inches, head of rates and cash at Royal London Asset Management.

The current level of around 1.20% broadly matches the level that RLAM expects on a one-year horizon, he said.

"The front end of the U.S. curve looks relatively fairly valued as five-year UST yields have already priced in a fair amount of interest rate hike expectations," he told Dow Jones Newswires in an interview.

In contrast, RLAM expects long-end yields to drift higher with the 30-year yield moving towards 2%-2.25%, close to the terminal rate.

Inflation is expected to remain at elevated levels in the next few months before starting to ease around the second half of 2022, Craig Inches, head of rates and cash at Royal London Asset Management, told Dow Jones Newswires. "Our view is still firmly that inflation is transitory," he said.

This will mean central banks will be cautious in raising interest rates, he said. RLAM expects the Bank of England to start raising the bank rate in February 2022, while the Federal Reserve will raise rates in the fourth quarter of 2022, well after the expected end of tapering around mid-2022, Inches said.

The ECB's first deposit rate rise won't take place before late 2023, he said.

The ECB could keep its current -0.50% deposit rate until around 2025 and interpret above-target inflation as "transient" even if it lasts for well over a year, said Jack Allen-Reynolds, senior European economist at Capital Economics.

He expects the ECB to leave its policy very loose longer than the market currently anticipates.

The Pandemic Emergency Purchase Programme will end in March, but the ECB is likely to increase the Asset Purchase Programme to EUR40 billion per month from EUR20 billion, he said.

U.K. borrowing costs rose after official data showed unemployment in the country fell to 4.3% in the three months to September, from 4.5% in the previous three-month period. Both levels mark their highest points since the Bank of England's last policy decision onNov. 4 and RBC Capital Markets says the data could pave the way for a rate increase in December.

"Today's release, especially if combined with non-official data, removes a large degree of uncertainty around the impact of the ending of the furlough scheme," said RBC European economist Cathal Kennedy.

Commodities:

Oil prices softened in early European trade. The IEA says growing crude supply could ease the pressure from resurgent economic activity and the gas crisis, forecasting a supply increase of 1.5 million barrels a day in November and December.

That will loosen a market in which demand is balanced between resurgent economic activity and a gas crisis on the one hand, and rising oil prices and new European Covid-19 cases on the other, the report added.

European benchmark gas prices were up 5%. DNB Markets noted that "surprisingly, it seems Russian gas supply to Europe might decline moving into December."

Copper edged lower as the dollar rallies to its highest level in around 16 months. The red metal is unlikely to recapture the highs it hit earlier this year, said Capital Economics.

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11-16-21 0637ET