MARKET WRAPS
Stocks:
European stocks climbed Tuesday for a two-session winning streak as investors regained some confidence after a period of uncertainty.
The Stoxx Europe 600 added 1% in morning trade, with financials and consumer discretionary sectors leading the gains.
"Yesterday's strong session in the U.S. and most of Europe has helped to put markets on a more secure footing," IG analysts said.
"With the FOMC meeting out of the way and six weeks until the next one, investors have been able to recover some optimism. U.S. earnings season is still in full flow, but the declines have driven prices and valuations back down to a level that allows buyers at least to consider jumping back in."
Stocks on the Move:
HeidelbergCement stock rose 4% after it released fourth-quarter preliminary earnings late Monday which were ahead of consensus and the company's expectations, said Davy Research.
The cement maker said it expects Ebitda at EUR979 million, about 5% above consensus estimates, while the expected fourth-quarter result from current operations was roughly 19% above consensus, Davy said.
However, "while ahead of market estimates, EBITDA margins still declined roughly 100bps [basis points] year-on-year in the quarter as the group struggled to recover higher input costs," Davy said.
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Shares in UBS advanced more than 6% after the bank said profit growth from managing money for the rich is giving it firepower to return more money to shareholders and take on competitors in digital wealth advice.
The Swiss bank raised some financial targets and said it is aiming to buy back up to $5 billion in shares this year, after spending $2.6 billion on buybacks in 2021. Analysts at Citi said the buyback had been expected to be much smaller.
Stocks to Watch:
Technip Energies is well-placed to cash in from growth in liquefied natural gas and decarbonization, said Jefferies, starting coverage of the stock with a buy rating and a EUR18 target price.
The Paris-listed energy company, which was spun off from TechnipFMC last year, has leading capabilities in LNG, with plenty of potential projects ahead, said Jefferies, pointing to gas as a key emissions-reducing source until green hydrogen becomes more scalable.
Technip Energies is meanwhile growing its decarbonization offering, including in blue hydrogen and carbon capture, though revenue from these markets may not be material until next year at the earliest, Jefferies noted.
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Ubisoft Entertainment is likely to consider a bid if it came at a reasonable premium, Citi said, noting there's no reason to assume the videogames maker might not be a target given the recent M&A boom in the industry. Citi cited data suggesting that the total value of deals done in the sector in Jan. 2022 alone is more than for the whole of 2021.
"We have no evidence that there is direct interest in Ubisoft at this stage, but we believe there is no prima facie reason why it might not be a target," Citi said, noting that Ubisoft has both scale and an attractive content library.
Economic Insight:
The European Central Bank is unwilling to tighten financing conditions and will be willing to wait for further evidence on inflation before starting to remove the continuing accommodation as abruptly as the market is pricing in, said Annalisa Piazza, fixed-income research analyst at MFS Investment Management.
"Such a baseline scenario for policy rates is consistent with our view that the short end of the EMU [eurozone] curves will remain well anchored in the current environment of rising global yields."
MFS IM sticks to the view that the ECB's slow interest rate rising cycle won't start before 2Q-3Q 2023, and expects the tone of the February policy announcement not to diverge much from that in December.
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The ECB will have to differentiate itself from the Federal Reserve at its meeting on Thursday and explain its reasons for patience, said Agnes Belaisch, chief strategist for Europe at Barings Investment Institute.
Last week, the Fed tried to announce the start of policy tightening without committing to a rate path afterward, but that optionality didn't work, and market participants priced in even more policy rate rises than before, she said.
"Having declared the time to act had arrived, they also priced in an ECB rate hike by the start of 2023, at odds with ECB forward guidance."
Economic Data:
IHS Markit's purchasing managers index data showed the eurozone manufacturing sector regaining some momentum at the beginning of 2022, with production, new orders and employment all registering faster increases. The eurozone manufacturing PMI rose to 58.7 in January up from 58.0 in December, reaching its highest level since August.
"Prospects have also brightened, with a further easing in the number of supply chain delays playing a key role in prompting producers to revise up their expectations for growth in the coming year," said IHS Markit's chief business economist Chris Williamson.
The rate of input-price inflation eased to its weakest in nine months, but prices charged for goods leaving the factory rose at the second-highest rate in almost two decades.
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France's headline inflation climbed further at the start of the year, primarily due to higher energy prices, said Pantheon Macroeconomics.
Inflation in France rose to 2.9% in January against the consensus forecast of 2.4%. A further increase in energy inflation, to 19.7% from 18.5% in December, offset a fall in manufactured goods inflation by 0.6 percentage point to 0.6%, said Pantheon's chief eurozone economist Claus Vistesen.
Services inflation, however, rose further, to 2% from 1.8% in December. Inflation in food also advanced and rose to 1.5% on year due to a further increase in fresh-food prices.
"Overall, these data show that inflation pressures in the eurozone's second-largest economy remained elevated at the start of the year," Vistesen said.
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Growth in Italy's manufacturing sector cooled to an eleven-month low in January on Omicron-related disruptions, the latest purchasing managers survey data showed. The IHS Markit manufacturing PMI came in at 58.3, signaling strong growth, but below the 62.0 registered in December.
"There were signs that the Omicron variant had hindered the sector in January as output growth cooled to the slowest for a year and gains to demand softened, with firms reporting that labour shortages, and supply delays linked to Covid-19 had weighed on production," said IHS Markit economist Lewis Cooper.
Regarding prices and supply chains, the rate of cost inflation slowed to the weakest since last March and delivery delays were the least widespread for five months, the report said.
U.S. Markets:
Stock futures and Treasury yields edged lower, as investors awaited manufacturing data and earnings from big-name companies including Exxon Mobil and Alphabet.
Investors are hoping that the broad turbulent trading seen in January -- the S&P 500's worst month since March 2020 -- is behind them. Markets slumped, led by technology stocks, as investors worried that the Federal Reserve was getting set to tighten policy just as economic growth was slowing.
The market's losses have halted this week, while investors continue to assess the economic outlook.
"The chips do seem to be lining up for a bit of a rebound," said Seema Shah, chief strategist at Principal Global Investors. "The market got ahead of itself with expectations of an economic slowdown. When we look at the economic data there is very little to suggest that we will see anything other than a slight softening."
Forex:
Expectations that the ECB could turn more "hawkish" by signalling monetary policy tightening at Thursday's meeting is supporting the euro but this recovery may not last, said Unicredit.
"These EUR/USD recovery attempts could quickly fade and reverse if Christine Lagarde reiterates that a rate hike is unlikely to be delivered by the ECB this year, as we expect," Unicredit said.
EUR/USD may trade in a range above 1.12 Tuesday as a light agenda for economic data fails to offer the market clear direction, it said.
The dollar was down 0.2% against a basked of currencies but ING said it may stabilize as investors speculate over the size and pace of monetary policy tightening by the Fed.
"We think the dollar may already start stabilising today, even if another good day for risk assets may keep pro-cyclical currencies supported--which incidentally took the biggest hit last week," said ING's Francesco Pesole.
He said speculation the Fed could deliver five interest rate rises in 2022 including a 50 basis-point increase in March, should support the dollar.
Bonds:
Even if the political backdrop remains relatively benign in the eurozone this year, Capital Economics still expects peripheral government-bond yield spreads to rise a bit more.
This is mainly because the ECB is expected to withdraw support for the bond market by ending its net government bond purchases in December, before starting to raise rates in March 2023, said markets economist Franziska Palmas.
Given this backdrop, CE forecasts the 10-year Italian BTP-German Bund yield spread to widen to 175 basis points by the end of 2023.
Sovereign bonds lost ground across the board in January, with Treasurys underperforming their European counterparts and Italian BTPs a relative outperformer, said Deutsche Bank. Treasurys lost 1.9% last month, compared with a 1.1% loss for German Bunds and a 1.2% decline in French OATs.
"It was the worst monthly performance for Treasurys since February 2021," said Deutsche Bank. Italian BTPs lost 0.6%, and were thus a relative outperformer.
Deutsche Bank attributes the relatively good performance of BTPs to easing concerns over political risk, given the re-appointment of President Sergio Mattarella, which enabled Prime Minister Mario Draghi to continue in office.
Commodities:
Oil prices weakened in Europe as investors awaited the latest API data and an OPEC+ meeting for clues about supply.
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02-01-22 0607ET
