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EUROPEAN MIDDAY BRIEFING - Stocks Tumble Again in Latest Omicron Seesaw

12/02/2021 | 06:33am EST

MARKET WRAPS

Stocks:

European stocks were deep in the red on Thursday, following a turbulent day on Wall Street, as traders struggle to forecast the impact of the Omicron variant on the global economy and central bank policy decisions.

Investor sentiment continues to seesaw following the latest headlines on Omicron that has prompted waves of travel restrictions and fears of a renewed global surge of Covid-19. The specter of the Federal Reserve speeding up its plans to slow, or taper, its program of monthly asset purchases due to higher inflation, as well as a looming deadline to fund the U.S. federal government, represent other market pressures.

"The bounce of Wednesday's European session is now a distant memory, as the discovery of U.S. cases of the new variant show that the spread of this new enemy has already begun," wrote Chris Beauchamp, Chief Market Analyst at IG.

"Now the issue becomes one of mitigation, and here the policy responses may yet provoke a further short-term hit to equities."

The oil sector managed to buck the downward trend, helped by rising crude prices ahead of decision day for OPEC+.

Shares on the Move:

STMicroelectronics shares traded 4% lower but estimates for next year aren't expected to suffer from news that demand for Apple's iPhone 13 line-up has weakened, Equita Sim said, citing a report from Bloomberg that Apple informed its component suppliers of the slowdown.

Jean-Marc Chery, CEO at the European chip maker, in a recent speech talked about a semiconductor market expected to grow by 10% in 2022 with STMicroelectronics expected to outperform, Equita Sim added. "We do not see major risks for STMicroelectronics 2022 estimates at the moment."

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Shares in Thyssenkrupp traded 0.5% higher after the industrial group set mid-term targets and provided some detail on the restructuring it has been going through. Among other measures, it plans a possible stock market listing of the Ude Chlorine Engineers business and will hold a separate Capital Markets Day on Jan. 13 next year to announce more details.

However, Jefferies said Thyssenkrupp is set to focus on gradual, structural improvement in profitability as well as sustainable and positive free cashflow generation, as expected.

Economic Insight:

The eurozone pushed on with a strong recovery in 2021, but in many ways that has been the easy part, said Oxford Economics' head of Europe economics. "With reopening tailwinds mostly exhausted, the recovery will need to be driven by fundamentals, with a strong consumer and corporate sector stepping up at a time when fiscal policy starts to shift," said Angel Talavera.

The near-term path will be fraught with obstacles given the resurgent Covid-19 risks, supply-chain problems and surging energy prices. However, Oxford Economics still expects another year of robust growth of close to 4% and it envisages a strong disinflation dynamic reasserting in late 2022 after the current price surge.

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Oxford Economics said the U.K.'s economic growth in 2022 should be strong by recent historical standards provided the Omicron variant doesn't result in renewed restrictions.

GDP growth will likely slow from the pandemic economic rebound in 2021, and the recovery will enter a tougher phase as policy support is being withdrawn, said chief U.K. economist Andrew Goodwin. However, both household consumption and corporate investment should support growth in 2022, as deductions encourage firms to spend some of their cash and consumers spend some of their excess savings, Goodwin added.

Inflation fears should calm in the second half of the year as there is little evidence of underlying pressures building and commodity prices should fall back.

U.S. Markets:

Stock futures rose as investors digested the latest headlines on the Omicron variant ahead of fresh data on the labor market.

Commentary from scientists and pharmaceutical executives has helped drive market sentiment, as investors await more concrete data on vaccine efficacy against the variant. On Thursday, investors were focused on comments from the World Health Organization's chief scientist suggesting vaccines were likely to still offer some protection.

"More than anything, people are still dealing with uncertainty about Omicron and how much of a threat it poses," said Salman Baig, a multiasset investment manager at Unigestion. "Some might see this as a buy the dip opportunity. But it wouldn't surprise me if the market action reverses or loses steam later today."

Four Fed officials are due to speak Thursday, as the latest jobless claims report gets released.

Earnings season is ongoing, with food-retailer Kroger and Dollar General scheduled to report Thursday before the opening bell. Cosmetics company Ulta Beauty and gunmaker Smith & Wesson Brands are expected to post earnings after markets close.

Shares of WeWork dropped over 5% in off-hours trading. The office-sharing company said in a securities filing that it would restate several quarters of its results, including its latest one, and that management had concluded there was a material weakness in its internal controls.

Forex:

The dollar inched higher in Europe as concerns about omicron continued to dominate markets, leaving limited effect for now from the prospect of faster monetary tightening by the Federal Reserve.

However, the dollar should strengthen by the beginning of next year as monetary policy takes center stage, said MUFG. "We expect the Fed to continue to tighten policy. It leaves room for rates and the dollar to rise further at the start of next year," said currency analyst Lee Hardman.

Comments this week from Jerome Powell "provided strong guidance" that the pace of asset-purchase tapering would be speeded up, potentially allowing interest rates to rise sooner, Hardman added.

The Turkish lira weakened after President Recep Tayyip Erdogan replaced finance minister Lutfi Elvan following reported clashes over Erdogan's unorthodox view that high interest rates stoke inflation. Erdogan named loyalist Nureddin Nebati as the new finance minister.

The market may interpret the move as "another representative of a stability-orientated policy being dismissed and as an indication that Erdogan is replacing the last critic of his approach," said Commerzbank currency analyst Ulrich Leuchtmann.

"If this view takes hold, it would become even more obvious from the market's point of view that we cannot expect to see a change in a policy that has been weakening the lira so effectively so far."

Bonds:

Uncertainty over the European Central Bank's monetary policy leaves eurozone noncore government bond spreads little leeway to tighten again, said Florian Spaete, senior bond strategist at Generali Investments. "On the contrary, in view of the emerging scaling back of policy support, we consider a further spread widening to be likely."

Uncertainty about the Omicron Covid-19 variant is currently high, which is likely to prevent a sustainable strong upward move in government bond yields, but if the existing or modified vaccines prove effective, the upward trend in yields is likely to continue, Spaete added.

The emergence of Omicron will affect the ECB's Dec. 16 monetary policy meeting, said Martin Wolburg, senior economist at Generali Investments.

The ECB is expected to adjust its inflation outlook to the upside, and it will also continue to make clear that an interest rate rise in 2022 isn't in the cards, Wolburg said. Generali also expects potential for a more dovish stance on post-PEPP QE. "Given increased pandemic risks again, there is a good chance the ECB becomes more dovish on post-PEPP QE than currently thought and announces this in December."

A number of uncertainties make any changes to Italy's rating unlikely when Fitch reviews it on Friday, said Citi, although S&P's move to a positive outlook on Italy in October could put upward pressure on other agencies to catch up.

"With the uncertainty on ECB purchases, recent increase in borrowing costs, Omicron uncertainty and potential political risk on the horizon, Fitch might wait to decide on any upward rating action in our view," said Citi.

Commodities:

Oil held gains of more than 1% as investors awaited signals from OPEC on what policy it will take into its ministerial summit with non-cartel allies.

Previous OPEC+ policy had been to raise production by 400,000 barrels a day in January. Now, with Omicron and recent U.S. Strategic Petroleum Reserve releases, analysts expect no action this month. "The combination of both these forces will be enough to push OPEC+ to pause its monthly output hikes for one month," said MUFG's Ehsan Khoman.

Gold prices weakened around 0.7%, with Jerome Powell's comments on tapering prompting investors to exit gold exchange traded funds.

Gold ETFs tracked by FactSet registered net outflows just shy of $170 million on Wednesday. The outflows came in the wake of Powell's comments that the tapering of stimulus measures could happen faster, opening the door to earlier rate hikes.

DOW JONES NEWSPLUS

EMEA HEADLINES

Glaxo's Covid-19 Antibody Drug Found to Be Effective Against Omicron

A Covid-19 antibody treatment developed by GlaxoSmithKline PLC and Vir Biotechnology Inc. was effective against the Omicron variant in early laboratory studies, the companies said, setting it apart from similar therapies that appear to work less well against the highly mutated strain.

The companies said Thursday that they had tested the drug, called sotrovimab, against certain individual mutations found in Omicron, which has now been detected in at least 24 countries, including the U.S. Glaxo and Vir said the findings were preliminary and they would need to test the treatment against the whole of the mutated spike protein found in the variant to confirm the result. The companies published a preliminary research paper on the findings, which haven't yet been peer reviewed.

Turkey's Erdogan Names Loyalist as Finance Minister Amid Lira Rout

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12-02-21 0632ET

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