MARKET WRAPS
Stocks:
European shares extended gains Tuesday, as investors continued to reflect on broad optimism that the global economy can weather omicron.
"Despite continually rising cases of Omicron, there is a growing belief that the variant is less deadly if more transmissible, particularly when coming up against the wall of triple-jabbed individuals," said Interactive Investor analyst Richard Hunter.
"Further solace was taken from the decision of the Food and Drug Administration to authorise the Pfizer/BioNTech booster shot for 12 to 15 year olds." That means the variant could prove less damaging to the global economic recovery than previously feared, Hunter said.
The first week of the year will bring the release of the minutes from the last Federal Open Market Committee meeting. Investors will focus closely on the minutes to gauge the Federal Reserve's plans to raise interest rates to cool the rapid rise of inflation. Many analysts predict the central bank could raise rates as soon as March.
Stocks to watch:
Equita has started its coverage of Ariston at buy with a target price of EUR12.4 and said the Italian heating-systems maker has posted solid performances in recent years with rising sales, and current market conditions bode well for its future earnings.
Ariston "has the credentials to keep growing, also thanks to the acceleration of the underlying markets that will continue to benefit from the increasing push for renewable and high efficiency solutions." From 2018 to 2021, organic sales rose at a compound annual growth rate of roughly 5% and should grow by 7% in average between 2021 and 2024, Equita has forecast.
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Jefferies said Delivery Hero's move to take a controlling stake in Spain's Glovo has placed it in the driving seat of sector consolidation in the food-delivery industry. The German company signed an agreement, unveiled in the final hours of 2021, equivalent to a further 39.4% stake in Glovo, now valued at around EUR2.3 billion, giving Delivery Hero around 83%.
While the target was not a surprise, the sense of urgency is, Jefferies said, adding that it suggests that the endgame of sector consolidation has firmly started. A 'fear of missing out' was visible when DH admitted it was chastened by Wolt's acquisition by DoorDash. Jefferies has kept its buy rating on the stock and EUR180 target price.
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Equita has started coverage of Iveco with a buy rating and a EUR18 target price and said the shares look cheap, after the truck maker listed in Milan following its spin off from CNH Industrial.
The company looks well-positioned to meet mid-term goals, even if it remains cautious over the short term given component shortages, cost inflation and the global pandemic, Equita said. Iveco is smaller, less profitable and less geographically diversified than some rivals, which could mean M&A deals ahead. Current multiples look very cheap following the listing, Equita said.
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Jefferies has raised its target price on Pernod Ricard to EUR235 from EUR230 and kept a buy rating on the stock. It said that despite Omicron, the drinks group's markets remain significantly more open than they did a year ago, forecasting good momentum for the second quarter.
Jefferies added that as long as pandemic-related restrictions don't materially increase, Pernod Ricard has scope for good top-line momentum in its first-half results, due Feb. 10, and this should mean a boost to operating income given a favorable channel mix and good operating leverage.
U.S. Markets:
Stock futures were rising Tuesday, with the Dow and S&P 500 on track to open at record highs, as the momentum that saw equities rally into the New Year continued.
"You would be hard pushed to find a reason not to be in a jubilant mood as an investor as financial markets dished out the Happy New Year," said Jeffrey Halley, an analyst at broker Oanda. "All signs that the U.S. economy is starting the year in continuing recovery mode."
Cruise line Carnival was a standout in the U.S. premarket, up 2.5% after a 6.4% jump Monday. Cruise ship stocks have by and large been sailing upward despite the impact of Omicron on their operations, including a rise in cases among passengers across their fleets.
Despite agreeing to delay by two weeks the rollout of a new 5G service amid aviation safety concerns, AT&T and Verizon stocks were resilient, up 0.1% and 0.3% in the premarket.
Forex:
The dollar continued to advance in Europe with the currency's strength bolstered by two narratives, according to Silicon Valley Bank's Minh Trang: a bit of a safety play following Omicron-variant headlines and the U.S. economy remains solid, which will allow the Federal Reserve to raise rates.
Bannockburn Global Forex said the dollar is likely to strengthen further in the near term on rate-rise expectations before turning lower in the second half of 2022. The market has priced in nearly 75 basis points of rate rises in 2022 and sees a two-thirds chance of an increase in March, said Bannockburn strategist Marc Chandler. The risk is "on the upside" for inflation in January and February, which will support rate rise expectations.
"We suspect that the dollar's high isn't yet in place and look for a more sustained pullback in the second half of the year as the economy [we anticipate] slows toward trend."
For some on Wall Street, it's not just a question of how soon the Fed might raise rates, but whether the central bank might bump up its currently near zero target by more than the customary quarter percentage point.
BMO Capital Markets said a 50 basis point rate increase could happen if inflation expectations data really started to surge higher. With expectations already swirling toward the possibility of a March rate increase, BMO said "the most compelling scenario for a 50 basis point hike is in the event the Fed waits to see if inflation eases during April/May and are wrong; leaving the FOMC decidedly behind the curve," and needing to catch up with a more aggressive tightening.
Elsewhere, the yen weakened against most G-10 currencies, hitting a five-year low verses the dollar as risk appetite improved.
Sterling may struggle to extend its gains much further given the market's subdued U.K. interest rate rise expectations, said MUFG Bank.
Reduced fears over the economic impact of Omicron and the BOE's decision to raise its key rate 15 basis points to 0.25% in December have encouraged the market to price in three 25 basis-point rate rises by summer, said MUFG currency analyst Lee Hardman.
However, the market remains reluctant to price in much further tightening after the rate breaches 1.00%, he said. That will "make it challenging" for sterling to continue rising in the near-term, he added.
The Turkish lira is likely to weaken before the central bank's first policy decision of 2022 on January 20 after staging a recovery in December, said Unicredit.
"We would handle any TRY recovery attempt with care after the massive profit taking that occurred in December. The TRY remains very volatile, but constant political pressure for lower interest rates and the acceleration of Turkish inflation in December don't bode well for the currency."
Bonds:
The rise in 10-year Treasury yields above 1.60% for the first time since end-November "serves as a foretaste of what could follow in a year of elevated inflation and prospective monetary tightening," said Michael Leister, head of interest rates strategy at Commerzbank. In the near term, positive macroeconomic data could add to the selling pressure.
"Near term, macro data will be key as markets shrug off Omicron fears and upbeat data over the coming days should only add to this sentiment," said Leister.
In the eurozone, while government bond yield spreads are on a "tightening spree," bond syndications are ensuring volatility, Leister added.
The return outlook for German government bonds remains poor in 2022, said Aramea Asset Management, which expects 10-year Bund yields to be in positive territory in six months' time.
"The German yield curve is likely to steepen in 2022 in view of unchanged ECB key rates and the prospect of an early end to the QE program." On a six-month horizon, Aramea expects the 10-year Bund yield trading at 0.10%.
Commodities:
Oil prices extended gains in Europe ahead of the OPEC+ meeting, but Swissquote said Brent will likely remain capped at $80 even if the cartel sticks with its modest 400,000 barrels a day increase.
"Even with the idea that better days are ahead of us and recovery should support better demand in oil, the IEA has been warning of a larger global glut in the first months of the year."
Gold prices ticked higher with some investors "seeking the safety of the precious metal as some countries tighten measures to contain the escalation in the numbers of new Omicron cases," said Ricardo Evangelista, a senior analyst at ActivTrades.
Any gains will likely be capped, he said, with both the dollar and Treasury yields on an upward trajectory in anticipation of rate hikes from the Fed.
Copper weakened on the London Metal Exchange's first trading day of the year, pressured by a stronger dollar.
Fitch Solutions said copper prices look set to fall, but not by as much as it previously expected. It has raised its copper price forecast for 2022 to $9,200 a ton from its earlier $8,000 a ton estimate, retaining its bearish outlook as fundamentals weaken in the coming months.
Fitch reckons that tight copper inventories at both the LME and the Shanghai Futures Exchange would ease, while consumption should stay stable. However, copper price declines should be limited by higher 'green demand' amid the expansion of the renewables sector.
The correction in European gas prices looks to have begun, and shares in exposed energy companies should follow, said Citi. The bank said that mild winter temperatures in the continent have been a big factor in the correction, and estimates that gas futures are yet to fall 15% for the first quarter and 65% for the second.
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01-04-22 0554ET
