- STOXX down 0.2%
- Wall Street futures tick up
- All eyes on U.S. CPI
- Market debut for Daimler Truck
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REASONS TO BE BEARISH ON EQUITIES (1135 GMT)
Views about the direction of travel for stocks are mostly on the bulls’ side with expectations of a solid economic recovery and the world gradually getting off the coronavirus hook next year.
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BofA is at the bottom of consensus, forecasting a 10% downside for the Stoxx 600 (.STOXX) while the consensus expects a 6% upside.
BofA analysts recall that the bullish consensus lies on the views that:
A) economic growth is likely to remain above trend
B) real bond yields, the discount rate for equities, are close to historical trough levels
C) credit spreads remain well-behaved
But that’s not how BofA sees things moving forward.
“We expect growth to soften, real bond yields to rise and credit spreads to widen, implying scope for equities to reverse some of their recent gains,” they say in a research note.
2022 earnings will be strong, but they are already priced in as “since mid-2020, the rally has been driven by a 50% rebound in the 12-month forward EPS,” they add.
BofA analysts believe it’s unlikely that 2022 earnings will provide some upside given “fading global PMIs”.
Meanwhile, the Omicron variant will likely translate into a modest economic headwind, weighing on asset prices as it seems likely to result in a rapid but less deadly increase in global Covid-19 infections.
The table below shows a summary of BofA strategy views.
ANOTHER SETBACK FOR FOOTSIE FANS (1020 GMT)
Many investors are hanging on to the idea that UK equities are bound to catch up their European peers and that they just can’t stay this cheap.
But it’s been a disappointing trade yet again this year and today’s data won’t bring any comfort with GDP up a meagre 0.1% instead of the 0.4% expected.
“UK growth nearly stalled in October, according to new GDP data, and that’s before Omicron struck”, wrote Russ Mould, investment director at AJ Bell.
“Rising energy, food and general merchandise prices have put pressure on family finances so Christmas may be disappointing for many retail and hospitality operators”, he added.
All in all, the British economy is still 0.5% smaller than in February 2020 while other countries in the euro zone have now broken even.
But if one wanted to look on the bright side for stocks, there’s now clearly a sense that the old lady of Threadneedle Street is unlikely to hike rates next week.
“Overall the read through is that the MPC is likely to put its policy normalisation plans on ice this time”, Investec economist Philip Shaw argued.
Even before the data was released, Citi analysts issued a note in which they said they expected the BoE to wait further till February to hike interest rates.
As they put it, the uncertainty about the labour market (which now seems to be holding up) has been replaced by the pandemic and now “Omicron constitutes a new risk to the recovery”.
The poor data could also contribute to weaken the position of Boris Johnson who will next week face a rebellion by Tory MPs opposed his imposition of new COVID rules, adding to political risk.
A YouGov poll for The Times newspaper showed Johnson’s Conservatives had dropped 3 percentage points from Dec. 2 to 33% of the vote while Labour rose 4 percentage points to 37%.
UK economy almost flat-lined in October, adding to rate hike doubts read more
UK PM Johnson loses poll lead after lockdown party revelations read more
GRIM OPEN BUT WEEKLY GAINS SEEM SECURED (0831 GMT)
The STOXX 600 opened about 0.5% down with all sectors losing ground.
Sentiment is poor after losses in Asia and on Wall Street but on the bright side, the markets still look set to be up on the week despite this morning’s dip. The main focus is likely to be U.S. CPI reading later on Friday.
The most noticeable interest point this morning among individual stocks is Daimler, which is down 17% as it spins off its Truck unit.
Daimler Truck opened at 28 euros per share for its market debut in Frankfurt.
Ashmore fell about 3.5% after Goldman Sachs cut its guidance and its target price for the stock. Changes in recommendations also hit Hellofresh which is losing 4%.
Boot brand Dr. Martens (DOCS.L) is one of the fast rising stocks of the session, up 4.5%.
Yesterday it posted a rise in first-half profit and got some attention by raising the price of its famous footwear by 10 pounds ($13.21) due to rising costs.
ALL ABOUT CPI (0816 GMT)
Inflation-watchers were greeted on Friday by news that Japan’s wholesale inflation had hit a record 9.0% in November, rising for the ninth straight month. The news sets the stage for the U.S. CPI release that economists expect at 6.8%, a level that would be the highest since 1982. Some even expect a headline number with a “7-handle” read more .
So jittery are Americans about inflation that President Joe Biden — facing mid-term elections next year — released a statement saying the data would not “reflect today’s reality” and price rises would soon subside read more .
In any case, the Federal Reserve looks almost sure to speed up stimulus unwinding when it meets next week — all the data indicates a robust economy and tightening labour markets, with Thursday’s weekly jobless claims sharply below predictions.
Even the Bank of Japan will discuss at next week’s meeting paring pandemic-time emergency funding, Reuters reported on Friday read more .
Unsurprisingly, economists polled by Reuters predict higher bond volatility ahead, though they also see 10-year U.S. yields ending 2022 around 2% – barely 50 basis points higher than now read more
U.S. Treasury yields are on track for their biggest weekly rise since March, following three weeks of decline. Equity markets are reasonably buoyant – while world stocks are set for the biggest weekly gain since March; European stocks are down though Wall Street futures are pointing north.
Meanwhile, bets on a UK rate hike next week should dwindle further after data showed a tepid 0.1% GDP expansion in October (0.4% was forecast), alongside sharp falls in manufacturing and construction read more
Key developments that should provide more direction to markets on Friday:
-Fitch downgraded property developers China Evergrande and Kaisa, citing offshore bond default read more
-European Commission announced draft rules to give drivers for firms such as Uber and Deliveroo employee benefits read more
-ECB speakers: President Lagarde, board members Panetta, Weidman and Villeroy BIS head Carstens
-Final services PMIs everywhere
-Final German CPI
-U.S. CPI/University of Michigan sentiment and inflation expectations index
-Fitch to review Spain/UK ratings
NOT LOOKING GOOD (0725 GMT)
European futures are clearly trading in negative territory this morning, losing about 0.6% while Asia is closing its session well into the red.
MSCI’s broadest index of Asia-Pacific shares outside Japan lost 0.8% and Japan’s Nikkei shed 1%.
Sentiment hasn’t rebounded since Wall Street ended Thursday on a steep loss as investors banked some profits after three straight days of gains.
There’s a lot at stake with the incoming U.S. inflation data and what it will mean for the Fed’s taper plans.
A Reuters poll for the consumer price index (CPI) for November came in at 6.8% year-on-year.
($1 = 0.7569 pounds)
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