- European stocks down 0.7%, after opening lows
- Powell’s appointment strengthens bets on rate hike
- Technology leads industry downturns, volatility increases
- U.S. Equity Futures Stable After Sale
November 23 – Welcome home for real-time market coverage presented by Reuters reporters. You can share your thoughts with us at [email protected]
WILL BUND RETURNS FALL AGAIN IN 2022? (12:24 GMT)
Terminal rates have been pretty much all the rage lately as they may explain the current low levels of nominal and real yields.
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HSBC Global Research analysts have incorporated a series of terminal rate estimates into their forecasts and say they expect 10-year Bund yields to “fall instead of rising in 2022” despite monetary tightening in the United States. European Central Bank.
They argue that “the five-year maturity is the most sensitive to the start date of an ECB bull cycle according to our scenario analysis; maturities greater than 10 years are increasingly sensitive to the final rate “.
“Unless we assume a final rate higher than anything the market infers in 2021, we don’t think the fair value of 10-year Bund yields should exceed zero,” they say.
“Our current end-2021 forecast of -30bp (Germany’s 10-year yield) reflects a mix of early and cautious upside scenarios,” which the market will be slow to give up, they add.
Our forecast of -50bp at the end of 2022 is a mix of our “cautious hike” and “no-hike” scenarios.
Economists estimate the terminal or natural interest rate, which is the rate consistent with full employment, capacity utilization and stable prices.
The chart shows that the yield on German 10-year government bonds has remained below zero since May 2019.
THE RISKS OF THE FOURTH COVID WAVE: “SIGNIFICANT BUT MANAGEABLE”
Investors shouldn’t be overly worried about the possible negative impact on economic growth resulting from this fourth wave of COVID-19 infections across Europe.
Goldman Sachs performed an analysis to conclude that the risks are “significant but manageable” in their baseline scenario.
The US bank estimates a potential impact on euro area GDP growth of 0.2 percentage point in Q4 and Q1 compared to their current forecast, and around half that in the UK.
“A significant drag but significantly lower than last winter,” they note, adding that in each scenario, activity is expected to rebound in the second and third quarters as countries lift restrictions.
“We expect additional targeted restrictions in the four big euro area countries and (to a lesser extent) in the UK, but are not seeking a return to general national lockdowns …” he says.
“Europe has significantly higher Covid immunity than last winter, which should help protect hospital capacities, especially in the South,” he adds.
The GS’s bearish scenario involves a repeat of last winter’s lockdowns, which means a cumulative 1.4% drop in euro area GDP.
END-OF-YEAR GOALS ACHIEVED: WHAT NOW? (1007 GMT)
The bull run that has pushed many European benchmarks to surpass analysts’ targets is showing clear signs of fatigue, and now that COVID-19 and rate issues are at the top of the market narrative, many are wondering. ‘there is still an advantage.
For Christian Stocker, strategist at UniCredit in Munich, stocks have already run their course this year, but over the next 12 months he is bullish.
“European equity markets have met or even slightly exceeded our year-end index targets for this year. While we do not expect any further impetus in the near term, the environment remains constructive,” he said.
“We foresee a potential of up to 10% for European equities through the end of 2022, although the path to higher prices might not be easy,” he adds. This means that the Euro STOXX 50 could reach levels around 4,750 and the DAX climb to 18,000 points.
And Stocker is not alone.
JP Morgan also maintained its constructive stance on equities this week, “looking to use the lows to catch up” read more.
Morgan Stanley said on Friday: “We see more upside but more volatility in 2022 given macro cross-currents; our new MSCI Europe index target is up 8%.”
SECOND ROUND (0923 GMT)
Jerome Powell’s second run as chairman of the Federal Reserve brought out the bulls in the US dollar in strength. Money markets have advanced their expectations of a rate hike by a quarter percentage points by June of next year from September 2022, just weeks earlier.
Ten-year US Treasury yields are within 10bp of 2021 highs, while the US dollar has broken some important market levels against its rivals. What can spoil the party? A prolonged rise in bond yields can lower high-flying tech stocks and weigh on the broader market, if last night’s price action is any indicator.
Technology was the biggest drag overnight and growth stocks lagged the most after outperforming value stocks last week.
Watch this place.
STOXX slips AT 3 WEEKS LOW (0855 GMT)
European stocks are expected to experience their worst session in nearly two months as rising COVID-19 cases and concerns about rate hikes rocked sentiment ahead of flash reads on Eurozone trade activity .
The benchmark STOXX 600 stock index (.STOXX) drops 1.5% to a 3-week low, with all sectors trading lower and tech stocks falling 2.4%. Over 86% of STOXX components traded in the red.
The worst performing is AO World, whose shares fell nearly 30% early in the session after the company warned of product shortages and slashed its earnings outlook for fiscal 2022. Read more
BE CAREFUL OF THE GAP (EUROPE-US) (08:20 GMT)
When the anticipated impressions of the Purchasing Managers Indexes (PMIs) arrive, the focus will be on increases in companies’ input costs and whether they show signs of easing.
The readings could also widen the gap between robust US activity and a COVID-plagued Europe, which could further depress the euro, which hit new 16-month lows on Monday.
Monday’s Eurozone consumer confidence indicator offered a warning, falling below pre-pandemic levels. The October PMIs showed that the bloc’s activity was slowing the weakest in six months, while business costs were rising at the fastest rate in two decades. US and UK PMIs fared better, but dramatic price increases have always been evident.
A slowdown in prices would prove that central bankers are right, who have so far dismissed the surge in inflation as transitory. But Fed Chairman Jerome Powell (reappointed for another four years) on Monday spoke of the corrosive impact of inflation. The United States could also unveil an emergency oil release later today to lower energy prices. Read more.
Powell’s reappointment sent the markets into a betting frenzy on tightening policies; three rate hikes in the United States are scheduled for 2022, starting in June read more.
US Treasury yields are higher again this morning after hikes of 5 to 8 basis points on Tuesday, as the dollar entered a fifth straight week of gains against a basket of currencies.
When does this become a problem for the stock markets?
Technology stocks listed on the Nasdaq, vulnerable to higher rates, fell on Monday and are expected for another loss-making session. Even a 2% rally in bank stocks (.SPXBK) did not prevent a lower close of the S&P 500. Futures are signaling weakness there and for European stocks.
Finally, El Salvador’s plans for a billion-dollar bitcoin-backed bond don’t appear to have benefited the coin much; it remains near one-month lows read more.
Key developments that should give more direction to the markets on Tuesday:
Tuesday 23 November
-E.ON will invest $ 30 billion for the green transition learn more
– BOE MPC member Jonathan Haskel speaks
– ECB speakers: Pentti Hakkarainen, member of the ECB’s executive board
-US Treasury auctions 7-year notes, 2-year floating rate notes
-Philly Fed Non-Manufacturing Business Outlook Survey
-Emerging markets: Nigeria’s central bank meets
-American results: American Eagle, Medtronic, Best Buy, Dollar Tree, Abercrombie and Fitch, Hewlett Packard, Nordstrom, Gap, Dell
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