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M&A TO THE RESCUE (1149 GMT)
There’s a good chance this session will be remembered as the day European equities entered the Fed tightening cycle after three days of bliss in 2022.
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Moving forward, as Swissquote analyst Ipek Ozkardeskaya wrote this morning, “we are now stepping into a period where good data is bad as it fuels the Fed hawks, and bad data is bad, as well, because it can’t fuel the Fed doves”.
Because rising yields typically dent equity valuations, stocks will be more and more dependant on earnings, buybacks and M&A to keep on going North.
But as the rebounding banking index showed in late morning trading, the prospect of rising rates is far from being a negative for all stocks, particularly if one adds a pinch of M&A.
France’s SocGen and its car leasing division ALD got a big boost after they announced a deal to buy rival LeasePlan for 4.9 billion euros.
One typically expects the bidder to suffer from such announcement but the French bank saw its shares rise 2.5% and reach the STOXX 600 session’s top winners. ALD also jumped a handsome 8%.
“The combination of ALD & LeasePlan makes strategic sense in our view and will grow SocGen’s mix towards a business with good & recurring revenue growth and a high profitability”, Jefferies analysts commented.
Still in the banking sector, France’s Credit Agricole was on the rise too after Italian daily Il Messaggero reported that the French lender had offered to buy troubled Banca Carige. The latter was also up 3.4%.
French retailer Carrefour made to the top of best performing European stocks with a 3.9% rise after a Bloomberg report said rival Auchan was considering bidding again.
“A year on from the aborted Couche Tard approach for Carrefour, Auchan’s potential interest in Carrefour seems to be firming up with reports that private equity funding could enable a cash bid in the region of €23.5/share (c.35% premium)”, Citi analysts commented.
“If so, we believe this might be enough to get a deal done”, they added.
FED TIGHTENING CYCLE 101 (1024 GMT)
This morning’s market price action seems to be coming straight out of a Fed tightening cycle 101: expect volatility and growth stocks to sell off.
Well, the EURO STOXX 50 Volatility index did jump from 17 to 22 and the tech benchmark dropped 2.5%.
But in the grand scheme of things, it’s fair to say that the market reaction to the Fed’s hawkish minutes really doesn’t come as a surprise.
“What’s interesting is that what most thought would happen in 2022, expensive spec tech/high growth pulling back its horns and value/cyclical/energy/financials outperforming has played out a little too obviously and quickly”, said Neil Wilson at Markets.com.
Indeed, strategists were expecting rising bond yields to trigger a rotation to value and some volatility but all in all, the consensus is overwhelmingly banking on European stocks to rise in 2022.
“The Fed minutes don’t alter our base case expectation that equities will continue to move higher, and for the more cyclical markets to be the relative beneficiaries of above-trend U.S. and global growth”, was the take of the UBS House View this morning.
The Swiss bank believes the dip is “a bit overdone” and points out that “historically, stocks perform well in the months leading up to the Fed’s first rate hike”.
Barclays’ European equity strategy team also told its client to expect volatility and use it to buy some dips.
Goldman Sachs also issued a pretty positive note on European equities this morning, expecting total returns of about 12% for 2022.
Of course the drivers this year will be different than at the beginning of the post-pandemic crash rally.
“When rates rise equity valuations typically fall; returns are driven more by earnings and cash distribution”, the Goldman Sachs analyst writes.
Europe is also likely to get an edge in the tightening cycle as its stock markets are home to many banks, value and cyclical stocks which typically thrive when bond yields are on their way up.
FED MINUTES: EUROPEAN TECH TRACKS NASDAQ LOWER (0821 GMT)
The European Tech index lost over 2% in the first minutes of trading, tracking the Nasdaq which plunged over 3% in its worst session since February, after the Fed minutes suggested U.S. interest rates may rise sooner rather than later.
As you can see below there’s a sea of red among the constituents of the tech index:
Investors are typically reluctant to pay big equity premiums for growth stocks when bond yields rise quickly and that seems to be exactly the arbitrage that’s taking place today.
By the same token, portfolio managers have already engaged a rotation towards assets which usually thrive in when interest rates go up.
Commodities, banks and insurers are among the stocks which are limiting their losses with the three sector down between 0.3% and 0.5%.
The broader market is under heavy selling pressure with the pan-European STOXX 600 down 1.2%.
That’s quite a stark change of mood after three straight sessions of gains.
As for individual moves Dr. Martens plunged over 10% after Permira sold 65 million shares at 395 pence each. The stock had closed at 421 pence yesterday.
Among winners, France’s Carrefour jumped close to 4% after a report that rival Auchan is considering another bid for its rival.
WHEN THE HAWKS SING (0736 GMT)
All it took was the minutes of a three-week old U.S. Federal Reserve policy meeting to change the mood music in global markets. The Fed’s December meeting minutes showed officials had discussed shrinking the U.S. central bank’s overall asset holdings as well as raising interest rates sooner than expected to fight inflation. read more That sent global markets in a tailspin with investors heading for the exits.
The Dow, which had hit a record high earlier in the day, reversed course and ended down more than 1%. The selloff was broad-based as markets underwent one of the most violent rotation trades in recent times with investors dumping tech stocks and favouring consumer staples and industrials. The Nasdaq (.IXIC) plunged more than 3% on Wednesday in its biggest one-day percentage drop since February, signalling how much of the lofty valuations in technology stocks was premised on the view that interest rates would rise only gradually.
Bond yields shot higher with two-year yields , which track near-term rate expectations, rising nearly 3 bps to a 22-month high of 0.860%. Benchmark 10-year yields climbed 1.4 basis points above 1.71%, the highest level since April 2021.
In currencies, while the overall dollar index remained broadly unchanged from Wednesday’s levels, the greenback gained ground versus the Aussie and the Canadian dollar while remaining broadly unchanged against the euro and the Japanese yen. Indeed, the dollar index is poised to break out of a nearly 8-year range which could have far reaching implications for its rivals.
The selloff in U.S, markets reverberated globally with Asian stock markets (.MIAPJ0000PUS) falling 1% while market gauges of volatility rose to a three-week high. Cryptocurrencies, the darling of the pandemic-scarred investor crowd, slumped with bitcoin falling more than 5% overnight.
Money markets are now pricing nearly an 80% probability of a U.S. interest rate by March and more than 80 basis points of cumulative rate increases in 2022, a breathtaking shift in expectations considering that only three months ago, investors were expecting the first U.S. rate hike in the summer of 2023.
Key developments that should provide more direction to markets on Thursday:
Macro corner: UK PMI, German CPI, Europe Nov Producer prices, U.S. Dec ISM
ECB’s Schnabel gives speech in Frankfurt
Catering group Sodexo beats first-quarter revenue forecast as schools reopen read more
FED-INDUCED SELLING SPREE ABOUT TO HIT EUROPE (0701 GMT)
The selling spree which hit Wall Street following the release of the Fed minutes last night is about to wash on Europe’s shores.
The risk-off mood has already spread outside of the U.S. with MSCI’s index of Asia-Pacific shares outside Japan down about 1.3%.
Futures for European benchmarks are down between 1.3% and 1.8%.
Given the losses sustained on the Nasdaq, the European tech sector is expected to be under heavy pressure.
Investors interpreted minutes from the Fed’s December meeting as being more hawkish than expected and fast-rising yields and growth stocks usually don’t mix well.
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