EUROPEAN MID-DAY BRIEFING – Stocks and oil prices collapse on Omicron borders

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Stocks and oil prices fell as investors feared that an increase in Omicron Covid-19 cases would slow economic growth and add pressure to inflation.

Some countries place restrictions to stem the spread of the Omicron variant at the start of the holiday season. The Netherlands reimposed a lockdown on Sunday, with all non-essential shops, bars and restaurants closed until mid-January. Irish Prime Minister Micheál Martin also announced new restrictions. President Biden plans to provide an update on the fight against Covid-19 in the United States on Tuesday, where cases are increasing.

The rise in infections has raised fears that a new wave may prolong supply chain disruptions that have driven inflation up.

“We are really seeing Omicron spreading like wildfire, and it’s weighing on sentiment,” said Esty Dwek, chief investment officer at FlowBank. “You see blockages triggered in Europe.

You are seeing more and more restrictions and the number of cases is increasing so much that even if it is less serious it could lead to more hospitalizations “, which risks causing further restrictions that will weigh on growth, he said. -she adds.

Stocks on the move: BNP Paribas shares are trading down 0.5%, but outperforming peers in a gloomy day for European stocks.

The French bank agreed to sell Bank of the West to Bank of Montreal for $ 16.3 billion in cash. BNP Paribas shares outperform the French blue chip CAC 40 index, as well as all the main European banking stocks. The Swiss UBS fell 3.1%, Credit Suisse traded down 3.7% and Deutsche Bank fell 3.7%.

Data in Brief: The sharp rise in Covid-19 cases in the UK due to the spread of the Omicron variant will affect the country’s short-term economic growth, economists at Pantheon Macroeconomics said.

In the best-case scenario, in which the UK did not apply additional restrictions, GDP would decline by around 1% in January compared to November, they said.

The decline in activity will be much more severe if hospital admissions increase at such a rapid rate that a full lockdown is required in January, with GDP expected to fall 6% from November’s level in this scenario, a said Pantheon.

If the UK were to return to a partial lockdown similar to that experienced between April and May of this year, GDP would fall by around 2% in January compared to November, he said.

Sentiment in the German export industry deteriorated in December, the Ifo Institute said. The Ifo index of export expectations fell to 12.1 points in December from 15.8 points in November.

“Exports are likely to increase in the first quarter of 2022, albeit at a slower pace,” said Ifo chairman Clemens Fuest. Expectations in the auto industry have taken a substantial hit, said Ifo.

While additional international orders are still expected in December, they will be much lower than expected the previous month. The picture is similar for manufacturers of electrical equipment, said Ifo.

Textile makers, food and drink makers and printing companies expect exports to drop slightly, the German institute said. In contrast, the expectations of machinery and equipment manufacturers have improved.

American markets:

Stock futures sank amid an increase in Covid-19 cases and as President Joe Biden’s $ 2 trillion tax and expense package appeared dead after Senator Joe Manchin said that he would not support the plan.

Dr Anthony Fauci, Biden’s chief medical adviser to Biden, said he expects coronavirus cases in the United States to hit record highs this winter, driven by the Omicron variant. He said he expects “significant stress” on hospital systems in parts of the country.

Goldman Sachs economists cut their US growth forecast for 2022, citing Manchin’s rejection of the Biden spending bill.

“The enactment of the Build Back Better bill had already sounded like a close call and in light of Manchin’s comments, we are adjusting our forecast to remove the assumption that BBB will become law,” Goldman economists wrote in a report. report Sunday. “Failure to pass BBB has negative implications for growth.”

The West Virginia Democrat stunned the White House on Sunday after telling Fox News the package was a “no” to him, adding he couldn’t “vote to continue with this bill.”

The bill, which Senate Democrats had hoped to pass by Christmas, was stalled last week after protracted negotiations between Manchin and Biden. “I have tried everything humanly possible,” Manchin said on Sunday. “I can’t do it.”

In pre-market trading, shares of cruise lines fell, with Norwegian Cruise Line and Carnival falling more than 3% each. Shares of energy companies slipped along with oil prices. Shares of Occidental Petroleum fell almost 4% and Marathon Oil fell more than 5%.

Portfolio managers whose performance is evaluated from year to year are also likely to liquidate their positions and realize gains after a strong year in the markets. Despite recent market volatility, the S&P 500 is up over 20% this year.

Forex:

The Federal Reserve’s focus on starting to raise interest rates next year, with asset purchases set to end by the end of the first quarter, will continue to shift the focus of the government. market towards the dollar, strengthening the currency, Danske Bank said.

Currency divergence between the US and the Eurozone is expected to push EUR / USD towards 1.10 in 12 months, Danske predicts.

“Market themes are increasingly favorable to the dollar,” he said. “The manufacturing cycle is clearly slowing down, but central banks need to tighten to catch up with inflationary pressures and this is pretty negative for EUR / USD.” Danske is forecasting EUR / USD at 1.12 in three months and 1.11 in six months.

Prices of Bitcoin and other cryptocurrencies have fallen as fears over restrictions aimed at stopping the spread of the Omicron coronavirus variant weigh on risk appetite.

“Cryptocurrencies are currently trading alongside risk appetite, and in the absence of any breaking news or hard-hitting tweets, we might expect the negative pressure to continue,” Ipek Ozkardeskaya said. , Swissquote Bank analyst.

“The next important technical level to watch in Bitcoin is $ 45,000, a touch below that level, there is another major Fibonacci support on the July-November rally, which could further call the death of the latest rebound. . ” Bitcoin, Leading Cryptocurrency, Falls 2.4% to $ 45,986, Says CoinDesk

The Japanese yen rose against the dollar as US Treasury yields fall amid increased demand for safe-haven securities, reflecting concerns about the Omicron coronavirus variant and the prospect of tighter US fiscal policy.

“USD / JPY continues to be the G10 currency pair most closely correlated to US yields, and has come under downward pressure alongside US yields,” said MUFG currency analyst Lee Hardman.

Investor sentiment is undermined by new evidence of Omicron’s disruptive impact and by Democratic Senator Joe Manchin’s assertion that he will not support President Joe Biden’s $ 2 trillion spending bill , did he declare.

The Turkish lira has fallen to new all-time lows and the liquidation is likely to persist as Turkey’s central bank appears poised to cut interest rates further in 2022, Unicredit said.

The bank said last Thursday it could keep rates unchanged in the first quarter of 2022, but further rate cuts next year remain likely due to pressure from President Recep Tayyip Erdogan, Unicredit economist said. Gokce Celik.

“Inflation is likely to rise sharply over the next few months and the downward pressure on the TRY may continue as other central banks tighten.”

Meanwhile, Turkey’s “shortage” of foreign exchange reserves means that foreign exchange interventions are unlikely to be large enough to stabilize the pound, Celik said.

Obligations :

Neuberger Berman is underweight in duration due to a steepening bond curve bias, as he begins to profit from his strong overexposure to corporations, said Patrick Barbe, Head of European Investment Grade Fixed Income .

The backdrop to this positioning is Neuberger Berman’s opinion that the decisions of the European Central Bank herald the normalization of economic activity and that the market should follow as soon as the pandemic no longer needs to be considered. as a risk, said Barbe.

Neuberger Berman expects the market to return to its pre-pandemic level, with the exception of short-term bonds which will still benefit from “forward guidance” terms, Barbe said, referring to the guidance from the market. ECB that it will not increase interest rates because as long as inflation remains permanently at or below 2%.

The expected high volume of euro area government bond issuance at the start of the year could serve as a first litmus test, said Elmar Voelker, senior fixed income analyst at LBBW. “Eurozone countries typically flood the market with a large number of high volume new issues in the first few weeks of the year, mostly with long and ultra-long maturities,” he said.

The high level of support for the ECB’s asset purchase programs, which will only be moderately reduced in the near term, “is likely to alleviate the looming difficulties,” Voelker said. Important price concessions will have to be taken into account given that the net volume of euro sovereign bond issuance is expected to rise sharply in January and February, the analyst said.

Citigroup is neutral on the dynamics of Greek-Italian 10-year government bond yield spreads at levels around 20 basis points, strategist Aman Bansal said.

The ECB decided not to allow the purchase of Greek government bonds under the asset purchase program, but said Greek government bonds could benefit from flexible reinvestment of redemptions pandemic emergency purchasing program to avoid disruption in purchasing.

The ECB bought Greek government bonds with a waiver in the PEPP given Greece’s current sub-investment grade rating, but is not buying them under the APP. Flexible reinvestments “should be in addition to already existing supports for the strong economic recovery underway, the likely efficient use of NGEU funds and the potential for ratings upgrades,” Bansal said.

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20-12-21 0635ET


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Felix J. Dixon