EMEA Morning Briefing: Stocks to Waver After Wall Street Rally

MARKET WRAPS

Watch For:

OECD Harmonised Unemployment Rates.

Opening Call:

European stocks could waver at the open, while U.S. stock futures point to extended gains on Wall Street. The dollar strengthens against the euro and yen. Treasury yields rise. Oil is mixed and gold prices are down.

Equities:

European stocks could waver at the open after another broad rally on Wall Street as investors wagered that the new variant of the COVID-19 virus won’t pose a big threat to the economy.

The balance of the latest Omicron updates appears to indicate that another major economic shock isn’t coming, which has sparked short covering and a scramble to buy after a few weeks of losses, said ThinkMarkets analyst Fawad Razaqzada. “It’s a relief rally,” he said.

Eventually, though, investors will likely refocus on monetary policy and the pace of the Federal Reserve’s tapering program, said Mr. Razaqzada. “That’s going to be the next big thing for the market,” he said.

The Fed is scheduled to hold a two-day meeting of policymakers next week.

Uncertainty over Covid and Fed policy, however, may challenge the usual holiday cheer. Additionally, lower trading volumes in the lead-up to the holidays are likely to cause exaggerated moves in either direction, analysts say.

“We’re in this period where investors are grappling for any news they can find and that, coupled with low liquidity, is leading to some big moves,” said Hugh Gimber, a strategist at J.P. Morgan Asset Management.

Stocks advanced in Asia, while Japan downgraded its growth estimate for the last quarter to minus-3.6% from an earlier reported contraction of 3.0%.

Stocks to watch: TUI looks set to report a pandemic-driven revenue hit in full-year results due Wednesday, Numis Securities said. In August, management guided to lower FY21 revenue on-year, Numis said.

“Like the rest of the sector, TUI has had a challenging Covid period, requiring capital injection via equity, debt and disposals,” Numis analyst Richard Stuber said. TUI is also more asset-heavy than rivals, he added.

“Conversely, its wider geographical customer base has benefited from less-stringent travel restrictions over summer ’21 and may possibly also [do so] during FY22,” he said.

“Nevertheless, with low near-term visibility for trading and a less-robust balance sheet, our preference remains with Jet2 and On The Beach.”

The outlook for European chemical stocks is strong, and recent falling share prices across the sector provide an attractive entry point on multiple stocks, JPMorgan said.

Most companies are also seeing good pricing power, offsetting the impact from raw-material and energy-price inflation on earnings, the U.S. bank said.

Commodity chemical prices could dip as temporary outages and shipping constraints ease, while, longer-term, companies are benefiting from trends like the switch to e-vehicles, decarbonization and developing more sustainable products, JPM said.

The bank has Air Liquide and Solvay as top picks, upgrades BASF to stock overweight, and Covestro and Clariant to neutral. However, it downgraded Arkema stock to neutral.

Forex:

USD/JPY may be supported for now by gains in the stock markets and easing of concerns about the Omicron variant. Strong U.S. economic data are likely to increase expectations for Fed’s faster shift to policy tightening, leading to the pair’s further advance.

U.S. weekly jobless claims due Thursday and consumer-price index figures on Friday are in focus ahead of Fed’s policy meeting next week.

The dollar strengthens against the euro and firms slightly against the yen. The WSJ Dollar Index was flat. Bank of America said it’s still bullish on the dollar versus the euro and yen for 2022.

“Leading indicators suggest the US is on track to meet the consensus forecast target for the next two quarters,” while the EU and Japan show material downside risk to the current 4Q consensus growth forecast, the firm said.

“Historical analysis shows the USD could broadly appreciate on the back of a positive surprise to the advanced US GDP data, while the EUR is at risk versus the USD and JPY in the scenario of a negative Q4 2021 advanced EU GDP surprise. The JPY historically has had negative correlation with JP GDP data surprise on preliminary JP GDP release dates.”

Bonds:

Treasury yields rose as Omicron fears recede and investors embrace a little more risk. “The covid data in South Africa is so far consistent with the assessment that Omicron is more transmissible, but less virulent,” Deutsche Bank said, noting that “data are subject to revisions and it is early days.”

Investors also adjust to an expected acceleration of the reduction in bond purchases by the Fed, which will sap a major source of demand for government debt.

Energy:

Oil was mixed in early Asian trade after rising on eased concerns over the Covid-19 Omicron variant. Oil may be supported by some near-term positive sentiment, thanks to signs of stronger demand, ANZ said.

China’s oil imports rose to a three month high in November, as new quotas for refiners were allocated, it noted. The country is one of the world’s largest importers of oil.

Metals:

Gold was slightly higher in early Asian trade, as investors continue to weigh current geopolitical tensions against easing concerns over the Omicron variant, ANZ said.

Gold may be pressured in the near term. Rising expectations that the U.S. Fed could reduce its asset purchases at a faster pace, and raise interest rates in the next year amid signs of higher inflation, could make the precious metal more expensive for holders of other currencies, ICICI Securities said.

Copper prices were lower, extending recent fluctuations amid a mix of favorable and unfavorable factors. Demand in China is likely to pick up in the coming months as the country’s power usage restrictions ease and property construction recovers, Huatai Futures said.

However, upward momentum in prices may be capped by ample supplies. “Copper prices will likely remain volatile for now,” it said.

TODAY’S TOP HEADLINES

Japan’s Economy Shrank More Than Estimated in Third Quarter

Japan’s economy shrank more than initially estimated in the July-September quarter due to weaker spending by consumers and the government, revised data showed Wednesday.

The world’s third-largest economy after the U.S. and China contracted 3.6% on an annualized basis, which reflects what would happen if the third-quarter pace continued for a full year.

House Votes to Approve Bill Setting Up Process for Lifting Debt Limit

WASHINGTON-Top Republicans and Democrats struck a deal for a process to raise the debt ceiling in the Senate, with the House passing a bill late Tuesday that paves the way for Congress to prevent a calamitous default.

The bill, which also prevents cuts to Medicare and other programs that threatened to kick in at the end of the year, is the product of weeks of talks between Senate Majority Leader Chuck Schumer (D., N.Y.) and Senate Minority Leader Mitch McConnell (R., Ky.). It doesn’t itself raise the debt ceiling. Instead, it sets up a procedure for an additional vote on the issue that would require a simple majority in the Senate rather than the 60 votes needed for most legislation.

Early Lab Test Shows Omicron Weakening Vaccine Effectiveness

The Omicron variant of coronavirus can partially evade the protection afforded by vaccines, according to laboratory tests conducted in South Africa that give one of the first indications of vaccine effectiveness against the variant, but scientists say the shots should still defend those inoculated from severe disease.

Scientists at the Africa Health Research Institute in South Africa tested the blood of 12 people vaccinated with the shot developed by Pfizer Inc. and Germany’s BioNTech SA against the Omicron variant to determine how effectively it neutralized the virus.

EPA Trims Ethanol Mandate for Gasoline as Biofuel Pressures Pump Prices

WASHINGTON-The Environmental Protection Agency on Tuesday proposed reducing the amount of ethanol and other biofuels that must be blended into gasoline this year and retroactively lowered last year’s mandate, in a win for refiners who warned that raising the requirement would lift prices at the pump.

The decision comes as the price of ethanol, the most-dominant biofuel, has risen to its highest level in a decade. While U.S. gas prices are driven by the price of crude oil, refiners say ethanol prices have contributed to higher prices at the pump, though gasoline has dipped from recent highs.

Companies Plan Big Raises for Workers in 2022

Companies are planning for steeper wage increases next year than at any point since the 2007-2009 recession, according to a new report, amid a tight labor market and the highest inflation in three decades.

A survey by the Conference Board set for release Wednesday finds that companies are setting aside an average 3.9% of total payroll for wage increases next year, the most since 2008.

Biden Warns Putin Invasion of Ukraine to Be Met With Economic Response and More

President Biden warned Russian President Vladimir Putin that the U.S. and its allies would meet a military invasion of Ukraine with strong economic penalties, moves to bolster Ukrainian defenses and fortify support for Eastern European nations.

For two hours Tuesday, the two leaders held a secure video call to address what the U.S. has described as large and unusual troop movements near Russia’s border with Ukraine in recent weeks.

Early Lab Test Shows Omicron Weakening Vaccine Effectiveness

The Omicron variant of coronavirus can partially evade the protection afforded by vaccines, according to laboratory tests conducted in South Africa that give one of the first…