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EUROPEAN MIDDAY BRIEFING: Stocks Steady But Omicron Uncertainty Persists



European shares posted modest gains Monday, recouping some losses from Friday's steep selloff as investors continued to monitor the likely implications of a new variant of Covid-19.

"Friday was a panic selloff," said Ipek Ozkardeskaya, senior analyst at Swissquote Bank. "Traders have had time to sit back and breathe a bit," she added, saying that trading volumes were lower over the Thanksgiving holiday, likely exacerbating declines.

Investors are awaiting more clarity on the likely transmissibility and severity of the Omicron variant and whether it will weigh on the efficacy of vaccines. Some money managers worry that the new strain could hit global mobility and the economic recovery.

Shares on the move:

BT shares rose close to 9% after a media report that Indian conglomerate Reliance may bid for control for the U.K. company, AJ Bell said. The report about BT comes after Reliance was recently outbid on a deal for control of a Dutch unit of T-Mobile. French billionaire and Altice founder Patrik Drahi has built up a stake in BT and Deutsche Telekom also has a sizeable holding, so a bidding war may be afoot, the brokerage said.

"Despite its substantial pension liabilities and debts and iffy track record, it has a near-monopoly position in the U.K.'s broadband network. And, for all its recent woes, BT has the capacity to generate substantial cash flows," AJ Bell said.


HeidelbergCement shares fell more than 1% after Jefferies cut its rating on the stock to hold from buy, with a EUR65.30 target price. However, the brokerage said the shares were fairly cheap but lacked a catalyst. Recent acquisitions--such as digitization firm Command Alkon and Tanzania's Tanga Cement--are failing to inspire and acceleration of share buybacks is unlikely, Jefferies added.

The German construction-materials maker also faces tough comparables in the first half of 2022, which may give rise to investor concerns about the sustainability of growth, especially in Europe. The market may not pay for potential at this stage, and it may take time for investors to rebuild confidence in the medium-term potential of the company, Jefferies said.


Telecom Italia shares were down more than 2% following news of the CEO's resignation. Bryan Garnier said the exit of Luigi Gubitosi as the company starts examining a takeover offer by KKR highlights how much power Vivendi has over the deal.

Telecom Italia received a friendly and non-binding indication of interest from KKR to buy out the company at EUR0.505 a share, a price which Vivendi believes doesn't reflect the value of the company. Vivendi has a 23.75% stake in Telecom Italia.

"Vivendi can accept an offer below its average entry price but we doubt the group will accept another significant depreciation, below the current book value. As such we do not expect Vivendi to accept anything below EUR0.8," Bryan Garnier said.

Market Insight:

Markets will likely remain volatile until more is known about the new variant of the coronavirus, but keeping equities at a small overweight and bonds at an underweight is still the right strategy, Michael Strobaek, global chief investment officer at Credit Suisse, said. News of the spread of the variant caused sharp risk-off moves on Friday, and there will likely be further market reactions this week, he added.

"Financial markets will be inevitably affected by bouts of volatility into 2022... When they affect risk assets and raise the equity risk premium, it is an opportunity to take exposure to selected equities." Specific sectors favored by Credit Suisse include logistics and pharmaceuticals, which are considered more defensive by nature.

Economic Insight:

UniCredit expects a further strong rise in Germany's annual inflation rate to 5.4% in November, from 4.5% previously, its highest reading since the summer of 1992. The key driver of November's rise is expected to be a base effect stemming from the VAT cut in the second half of 2020 and lower energy prices last year, UniCredit said. By European Union-harmonized standards, the reading may even surge to nearly 6% year-on-year, as a change in the index weightings will add to the base effect.

Economists polled by The Wall Street Journal forecast inflation will rise to 5.1% year-on-year. However, the rate is already likely to decline again at the turn of the year, UniCredit added. The data is due to be published at 1300 GMT.

U.S. Markets:

Stock futures were higher after Wall Street on Friday suffered its worst day in more than a year amid growing concerns over the new omicron variant.

"The pandemic and Covid variants remain one of the biggest risks to markets, and are likely to continue to inject volatility over the next year(s)," Keith Lerner, co-chief investment officer and chief market strategist at Truist Advisory Services, wrote in a note. "It's hard to say at this point how lasting or impactful this latest variant will be for markets."


The dollar has started the week higher against a range of currencies, including the euro, as investors continue to evaluate the danger of the newly-emerged omicron variant of the coronavirus. So far, there are encouraging signs that the symptoms appear mild compared with other variants, but the uncertainty is still likely to lead to greater volatility in currencies, said MUFG.

"The developments should continue to favor higher FX volatility. European assets and currencies had already been undermined in recent weeks by another Covid wave heading into the winter. The new variant risks making that situation worse," MUFG said.

CBA said the dollar is likely to remain elevated this week, particularly against commodity currencies, even as markets pare back Fed tightening expectations due to Omicron uncertainty.

Some FOMC officials have recently suggested they are open to upping the pace of tapering in December, but "the emergence of omicron may delay such a policy change," CBA said.

Bannockburn Global Forex said Omicron has injected a new dynamic into foreign exchange markets and a key risk is that uncertainty about the level of threat is not lifted quickly, which would underpin volatility.

It said there are three key changes since the middle of last week: odds of a Bank of England rate increase next month have fallen further; acceleration of Fed tapering seems unlikely, and prospects for stronger world growth are diminished on the margins.

"This undermines risk appetite and weakens those currencies that often appear to do better in robust growth phases, e.g., dollar bloc, Scandis, and most emerging market currencies."

The discovery of the omicron Covid-19 mutation has upended market pricing of future interest rates globally. Fears that the new variant may derail the nascent economic recovery as governments reimpose social restrictions and travel bans have prompted investors to cut risk and piled back into safe assets, including U.K. government bonds. The setback from the new virus strain has increased the chance that Bank of England policymakers may hold interest rates in December.

"Market participants will now have to be prepared for a substantially wider range of possible outcomes," UniCredit analysts said. The BOE's policy decision is due on Dec. 16.


The underlying flight to safety remains and is likely to extend in eurozone government bond markets, while a prospective bounce in German inflation underscores the dilemma for the European Central Bank, said Commerzbank's rates strategist Rainer Guntermann.

In its exit from accommodative policy, the ECB balances between growth and inflation concerns. News about the Omicron coronavirus variant hasn't added to investors' concerns over the weekend, but visibility remains low, he said.

Government bond supply in the eurozone will be reasonably high this week, with Italy, Germany, Spain and France lining up for auctions.

Societe Generale has forecast the end-2022 level of German 10-year Bund yields at 0.25% in an environment of "growthflation," it said. This is around 58 basis points above current levels.

"While the ECB's policy normalization is taken for granted, its speed and extent will depend on inflation developments," said Adam Kurpiel, head of rates strategy at the SocGen.

Inflation should decline in 2022, but eventually stabilize at levels higher than in the 2013-20 period, Kurpiel said. The bank's base case is "growthflation" in Europe, with the outlook firmly skewed towards higher rates and steeper bond curves, even as structural, regularly and climate-related developments are altering the usual relationship between the rates market and the economic and monetary cycles.

SocGen said next year is set to prove trickier for eurozone government bond yield spreads, as the ECB will be scaling back its asset purchases. "Even if the central bank engineers a gradual transition, an environment of rising yields and wider credit spreads should widen EGB [eurozone government bond] spreads."

A spread widening doesn't need to be disorderly, but some "pockets of stress" could exaggerate moves in a busy election-calendar period in the first quarter of 2022, SocGen said. "Overall, we see less risk of a full-blown political crisis, which is likely to play second fiddle to the ECB's gradual exit."

DZ Bank keeps government bonds underweight in its overall eurozone fixed-income strategy, as climbing yields and higher risks of spread widening cloud the outlook for total returns of eurozone government bonds next year.

Analyst Daniel Lenz said he sees room for a possible uptick in political risks, in particular in France and Italy. In the current environment, DZ Bank sees sovereign bonds with low index duration or with carry pick-up more attractive, with preference for short and medium maturities across the board.

Government bond issuance in the eurozone is set to fall to an all-year low in December in a seasonal pattern as sovereigns end or have already ended their annual funding programs, LBBW said.

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November 29, 2021 05:56 ET (10:56 GMT)

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