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EUROPEAN MIDDAY BRIEFING - Shares Little Changed, Appetite Remains Fragile

MARKET WRAPS

Stocks:

The Stoxx Europe 600 ticked up 0.1%, led higher by shares of technology and healthcare companies. With the exception of London's FTSE 100, most major indexes in Europe were in positive territory.

U.K. shares wobbled after data showed economic growth slowed, with Britain's current account deficit widening in the third quarter. The data revealed the U.K. economy was struggling to recover even before the emergence of the Omicron variant of Covid-19.

Stocks have been choppy, posting big down days and up days, as investors seek to determine how severe the economic impact of the rapid spread of Omicron will be. Adding to nervousness in the market, investors are preparing for the Federal Reserve to raise interest rates in 2022 and are trimming positions before year-end.

"Some investors just want to protect some of their profits, I would assume," said Daniel Egger, chief investment officer at Switzerland-based St. Gotthard Fund Management. "This volatility could spill over into next year."

Shares on the Move:

Beiersdorf shares rose 1.2% after it agreed to buy Chantecaille's skin-care division for an enterprise value that could rise to $690 million, depending on the business's development.

Delivery Hero rose 5.6% after the German food-delivery firm said it planned to sell its Foodpanda subsidiary's operations in Japan and shrink them in Germany.

Rio Tinto fell 2.4% after the mining company said it had agreed to buy an Argentine lithium project for $825 million, seeking to tap into demand for battery minerals.

Syncona shares rose almost 9% after it said Novartis has agreed to acquire its portfolio company Gyroscope Therapeutics for up to $1.5 billion.

Economic Insight:

Oxford Economics' eurozone recovery tracker continued its downward trajectory in early December as the resurgent pandemic, re-imposed restrictions, and voluntary social distancing took their toll on activity. The tracker fell to 80.2 points from 83.4 in the two weeks ended Dec. 5. This is the lowest reading since May, said OE's Tomas Dvorak.

The drop was driven by falls in consumer spending, particularly in contact-intensive settings, and in mobility. Also, financial conditions experienced a sharp decline due to increased volatility in response to Omicron, said Dvorak. The tracker's readings are in line with OE's forecast of a sharp slowdown in growth in winter.

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The eurozone economy is in decent shape coming into 2022, said Pantheon Macroeconomics. Reopening delivered strong GDP growth in the second and third quarters of 2021, by a cumulative 4.4%, and the economy likely expanded again in the fourth quarter by 0.5% to 0.6%.

Full-year growth for 2021 will be just over 5%, reversing much of the 6.5% plunge in 2020, according Pantheon, but the economy is now slowing more quickly than the consensus expected, a trend that will carry over into the first quarter, and restrictions to tackle Omicron are the main risk for the economic outlook. It forecasts eurozone GDP will grow 3.8% in 2022.

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Supply problems have once again worsened significantly for German retail, according to the the Ifo Institute. In December, 81.6% of retailers complained that they won't receive all the goods they ordered, up from 77.8% in November.

German retail is in a double bind, according to Klaus Wohlrabe, head of surveys at Ifo. "Retailers can't offer all products, and customers are reluctant to shop in the face of high coronavirus numbers."

The situation is particularly challenging for retailers of electronic household appliances and consumer electronics, sectors in which almost all businesses are struggling with supply problems. The situation in the toy retail business has eased somewhat, although 77% of retailers continue to report delivery shortfalls.

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Even before the emergence of the Covid-19 Omicron variant, the U.K. economy was struggling to recover fully, said Pantheon Macroeconomics' senior U.K. economist Gabriella Dickens.

The 1.5% shortfall in GDP from its fourth-quarter 2019 peak remains one of the largest in the G-7, as it is below the 1% shortfall in Germany or the 0.1% shortfall in France, Dickens added. Omicron is hitting the economy hard and now Pantheon expects quarter-over-quarter GDP growth to drop to 0.6% in the fourth quarter and to 0.0% in the first quarter of 2022, largely because of a contraction in output in certain consumer-facing services.

"Even without Omicron, the economy still will have struggled for momentum," Dickens said.

U.S. Markets:

Stock futures traded slightly lower Wednesday with Wall Street coming off the previous session's strong gains after President Joe Biden said the U.S. wouldn't impose stiff lockdowns amid a surge in Covid-19 infections.

Biden said he will make 500 million free at-home tests available to Americans who request them. In addition, the government is preparing to send military doctors and nurses to hospitals that become overwhelmed with cases.

Stocks have been on shaky ground as 2021 comes to a close because of worries about inflation, reduced monetary support from the Federal Reserve and what effect the Omicron variant will have on the economy.

"Markets are adjusting to the reality that it will have to face sporadic headwinds to growth without Pavlovian central bank dovish reactions [stimulus] -- and that's causing a pullback [in general]," wrote Tom Essaye, founder of Sevens Report Research.

Forex:

The Turkish lira stabilized after rebounding spectacularly on Tuesday, a trend which could continue over the coming two weeks, even though beyond that it is likely to resume falls, said Ipek Ozkardeskaya, analyst at Swissquote.

"The fact that the carry positions have been nicely cleared over last days' massive rally should keep the positive momentum much contained in the USD/TRY, at least for the next couple of weeks."

On Tuesday, USD/TRY dropped from Monday's record high of 18.3674 after Turkey announced measures to encourage locals to hold lira rather than foreign currency. The lira has lost a large chunk of its value in recent weeks due to President Recep Tayyip Erdogan's unconventional view that interest-rate cuts lower inflation.

Bonds:

DZ Bank expects 10-year German Bund yields to reach 0% in 12 months time after a gradual increase in the coming quarters.

The bank expects a rise to -0.10% on a three-month horizon and stabilization at that level in the following quarter, driven by continuing economic growth. Nonetheless, the move upward will be moderate because the European Central Bank will continue to reinvest bond redemptions under the PEPP until at least the end of 2024, one year longer than it had previously planned, said DZ.

"All in all, this means longer-term Bund yields have limited scope to move significantly higher," said analyst Christian Reicherter.

The 10-year gilt yield was steady, despite the downward revision to third-quarter U.K. growth.

U.K. borrowing costs over a 10-year period continue to trade at the highest levels since early December, as a second official estimate shows growth slowed in the third quarter of this year. Gross domestic product grew by a revised 1.1% over the third quarter, down from the previous estimate of 1.3% and undershooting expectations for a steady reading.

"The downward revision to GDP in 3Q means the economy had a little less momentum going into the closing months of the year than we previously thought," said Bethany Beckett, U.K. economist at Capital Economics. GDP growth looks to have slowed also in the fourth quarter as Omicron infections weigh on activity, Beckett added.

Commodities:

Oil prices held minor gains in Europe in relatively calm trading despite the reduced volumes, with the latest API data seen as slightly bullish for crude and slightly bearish for gasoline.

European gas prices slid 9.3%, paring some of their Tuesday gains that came as flows of Russian gas to Germany via Poland reversed in direction due to low supply. DNB Markets' Helge Andre Martinsen expects more of the same Wednesday, but the Financial Times in London has reported that ships carrying LNG destined for Asia are rerouting to supply Europe.

Copper futures were up 0.2% in London trade, with the recent rally slowing to a crawl as volumes thin out ahead of the public holidays. Gold prices edged down, lacking fundamental support.

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December 22, 2021 05:56 ET (10:56 GMT)

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