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EUROPEAN MIDDAY BRIEFING - Stocks Fall, EDF Plunges on French Power Price Cap

MARKET WRAPS

Stocks:

European stocks fell Friday, with technology bearing the brunt of losses on the heels of heavy losses for that sector on Wall Street amid worries over Federal Reserve action to control inflation.

The Stoxx Europe 600 index dropped 0.9%, following a modest decline on Thursday, which snapped a two-session winning streak

EDF shares slid 20% after pulling guidance. EDF was the worst performer on the Stoxx Europe 600, as the French state-controlled utility late on Thursday pulled its guidance for the year, saying the government's new moves to curb higher electricity bills will have an estimated impact of up to 8.4 billion euros ($9.62 billion).

Shares on the move: SAP was up near 1% in the U.S. premarket trade, after the German software group reported that revenue from its cloud-computing business rose 28% in the last quarter.

Shares in Currys dropped 4% after the U.K. electrical-goods retailer reported lower demand during its peak Christmas period and downgraded full-year adjusted pretax profit guidance.

While demand took a hit from the Omicron coronavirus variant, supply-chain disruption and a general weakening of tech demand among consumers, online sales rose strongly, trading firm eToro said.

"Currys shares have been hit hard this morning as the firm lowered its full-year profit guidance, which is perhaps unsurprising," eToro analyst Adam Vettese says. "But looking further ahead, its position in the market is undisputed and we see a return to sales growth once Omicron and the global supply crisis ease."

Data in focus: Germany's gross domestic product grew 2.7% in 2021, compared with the previous year, tracks the economists' comments here. [https://newsplus.wsj.com/search/realtime/topic/?searchParts=[{%22t%22:%22djn_code%22,%22q%22:%22djn:R/GE%22,%22c%22:%22R/GE%22,%22n%22:%22Germany%22}, {%22t%22:%22operator%22,%22q%22:%22and%22,%22n%22:%22and%22}, {%22t%22:%22djn_code%22,%22q%22:%22djn:N/ALMT%22,%22c%22:%22N/ALMT%22,%22n%22:%22All%20Market%20Talk%22}, {%22t%22:%22operator%22,%22q%22:%22and%22,%22n%22:%22and%22}, {%22t%22:%22djn_code%22,%22q%22:%22djn:S/GEGA%22,%22c%22:%22S/GEGA%22,%22n%22:%22Germany%20Annual%20GDP%22}]&searchFilterState=open&includeDefaultFilter=true]

Greece, which is still in sub-investment grade, might be on track to get further positive rating news later on Friday, when Fitch Ratings reviews the sovereign's credit status, Societe Generale said.

"Fitch could assign positive outlook to Greece's rating this Friday," SocGen's rates strategists said. Fitch currently has 'BB' rating with stable outlook on Greece. Fitch acknowledged the European Central Bank's announcement in December that it might still buy Greek government bonds until the end of 2024 as credit positive, SocGen added.

"As S&P revised upward Greece's rating outlook to positive in April 2021, Fitch is very likely to follow, in our view," the French bank's rates strategists say. Greece's 10-year bond yield trades 0.3 basis point lower at 1.517%, according to Tradeweb.

The impact of the Omicron coronavirus variant to the U.K.'s economy is expected to be modest, relative to past waves, ING's developed market economist James Smith said.

Cases have peaked, suggesting that Omicron's effect has been sharp but short-lived and staff shortages could ease soon Smith says, adding that consumer attitudes toward Covid-19 likely haven't changed much.

"The hit to GDP across December and January may not amount to much more than half a percent, not least because the recent booster vaccine and testing expansions may help boost health spending yet further, offsetting weakness elsewhere," he said. In this context, a Bank of England rate increase in February is growing more likely, he said.

The 0.9% on-month expansion for the U.K. economy in November brought it back to its pre-pandemic size for the first time, but GDP is set for a temporary setback due to Omicron, Capital Economics' chief U.K. economist Paul Dales said.

The performance of the economy was impressive in November, but tightened restrictions, staff absences due to illness or isolation, and heightened consumer

"The recent signs that the Omicron wave is starting to subside suggests that GDP will probably rebound in February and March," Dales said. From April 1, a sharp rise in taxes and utility prices is expected to drag on the recovery for the rest of this year, he said.

U.S. Markets:

Stock futures were little changed, as earnings season ramped up and investors awaited fresh data on retail spending.

Earnings are due from BlackRock, Citigroup, JPMorgan Chase and Wells Fargo ahead of the opening bell. Money managers will be looking for guidance on how companies are being impacted by the Omicron variant and elevated inflation. Some investors are betting that anticipated interest-rate hikes will fuel profits in financials and make the sector more attractive than tech.

Expectations for a rate rise as soon as March have caused some investors to sell government bonds, pushing up yields and down prices.

"Equity markets will continue to take their cues from the bond market," said Hugh Gimber, a strategist at J.P. Morgan Asset Management. "What's becoming clear is the Fed is realizing that inflationary pressures are larger and more broad-based than they previously expected."

Investors are trying to assess how heightened inflation, a tight labor market and rising wages will impact the Federal Reserve's timeline for raising rates. Lael Brainard, the White House nominee to serve as the central bank's No. 2 official, told Congress on Thursday that efforts to reduce inflation were the Fed's "most important task."

Fresh data on sales at retail stores, online sellers and restaurants in December are due at 8:30 a.m. ET.

Forex:

The dollar extended its falls that began after U.S. inflation data earlier this week were high but in line with expectations, prompting investors to take profits on the currency's strong gains since late November.

If Friday's retail sales figures are soft this "may provide an excuse for the dollar to correct a little further," ING said.

The DXY dollar index earlier fell to a two-month low of 94.6290 and could fall further toward 94.10, it said, adding that "extended positioning has probably made the dollar vulnerable early this year."

However, ING expects the falls to be temporary and says the dollar should start to rise again ahead of the Jan. 26 Fed policy meeting.

The euro's recovery versus the dollar may have slightly further to run but the gains won't last, ING said. The EUR/USD 1.1500 resistance level looks vulnerable and the pair could rise to 1.16, ING analysts said.

However, any increase to the 1.15-1.16 region would be a correction and ING retains its 1.08-1.10 target for this spring/summer as the Fed starts raising interest rates. EUR/USD's adjustment seems dollar-driven rather than any "bullish" reassessment of the euro with international fund managers investing in non-dollar assets such as emerging market equity and debt, they said.

Cryptocurrency dogecoin jumped 14% from its 5 p.m. ET level Thursday after Elon Musk said Tesla was accepting payment for some merchandise with the currency, which was originally started as a joke.

UBS Global Wealth Management enters a short position in the Swiss franc versus the Japanese yen, expecting the exchange rate to fall with a CHF/JPY target of 123 and a stop loss of 127.3.

That compares to the current CHF/JPY level of 124.975. CHF has appreciated more strongly than JPY due to less aggressive currency interventions by the Swiss National Bank than anticipated and expectations the Bank of Japan will maintain a more easy policy tone, UBS analysts said.

"However, recent comments from Japanese policymakers have signaled growing discomfort with yen weakness in light of rising import costs." That will limit CHF/JPY upside while short JPY positions look more stretched than short CHF positions, the analysts said.

Bonds:

Rates markets have entered consolidation mode after a strong selloff, said Societe Generale's rates strategists, who expect breaking above crucial levels by global rates being further off.

"Breaking key levels of 0% and 1.80% for 10-year Bunds and USTs (our 1Q targets) may require some time," they say. That said, they see the medium-term trend being firmly in place, targeting 0.25% on 10-year Bund yields and 2.25% on 10-year U.S. Treasury yields in late 2022.

Citi sees resistance to higher eurozone government bond yields to be defined by markets' pricing of global terminal interest rates, said strategist Jamie Searle.

"Resistance to higher euro yields is likely to come from the stickiness of global terminal rate pricing and growing policy error fears that may be hard to shake off," he said.

Citi is of the view that the selloff in German Bunds may already be fizzling out.

Gradual repricing of euro corporate bonds to price in higher interest rates has rattled returns in the first two weeks of 2022, said UniCredit. All sectors in the investment-grade corporate bond space have delivered negative total returns so far this year, analysts at the Italian bank said.

Total returns of high yield-credit, which include capital gains and interest income, are flat.

"The negative performance has taken place despite only a moderate new-bond supply... and has been driven practically entirely by yield volatility," they said.

The share of negative-yielding euro corporate bonds "has declined substantially" and the analysts expect the challenging environment for both investment-grade and high-yield credit to continue.

Citi expects eurozone government bond issuance to accelerate in the 15-20-year maturity segments in February and March and decline in the 10-year and 30-year maturities, said strategist Aman Bansal.

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January 14, 2022 06:46 ET (11:46 GMT)

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