EUROPEAN MIDDAY BRIEFING – Stocks Drop as Traders React to Hawkish Fed

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European stocks were around 1% lower Thursday, as traders had their first opportunity to react to minutes from the last Federal Reserve interest-rate setting committee and a subsequent selloff on Wall Street.

Investors’ nerves were shaken by meeting minutes from the FOMC suggesting a hawkish turn for the Fed. They showed the central bank’s monetary policy body considering earlier and faster interest-rate increases and a quicker start to policy tightening through the normalization of its massive balance sheet.

“The December FOMC minutes last night shattered the early year calm in financial markets,” said Jim Reid, a strategist at Deutsche Bank in the U.K.

“The shift in sentiment came against the backdrop of continued rises in sovereign bond yields,” Reid added. “There are a few other big questions outstanding, including how many rate hikes would take place before quantitative tightening begins and how Treasury and mortgage-back security holdings would be treated during runoff.”

Stocks on the move:

Banca Carige shares rose 3.4% following press reports that Credit Agricole has made an offer for the troubled lender.

According to Italian daily Il Messaggero, the French bank offered to buy Carige for EUR1, subject to a prior capital injection of EUR700 million from its current owner. Credit Agricole declined to comment on the report.

Carige already has a potential suitor: Last month, it received a nonbinding offer from Italian peer BPER Banca. Carige’s owner said the terms of the deal weren’t acceptable, but signaled it was open to negotiation.

Carrefour shares climbed 4.4%, with Bryan Garnier saying it expects the French grocer to remain a draw for potential merger or takeover activity in 2022, given its low valuation, healthy balance sheet and divestment potential.

Fresh media reports suggest rival Auchan remains interested and is talking to private-equity funds over a joint bid for Carrefour, and other suitors could also be interested, said Clement Genelot at Bryan Garnier. He pointed to Canada’s Alimentation Couche-Tard, which made an abortive bid at the beginning of last year. Auchan declined to comment on the new reports.

Sodexo shares traded 1.4% lower after the French food-services and facilities group reported higher revenue for the three months ended Nov. 30, but its top-line came in below Bryan Garnier’s own forecasts, even though revenue was in line with consensus.

First-quarter revenue of EUR5.26 billion and organic growth of 17.5% were below Bryan Garnier’s estimates of roughly EUR5.51 billion and 22.8%.

“Management confirms its guidance for the FY, noting, however that the new health measures related to Omicron will have an impact but it is currently difficult to quantify whether this will be significant or not, ” said Bryan Garnier.

Economic Insight:

German Manufacturing orders rose 3.7% on month in November following a revised 5.8% drop in October, leaving orders 6.6% higher than their pre-virus level, with Pantheon Macroeconomics saying activity was always likely to snap back after October’s plunge.

Turnover data, also released Thursday, suggests that German industrial production recorded another strong month in November, said Melanie Debono, senior Europe economist at Pantheon. The risks to Pantheon’s above-consensus forecast of a 2% increase in output for the month are to the upside, she said. “This is reassuring, and suggests that industry helped support GDP growth in the fourth quarter.”

Germany’s industrial production data will be published Friday.

U.S. Markets:

U.S. technology stocks were poised for further losses at the opening bell Thursday after getting clobbered by investors concerned about likely interest-rate rises.

Investors are bracing for a volatile spell for tech stocks, which have powered the market higher since the early-pandemic slump in 2020. Shares of companies such as Apple and Microsoft have benefited from low interest rates on top of blockbuster earnings helped by the shift to home working.

Rates, however, look set to increase, potentially as soon as March. Although investors say stocks can continue to rise in a period of rising rates that reflect a growing economy, tech shares and momentum stocks such as Tesla are seen as vulnerable.

“We could be in for a rough ride,” said Lars Skovgaard Andersen, investment strategist at Danske Bank Wealth Management. Mr. Andersen expects the volatility to last at least until tech companies begin to report earnings later this month, which he said could encourage investors to buy those stocks back.

Mr. Andersen sees the selloff as a buying opportunity but intends to target the broad market and European banks that stand to benefit when rates rise, rather than U.S. tech.

The catalyst for the selloff was the publication of minutes from the Fed’s December policy meeting. Traders in interest-rate futures are pricing in a 71% chance that the Fed will raise its short-term target rate from its range of 0% to 0.25% at its March meeting. That is up from 32% a month ago, shortly after Omicron emerged, according to CME Group data.


The dollar rose 0.2% in Europe against a basket of currencies, supported by markets pricing in a higher probability of a Fed rate rise in March simultaneously with the end of its bond-buying program, said Danske Bank.

The minutes “opens the window” for not only three rate rises this year, as the Fed has signalled, but four, Danske Bank said. Danske Bank expects EUR/USD to fall to 1.10 in 12 months.

IG said investors have been caught by surprise by a much more hawkish tone from the FOMC minutes that what many had expected. A shrinking balance sheet and aggressive rate increases indicated by the minutes may have driven concerns over some capping of economic momentum ahead, IG added.

The European Central Bank is likely to remain patient in raising interest rates as inflation eases, leaving the euro under pressure versus the dollar throughout most of 2022, said ING.

Data at 1300 GMT is expected to show German inflation eased, which would endorse bets that eurozone inflation has already peaked, said ING forex strategist Francesco Pesole. That is unlikely to have an immediate impact on the euro as the ECB’s path appears “pretty much set.”

In the longer term, however, softening price pressures should allow the ECB to maintain a gradual approach to tightening policy, which should “keep the Federal Reserve-ECB policy divergence a net-EUR/USD negative for most of 2022,” said Pesole.

Sterling gave up some of its recent gains as risk appetite deteriorated but the declines are likely to prove limited following an easing of U.K. travel restrictions, said ING.

The U.K. government’s decision Wednesday to reduce travel curbs suggests it is determined to avoid any major restrictions despite the spread of Omicron, said ING forex strategist Francesco Pesole.

“Once risk sentiment stabilises, this should allow the pound to stay supported.”


Eurozone government bond yields were higher after the latest Fed minutes hinted at a faster policy-tightening trajectory, said analysts.

“Hawkish Fed minutes are set to shift the upper bound of the Bund yield range while macro printers remain key,” said Commerzbank’s rates strategists Rainer Guntermann and Hauke Siemssen.

Potentially reinforcing the bond selloff, German manufacturing orders came in stronger-than-expected in November.

Scheduled government-bond issuance in the eurozone will come from France which will conduct its first bond auction of the year, offering EUR10 billion to EUR11 billion in May 2032 OAT–a new 10-year bond–as well is in May 2040- and May 2053-dated OATs.

The eurozone, the pioneer in the green sovereign-bond space, is set to continue expanding its issuance, said Bank of America, expecting EUR70 billion of green eurozone government-bond issuance in 2022, up from EUR50 billion in 2021.

Still, the overall eurozone green-labeled bond market will remain “minuscule” compared with the total outstanding or even with the inflation-linked market. “In 2022, supply pressures for green EGBs [eurozone government bonds] should therefore remain relatively subdued while demand is unlikely to abate relative to 2021.”

Bank of America said that one of the reasons for the sovereign green-bond market remaining so small despite “incredible” investor demand is the structural bottleneck in eligible investments.

The fair value of France’s new 0% May 2032 OAT, a 10-year government bond to be launched at Thursday’s auction, should be a touch above the 0% November 2031 OAT yield plus 4-basis-points level, said Mizuho.

The French Treasury Agency will launch the new 10-year bond as part of its EUR10 billion-EUR11 billion auction at which it will also reopen 0.50% May 2040 and 0.75% May 2053 OATs.

Mizuho’s rates strategists expect the new 10-year OAT to account for around EUR6 billion of total allocation at the auction.


Oil prices were little changed after a combination of mixed data on crude stockpiles and hawkish minutes from the Fed weighed on sentiment.

Gold futures fell to a two-week low after the minutes sent Treasury yields and the dollar higher.

Nickel ore production should rise solidly in 2022 and 2023 as there are fewer disruptions to mining in Indonesia and the Philippines and high metal prices encourage producers to dig up more, said Fitch Solutions.

However, production increases will later taper off to result in average 4% annual growth for 2021-2030, down from 6.6% a year during 2010-2019.

“The most fragile part of the global nickel mine supply pipeline is in Indonesia, where any delays to development of downstream nickel processing facilities could result strand nickel ore in the country and reduce the incentive for miners to boost output,” Fitch said.




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