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EQUITY RISK PREMIUM IS DOWN, BUT NO NEED TO ADJUST THE COST - BERNSTEIN (1049 GMT)
The equity risk premium is lower than at the end of 2019, according to Bernstein equity strategists, but investors don't need to adjust the cost of equity in their discounted cash flow models.
"The equity risk premium (ERP) has fallen in recent years in both Europe and the US - equities are less attractive relative to bonds than they were at the end of 2019," they write, a drop they attribute to the fact that bond yields have risen by more than equities have de-rated.
Stocks are still attractive relative to bonds in Europe, but the same cannot be said for the U.S. Bernstein calculate the equity return premium in Europe at close to 5%, above the long-term average of 4%, and in the U.S. at 2%, below the long-term average of 2.6%.
In Germany, the 10-year yield on government bonds is up about 300bps since the end of 2019, and up by 200bps in the U.S. in the same time-frame.
"The 12m fwd P/E in Europe has fallen from 15x to 12.8x over the same period (a de-rating of 14%), however the US equity market is now on exactly the same multiple it was at the end of 2019 (18.5x, no de-rating)," the strategists write.
However, the implied cost of equity is in line with long-term averages, and so Bernstein say there there is no need to adjust the cost of equity used in discounting cash flow models.
"Rising bond yields have been reflected in a falling ERP, resulting in a flat cost of equity."
(Lucy Raitano)
REAL ESTATE DRAGS ON STOXX 600 BUT RESULTS BUFFER LOSSES(0928 GMT)
The STOXX 600 is down 0.2% this morning, as the prospect of more interest rate hikes from the U.S's Federal Reserve permeates markets, though upbeat company results are helping limit losses in the index.
Interest-rate sensitive real estate stocks are weighing on the index, down 1.3%, chemicals are down by the same, and financial services are down 0.7%.
On the other hand, basic resources are faring better, rising 0.2% and tech stocks are up 0.1%.
The main thrust of the day is still the realigning of expectations after Fed Chair Jerome Powell's first day of his semi-annual testimony to Congress on Tuesday.
"Although there was nothing new in what Fed chair Powell said yesterday, the market took notice and comments made by the chairman acted like a wake-up call for market participants. There is a difference between expectations and reality," said Stephane Ekolo, global equity strategist at Tradition in London.
But it is results that are moving today's top risers and top fallers.
Languishing near the bottom of the index is British motor and home insurer Admiral, having touched a four-month low after posting a profit miss and slashing its dividend.
Andritz is the top riser, touching an all time high and last up 5.3% after full-year results. Continental, Elis and Eurazeo are all ticking higher after positive results.
(Lucy Raitano)
THE PERILS OF NOT KEEPING UP WITH POWELL (0823 GMT)
Hey Jay, why don't you say what you really think? That's been Asia's market reaction to the Fed chief's warning on faster hikes and higher rates.
Yields on two-year Treasuries have extended their spike to 5.07%, putting them 107 basis points above the 10-year and through the 100bp pain barrier for the first time since 1981.
Going by the textbooks that should be DEFCON 1 for recession, but stock markets aren't entirely buying it with S&P 500 futures holding steady so far.
Fed fund futures took Powell at his hawkish word and now imply a 70% chance the Fed will hike by 50bp this month, up from just 9% a month ago. The peak has shifted to 5.50-5.75%, with a risk of even more.
Goldman quickly raised its forecast of the peak by 25bp to 5.5-5.75% and assumes the FOMC dot plot will do the same.
JPMorgan noted Powell's focus on the "totality" of data places a lot of weight on Friday's payrolls figures and next week's CPI.
"Now that Powell has opened the door to 50bp, the bar has likely changed such that the February data need to reverse some of the January strength to stay at 25bp," say JPMorgan's analysts. And if they go 50bp this month, that might become the new norm for May and June.
Note, the CPI comes during the Fed's media blackout period, which will complicate the market reaction and maybe lead to a timely Fed whisperer column in one newspaper or another.
All this frenetic speculation has clearly been a boon to the U.S. dollar, which broke above its 200-day moving average on the yen for the first time this year to hit 137.49.
The euro reached $1.0538, having seen its biggest single-session fall in five months overnight.
The poor Aussie dollar suffered an even bigger hit as RBA chief Lowe took this exact moment to mention the possibility of "pausing" its 10-month tightening campaign.
Lowe cited Australia's relatively restrained wages growth and the fact hikes have more impact on household spending since the majority of mortgages have variable rates rather than fixed.
The Bank of Canada is likely to go all the way and actually pause at its policy meeting later on Wednesday, though it may sound hawkish to try and limit the fallout for the loonie.
The Canadian currency is at four-month lows of 1.3766 per dollar and worse is to come according to Deutsche Bank macro strategist Alan Ruskin.
"If the Fed follows through and hikes by 50bps in March, and even more likely the Bank of Canada strikes the pause button, the rate gap is consistent with USD/CAD heading up to 1.40 or even slightly beyond," says Ruskin in a note.
Essentially, the cost of not keeping up with the Fed can be a much weaker currency and a greater risk of imported inflation. Thanks again, Jay.
Key developments that could influence markets on Wednesday:
- German industrial output and retail sales data for Jan
- Appearances include ECB President Christine Lagarde and Bank of England Monetary Policy Committee member Swati Dhingra
- Fed Chair Jerome Powell second round testimony to House Financial Services Committee, and Fed's Barkin speaks
- U.S. JOLTS data, where forecasts are for a sizable fall in job openings, and will also have annual revisions. ADP employment and trade figures
- Bank of Canada announcement at 1500 GMT
(Wayne Cole)
FUTURES FLASH RED AS MARKET DIGESTS POWELL COMMENTS (0736 GMT)
European futures are a sea of red, as a ripple effect continues after Federal Reserve Chairman Jerome Powell on Tuesday opened the door to higher and possibly faster rate increases.
Eurostoxx 50 futures are down 0.3%, after ending Tuesday 0.8% lower, while the S&P 500 fell 1.5% yesterday.
Fed Chair Powell told U.S. lawmakers the central bank will likely need to raise interest rates more than expected in response to recent strong data.
In company news, Europe's largest defence electronics company Thales on Wednesday posted a 15.6% rise in 2022 core operating profit, and Swiss plumbing supplier Geberit posted better than expected net profit in 2022.
A week from now, British finance minister Jeremy Hunt will reveal his new budget, and looks set to refrain from big tax cuts or spending increases until the next election comes closer into view.
(Lucy Raitano)
