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TIME TO PULL BACK FROM EQUITIES? NOT JUST YET (1128 GMT)
Everybody seems to agree that the current scenario of
accelerating growth coupled with low interest rates will become
less and less favourable. So the question is: when will it be
time to step away from stocks?
BofA analysts reckon it's still early; their projections
imply a flat market in the near-term, with a pullback only from
Q4 onwards. They see the StOXX 600 index at 460 by the end of Q3
and at 420 by year-end (it's currently at 475).
The reopening of economies should allow PMIs and company
earnings to keep rising, and while the Delta variant poses
risks, growth projections are consistent with around 5% upside
for the StOXX 600 12-month forward EPS by mid-2022, they say.
The analysts noted that in the past whenever EPS continued
rising, it allowed markets to remain resilient even
as growth momentum started to roll over.
BofA remains overweight banks, insurance and value versus
growth, noting they were already discounting slower growth and
would benefit from rising bond yields over the coming months.
It also upped the defensive food & beverages sector from
underweight to market-weight after its recent underperformance.
(Stefano Rebaudo)
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TEMPORARY INFLATION NARRATIVE: THE SCEPTICS (0933 GMT)
While recent U.S data showed some tentative signs of price
pressures peaking, many analysts continue to fret about
inflation and the Fed raising interest rates sooner than
expected.
With U.S. 10-year yields still at around 1.35% and equities
at new record highs, the market appears to share the view that
price pressure will start to fade, says UBS Global Wealth
Management Chief Investment Officer Mark Haefele.
But for Rabobank analysts "the key point is that not long
from now, our narrative (about temporary inflation) is going to
collapse like a house of cards."
Considering around 25% of capacity at China's third-busiest
port just closed down again due to Covid-19, "the one thing that
does not seem likely is a rapid drop-off in supply-side
inflation," they tell clients.
Fiscal stimulus will boost demand-side inflation, with or
without the Fed tapering and moving towards higher rates. But in
both cases, it will cause a "mess in liquidity-addicted
markets," they add.
And while U.S. core consumer inflation eased in July,
producer prices increased more than expected, suggesting strong
demand fuelled by the recovery continues to weigh on supply
chains.
The chart below shows U.S. 10-year yield after inflation
data issued on Wednesday and Thursday.
(Stefano Rebaudo)
*****
STOXX SET FOR LONGEST WINNING STREAK IN 15 YEARS (0830 GMT)
European shares are on fire, set for their longest winning
streak since December 2006 thanks to a strong earnings season
and a revived M&A market.
The STOXX 600 is up 0.1% to hit another record high
and is on track for its 10th consecutive daily gains. It is also
set for its fourth consecutive weekly gains.
In the corporate front, Pet supplies retailer Zooplus
shot up 40% after it accepted a takeover offer worth
around 3 billion euros ($3.5 billion) from U.S. private equity
firm Hellman & Friedman.
But not all is good news, shares in London-listed company
Avon Protection collapsed 30% after "disappointing"
trading update.
(Joice Alves)
*****
MUDDIED WATERS (0801 GMT)
Investors can be forgiven for being nonplussed on the data front
this week. A day after U.S. consumer inflation data showed early
signs of price pressures peaking, readings from the producer
perspective showed inflationary readings remained firm.
That confusion was evident in global markets too.
World stocks are set to sign off the week on a record high
while the U.S. Treasury yield curve is still trading near its
flattest levels this year, a sign that bond punters remain
concerned about inflation.
For now, the Federal Reserve can maintain its assertion that
inflation rises are temporary.
But a majority of economists polled by Reuters expect the
Fed to taper its asset purchases in September -- the jobs market
is stronger and Fed officials appear to be more willing to
discuss tapering the $120 billion monthly asset purchases.
Until fresh data adds to the taper debate, markets will
likely remain in summer torpor mode.
Even a widening regulatory crackdown in China has failed to
ignite broader market unease with the VIX “fear gauge” dropping
to a five-week low, and a U.S. equity put/call ratio slipping
below already very low levels.
European and U.S. stock futures are generally flat, with the
second quarter earnings season supporting sentiment. U.S.
investment grade companies have recorded an impressive 30%
earnings growth in the June quarter compared to the similar
period two years ago, Citibank estimates.
Favourable readings were evident in Europe too with banks,
historically laggards, posting impressive results.
The spoiler in the cautiously optimistic markets outlook
remains the surging Delta variant of COVID-19, especially in
Asia. Malaysia's central bank on Friday slashed its 2021
economic outlook due to the COVID surge.
Australia’s two largest cities – Sydney and Melbourne – remain
in extended lockdown.
Elsewhere, oil prices fell for a second day, while the U.S.
dollar held near four-month highs against its rivals.
Key developments that should provide more direction to markets
on Friday:
- Europe macro: France unemployment, final July CPI, euro
June trade balance.
- U.S. macro: Import price index, Michigan University
sentiment readings.
- British engineering firm Babcock to sell its
consultancy unit Frazer-Nash for 293 million pounds ($404.5
million) in cash.
- Adidas is selling Reebok to Authentic Brands
Group(ABG) for up to 2.1 billion euros.
(Saikat Chatterjee)
*****
STOXX SET FOR FOUR CONSECUTIVE WEEKLY GAINS (0630 GMT)
The STOXX 600 is on track for its forth consecutive
week of gains after repeatedly hitting record highs over the
past days helped by M&A deals and strong earnings results.
European futures are mixed with the EUROSTOXX50 futures
pointing to declines while FTSE futures edging
up.
In the corporate front, Adidas is selling its
Reebok brand to Authentic Brands Groups for up to 2.1 billion
euros ($2.46 billion) as it seeks to draw a line under an
ill-fated investment that never lived up to the German sporting
goods company's expectations.
(Joice Alves)
****
