* European shares up 0.7%
* Credit Suisse chairman resigns over COVID-19 breaches
* China cuts rates on policy loans
* Wall Street shut for holiday
* Unilever plunges, GSK jumps
Jan 17 - Welcome to the home for real-time coverage of
markets brought to you by Reuters reporters. You can share your
thoughts with us at markets.research@thomsonreuters.com
"THE LULL IN MARKETS IS UNLIKELY TO LAST" (1645 GMT)
It was a pretty smooth session for European equities with
the STOXX 600 gradually gaining strength and ending up 0.7%.
The fact that Wall Street was closed seemed to have helped
and the EURO STOXX 50 volatility index is about 15% lower than
it was at the beginning of last week.
That being said, there was plenty of corporate news to
digest today, particularly with Unilever falling close to 7%
after news of its rebuffed 50-billion-pound ($68.26 billion)
offer for GlaxoSmithKline's consumer healthcare business.
The fallout was more limited for Credit Suisse which lost
2.3% after the abrupt departure of Antonio Horta-Osorio
following an internal probe into his personal conduct, including
breaches of COVID-19 rules.
"European stocks have made small gains today while US
traders take the day off, but the lull in markets is unlikely to
last," commented IG market analyst Chris Beauchamp.
"The gains will be swiftly reversed if US traders come back
tomorrow in a similarly bearish mood to that prevailing on
Friday," he warned, adding that risks linked to U.S. earnings
and the Fed might keep investors cautious.
Finally, it's worth noting that UK equities have
outperformed the rest of Europe for another session, with a
0.9% rise.
Since the beginning of 2022, the FTSE is up about 3.1%, well
above the decline of 0.7% suffered by the STOXX 600.
(Julien Ponthus)
*****
EURO ZONE: NOT THAT KIND OF INFLATION (1221 GMT)
Speaking of monetary tightening, it seems that ‘what kind of
inflation’ is going to be more important than the outright
levels when central banks decide their next moves.
According to Erik F Nielsen, UniCredit group chief economic
advisor, “standard ‘cost-push inflation’ is being accompanied by
‘demand pull’ inflation in the U.S., driven partly by fiscal
stimulus, partly by consumers reducing their excess savings.”
“As a result, and critically important for the appropriate
monetary policy reaction, the U.S. labour market is turning red
hot,” Nielsen says.
In Europe, inflation continues to be driven predominantly by
energy, the supply bottlenecks and the effect of the change in
the German VAT (value added tax) rate.
“This is all ‘cost-push’ inflation,” he adds. “In other
words, the high inflation rate in Europe is a sign of erosion of
the population’s real income and hence purchasing power, not as
a sign of over-heating.”
While in the U.S., the economy needs a more hawkish central
bank, in the eurozone, “any withdrawal of economic policy
stimulus would be a mistake,” Nielsen argues.
By the way, he also sees higher inflation during 2021 as
transitory “because it was overwhelmingly driven by one-off
factors, including higher commodity prices and the supply
bottlenecks.”
(Stefano Rebaudo)
*****
UNILEVER: DEBT AND MAYONNAISE (1145 GMT)
The market has spoken: Unilever is the worst performer
across the pan-European STOXX 600, losing over 7% as investors
wonder whether it will sweeten a 50-billion-pound offer for
GlaxoSmithKline's consumer healthcare business.
"The negative share price reaction probably reflects
investors’ fears that Unilever is going to come back with a
higher offer and potentially pay too much", argued Russ Mould,
investment director AJ Bell.
With speculation mounting that a bid could reach up to 60
billion and create an unsavoury debt pile, it's pretty
understandable that Unilever shareholders could feel a tad
nervous.
"Paying £50bn for a business that sells pain relief products
and toothpastes, comes across as a risky bet, and while there
appears to be universal consensus that Unilever needs to shake
up its business, a near £60bn price tag for doing so seems a
little on the rich side", CMC Markets analyst Michael Hewson
argued.
Mega deals are typically risky business and expensive mega
deals even more so.
"Very few deals with a purchase price of >20x EBITDA have
created value", Barclays analysts noted, adding that there's
also plenty of execution risks.
Barclays lowered its Unilever rating to equal weight "to
reflect the heightened risks that we see from this deal whether
it goes through or not, but also concerns around the steep
inflationary pressures that Unilever faces".
At HSBC too, the M&A rational of mega deals was put into
question.
"The patchy historical track record of large transactions in
the sector - and indeed Unilever's last really big acquisition,
Bestfoods - is also likely to be at the forefront of investors'
minds", the bank's analyst Jeremy Fialko wrote.
The situation is obviously much more comfortable for GSK
which is up about 4% this morning.
"At the very least, the Unilever bids will provide a floor
for the valuation of the GSK Consumer business", HSBC analyst
Steve McGarry also wrote, noting it's not "yet clear whether a
straight sale versus a de-merger (valuation aside) would
generate a better return for GSK's shareholders".
The question of what happens to Unilever's mayonnaise, deal
or no deal, also seems to be on everybody's mind.
At Markets.com, Neil Wilson said he doubted Unilever would
be ready to up its bid to what would be required and argued it
has enough on its plate when it comes to its brands portfolio.
"Does Unilever want it bad enough? I don’t think so. More
pressing things to consider … like the purpose of mayonnaise"
As noted by in a Deutsche Bank thematic note into ESG, a key
Unilever shareholder asked the company to define the social
purpose of its mayonnaise brand.
A question that's actually quite relevant when you consider
DB's chart below on how interest in ESG seems to have a positive
impact on profit margins.
"The relationship is certainly not perfect, however, since
data began in 2005 there are four identifiable periods where
corporate profit margins rose at the same time as a noticeable
upswing in "ESG" mentions in company documents", the DB research
reads.
Some reading:
Unilever signals pursuit of GSK consumer arm; shares fall
FACTBOX-GSK's consumer healthcare business coveted by
Unilever
(Julien Ponthus)
*****
"TOO EARLY TO ADD AGAIN TO TECH" (1058 GMT)
Tech stocks have been hit hard this year as investors sought
to reduce exposure to businesses that have flourished thanks to
abundant stimulus and the COVID-19 pandemic.
And given the Fed looks headed towards faster policy
normalisation, just as inflation rages and signs emerge that
COVID-19 could transition to endemic, that's understandable.
But after the initial hit, one may wonder whether it's time
already to jump back in.
Credit Suisse believes investors should steer clear from
such a temptation, saying it is "too early to add again to tech"
"Tech is discounting no rise in TIPS yield. We worry about
pull forward/maturity in parts of tech, valuation of software,
loss of earnings momentum (for software), acute concentration
and the bear market already in the small cap cloud," say
strategists at the Swiss bank.
They are still benchmark on software, after downgrading the
space in December last year for the first time in 12 years,
although they retain a small overweigh on tech via semis.
"We remain overweight semis, albeit reduced (valuations look
reasonable for a sector that should re-rate as it becomes less
cyclical, more capital disciplined with higher structural
growth, excellent relative earnings momentum), and it ranks top
on our fundamental scorecard".
Needless to say given the direction of travel of the Fed, CS
stays overweight on financials.
(Danilo Masoni)
*****
STOXX ON THE UP (0856 GMT)
European equities kicked off the week on right foot with
gains across most sectors and in heavyweight GSK driving the
STOXX 600 up 0.5% in early deals to recover part of Friday's
losses on growing policy tightening fears.
GSK rallied around 5% after the London listed drugmaker said
it had rejected a 50-bln-pound proposal from Unilever for its
consumer healthcare business. Unilever fell more than 6%.
Also on the watchlist was Credit Suisse, whose shares fell
more than 2% after the Swiss bank's chairman quit following an
internal probe into his personal conduct.
Activity is likely to remain subdued as Wall Street is shut
today for holiday.
Here's your opening snapshot:
(Danilo Masoni)
*****
RATE HIKES ON MY MIND (0738 GMT)
It's been a turbulent start of the year for world markets
with the prospect of interest rate hikes in the U.S. starting to
skim the froth off global equity valuations and leaving
investors wondering for how long the bull run would continue.
Talk about the Federal Reserve turning off the tap on
massive stimulus is here to stay but with the earnings season
kicking off on Wall Street risk sentiment could find some
comfort as corporates report double digit profit increases.
And for the coming week investors will be also spared
hawkish speeches from Fed officials now in blackout mode before
a policy meeting on Jan 26.
S&P 500 earnings are expected to have grown 23.1% in the
last three months of 2021 and STOXX 600 earnings are seen up
48.5%. Yet the bar is high and management teams might find it
harder to please markets accustomed to stellar corporate growth.
Shares in most big Wall Street banks fell on disappointing
numbers last week, leading to two consecutive weekly losses for
the U.S.'s main equity benchmark. Today it will be
quieter as Wall Street is closed for Martin Luther King Day.
Meantime, European index futures pointed to slight gains at
the open. In Asia, China's central bank unexpectedly cut the
borrowing costs of its medium-term loans for the first time
since April 2020 to cushion an economic slowdown.
And Chinese stocks advanced.
Finally, Credit Suisse Chairman Antonio Horta-Osorio has
quit following an internal probe into his personal conduct,
raising questions over the embattled lender's new strategy.
Its shares rose 2% ahead of the cash market open.
Key developments that should provide more direction to
markets on Monday:
* China's economy rebounded in 2021 from its
pandemic-induced
slump but the pace slowed further in Q4 off the back of weak
consumption and a property downturn
* GlaxoSmithKline rejected a 50-billion-pound offer from
Unilever
for its consumer goods arm, saying it undervalued the business
* ECB speaker: President Christine Lagarde
* Davos WEF starts
* EU finance ministers meet
* German foreign min Baerbock visits Ukraine
* UK Rightmove House prices Jan
(Danilo Masoni)
*****
($1 = 0.7325 pounds)