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* European shares erase all December gains
* STOXX 600 falls 2.8%, volatility spikes
* New virus strain, Brexit doubts spook investors
* US futures down sharply, Tesla set to fall on S&P debut
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markets.research@thomsonreuters.com
A ONE TRILLION EUROS MARKET FOR GREEN BONDS? (0841 EST/1341
GMT)
Green bonds are in the spotlight more than ever with the
pandemic and this is going to continue in the coming years as
focus on sustainability is expected to increase.
2021 could be crucial, according to NN Investment Partners
(NN IP), which sees a 50% global bond issue rise compared with
2020, which would take the global green bond market to one
trillion euros.
The asset manager expects the final version of the European
Union’s Green Bond Standard to be published in 2021 and sees it
as “the first driver of the green bond market surge in 2021.”
Besides the European Union will start issuing green bonds
from Q2 2021, for “an estimated amount of 225 billion, which is
on third of its Covid-19 recovery package,” it says in a
research note. Then more countries will make their debut,
including “Italy, Spain, the UK, Denmark, Ukraine and Slovenia.”
NN IP believes that the “finalisation of the first version
of the new EU Taxonomy and EU Green Bond Standard will have a
long-term positive impact on the integrity and transparency of
the EU green bond market and will act as the blueprint for
regulation in other regions.”
“The pandemic has created a positive boost, as a lot of
countries need more funding, and with green ambitions stronger
than ever the green bond market will be widely viewed as a major
opportunity,” says Jovita Razauskaite, Portfolio Manager Green
Bond at NN Investment Partners.
The European Commission has been tasked to make a legal
proposal for an EU green bond standard by June.
(Stefano Rebaudo)
*****
NEAR TERM-RISKS FOR RISKY ASSETS (1245 GMT)
Many are hoping for and expecting a risk-on 2021 with
vaccines available and governments and central banks continuing
to support the economy for as long as it takes.
But some analysts are flagging that investors are focusing
on the medium-term outlook while ignoring near-term risks.
Let’s see some of them, according to Barclays.
Markets have staged little response to the latest Covid
waves as they assessed that “the severity of restrictions is
likely to be low and additional waves are unlikely,” due to
vaccines.
This might not be completely true and Barclays analysts
recently revised down euro area and U.S. forecasts as activity
is taking a hit in developed countries.
Brexit troubles are still looming and Barclays, regardless
of the outcome, sees “volatility around New Year, as
implementation of the new trading arrangements could run into
unexpected disruptions.”
U.S. political drama might not be over as Democrats can
still gain control of the Senate after run-off elections in
Georgia, due on January 5. Some analysts think that this kind of
scenario might be good for markets because it would include more
government stimulus.
But a “potential rapid increase in U.S. yields triggered by
expectations of a faster recovery/fiscal slippage would be a
drag for risky assets,” Barclays says.
However, its view are positive on 2021, in line with
consensus, as “the potential reduction in global trade and
geopolitical tensions following Biden’s victory, the deployment
of vaccines and expectations of a global recovery amid ample
policy support underpin market optimism".
(Stefano Rebaudo)
*****
BANKS’ METRICS AND DIVIDEND RESTRICTIONS (1101 GMT)
Euro zone bank stocks staged almost no reaction to the ECB's
decision on dividends a couple of weeks ago as investors had
already priced in capped pay-outs in the run-up to the move. But
what about the impact on their main capital metrics?
Moody’s estimates that the negative impact of dividends on
Common Equity Tier 1 (CET1) ratio - a closely watched measure of
balance sheet strength – will be offset by benefits that banks
gained from the recent application of the European Union's
revised Capital Requirements Regulation 2 (CRR2 "quick fix").
The "quick fix", which relaxes capital requirements for some
banks’ exposures such as those on small- and mid-size
enterprises, resulted in a 40 basis points increase in CET1 in
the first half of 2020, according to Moody’s estimates.
Euro zone lenders have consistently increased their capital
ratios since 2015, according to European Banking Authority (EBA)
data as of June 2020.
But 2021 might be a tougher year for banks across the bloc.
“Regardless of whether banks make full use of earnings
distributions on 2019-20 profits, we expect banks’ CET1 capital
ratios to decline in 2021 as the pandemic-induced deterioration
in economic conditions inflates risk-weighted assets amid
diminishing bank customer creditworthiness,” Moody’s says.
Profits will remain challenged as credit costs are expected
to increase “particularly because credit exposures will migrate
to stage 3 from stage 2 under IFRS provisioning rules,” it adds.
(Stefano Rebaudo)
*****
THE YEAR THAT WAS: "CONTRARIAN CATASTROPHE" (0947 GMT)
Did you make a contrarian bet this year that didn't work out
the way you'd hoped for?
If your answer is yes, there isn't much you can do about it
now as 2020 draws to its close but it may be somewhat comforting
to know that you were not alone.
"... 2020 has been the worst year on record for contrarian
global stock-pickers. 2019’s winning trades kept winning. The
losing trades kept losing," strategists at Citi say.
It was a "contrarian catastrophe", they note.
"While we all like to think of ourselves as contrarians, the
simple point is that this strategy doesn’t work. The big payout
years for contrarians, like 2000 when the Tech bubble burst, are
not enough to make up for the more frequent years when they
lose. And in some years (like 2020), they can lose really big".
Check out this chart to make your own call.
(Danilo Masoni)
*****
EUROPE'S DECEMBER GAINS WIPED OFF, VOLATILITY PICKS UP (0832
GMT)
The stress caused by the new COVID-19 variant has resulted
in a broad sell-off across European equity markets in early
trading as investors fret over the damage expected from the
tougher restrictions imposed to fight the virus' spread.
Travel and leisure stocks are the hardest hit, down more
than 5%, followed by other cyclicals such as banks and oil. No
sector was trading in the black, and defensive plays barely
managed to limit their declines.
As a result the pan-European STOXX 600 benchmark
index fell 2% to erase all the gains it made so far this month,
while volatility gauges picked up, sending the euro zone
volatility index to a six-week high.
Among the handful of stocks in positive territory were
stay-at-home darlings such as Ocado and other delivery
firms, while precious metal miners like Fresnillo also
rose, as safe haven demand lifted gold prices to six-week highs.
Here's your snapshot:
(Danilo Masoni)
******
NEW STRAIN PAIN (0757 GMT)
A new COVID-19 strain, said to be up to 70% more
transmissible than the original, has led several countries to
shut their borders with the UK. And the lack of tangible
progress in Brexit talks, ahead of a Dec. 31 deadline has put
markets back into a state of angst.
That means there's little comfort from a U.S. congressional
deal on a $900 billion relief bill as focus has turned back to
the economic damage caused by tougher lockdown measures and the
possibility of tariffs on nearly $1 trillion worth of trade
flows between the UK and Europe.
Sterling is at the forefront of selling pressure, set for
its biggest one-day drop since September. European stocks index
futures are down more than 1.5%, while safe-haven demand is
supporting the dollar and lifting gold back to a six-week high.
U.S. stock futures steadied, however, helped by the stimulus
deal which will be likely voted on today. But Treasury yields
are down in response to the gloomy headlines and the gap between
two- and 10-year yields, which widened on Friday to near
two-year highs in anticipation of the stimulus package, has
narrowed a touch.
Monday also marks the much anticipated entrance of Tesla
into the S&P500 index. To make space for Telsa, which is up 720%
so far this year and trades at an astonishing 165 times forward
earnings, passive funds will need to sell an estimated $80 bln
worth of other stocks.
Meantime M&A continues apace. Lockheed Martin will to buy
U.S. rocket engine maker Aerojet Rocketdyne for $4.4 billion,
while a private-equity firm Thoma Bravo has reportedly inked a
$9.6 billion deal to buy software firm provider RealPage.
(Danilo Masoni)
*****
MORNING CALL: NEW VIRUS STRAIN STRESS (0635 GMT)
European stock markets are expected to open sharply down
this morning as the new strain of the virus which has shut down
much of the United Kingdom and closed its border is spooking
investors out of risk assets.
Futures for euro zone stocks are down 1.3%, 1% for Germany's
DAX and 0.8% for London's FTSE 100.
The blow for the UK blue chip benchmark is however softened
by the pound falling well over 1% which provides a currency
hedge to dollar earners on the index.
Things look better for Wall Street with futures for the S&P
500 flat and clearly rising (+0.4%) for the Nasdaq.
The deal for a new stimulus package in the U.S. should
clearly be a boost for global stock markets but the grim
coronavirus headlines are keeping any excess enthusiasm in
check.
MSCI's broadest index of Asia-Pacific shares outside Japan
<.MIAPJ0000PUS is flat and oil prices have taken a 3% hit.
On the bright side, many analysts believe that in the great
scheme of things, the new virus strain isn't a game changer.
"Once the markets have finished panicking and unwinding
recent speculative positioning, the fundamentals of lower for
more extended monetary policy, and the search for yield in a
zero per cent world, will quickly reassert themselves", wrote
Jeffrey Halley at OANDA.
(Julien Ponthus)
*****
