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WHAT TO OWN IN UNCERTAIN TIMES (0859 GMT)
It's hard to juggle between bond market flashing recession alerts and mixed signals from the Ukraine-Russia conflict.
But if you expect growth in Europe to decelerate this year, hurting company profits just as price pressures keep rising, it may be worth making equity portfolios more defensive to help them navigate through the downturn without too much damage.
Credit Suisse has some suggestions: Beiersdorf, BMW, Cellnex, CRH, Diageo, DSM, Eurofins, KPN, Lloyds, National Grid, Reckitt Benckiser, Sanofi, Siemens Healthineers, Smiths Group and Wolters Kluwer.
These stocks were screened out to meet some of the following criteria which the Swiss bank believes makes them well-positioned in this environment: low direct exposure to Eastern Europe; low exposure to euro zone cyclicality; cash rich; high US exposure; low exposure to rising input and freight costs; a strong ability to pass on input costs.
(Danilo Masoni)
BANKS: WHO SAID RATE RISES ARE ONLY GOOD (0821 GMT)
No doubt banks are better off with rising rather than falling interest rates - but not all that glitters is gold.
So while the prospect of rate rises is likely to ease pressure on margins squeezed by ultra accommodative policies, RBC highlights how that can be "a double-edged sword" - given the war in Ukraine and downside risks for the economy.
"The current geopolitical environment and uncertain outlook warrants an above-average COE and we see risk to earnings estimates," writes RBC analyst Anke Reingen.
"Our base case is an economic slowdown in 2022 but a more normal environment in 2023. On this basis the investment case for European banks looks less compelling at this stage".
Reingen also noted that in the UK, bank stocks have tended to underperform the market during rate hike cycles.
"The overarching question for us is whether the current geopolitical situation will lead to a recession," she said.
(Danilo Masoni)
STOXX: PARTIAL REVERSAL (0747 GMT)
European shares got off to a rather uneventful start this morning with main benchmarks heading south in a partial reversal of trades seen yesterday when optimism about a Russia-Ukraine deal boosted the sectors hit hard since the war started late last month.
Autos and banks gave up part of yesterday's rally, falling 1.6% and 1.2% respectively, while oil stocks rebounded, up 2% to lead sectoral gainers, as some scepticism over Russia's pledge to scale down military operations around Kyiv curbed the initial enthusiasm.
So the pan-regional STOXX 600 index snapped a three-day winning streak, falling around 0.5% in early deals from the 5-week high hit yesterday.
Here's your opening snapshot:
(Danilo Masoni)
A 1-2 PUNCH FROM THE BOND MARKETS (0658 GMT)
Whether or not you believe in the signalling power of the U.S. Treasury curve, inversion of the key 2-10 year segment remains a sit up and pay attention moment for world markets.
That's what happened, albeit briefly, on Tuesday when two-year bond yields rose above 10-year ones, inverting the curve for the first time since 2019 in what is widely regarded as an indicator of rising recession risks. That spread is just under four bps in London, flirting with inversion territory.
And while Fed researchers believe the predictive power of the spread to signal a recession is "probably spurious," suggesting other yield curve measures are better, the spread's track record as a recession indicator is punchy.
Since the 1960s, an inverted Treasury curve has been followed by a recession within two years, including the 2020 downturn caused by COVID-19. That means the significance of the latest inversion won't be lost on markets -- or the Fed.
And in another wow moment for the bond markets, the two-year German bond yield popped briefly into positive territory for the first time in eight years. Only three weeks ago, that yield troughed at around minus 80 bps.
With Germany warning that it could be heading for a gas supply emergency even as inflation surges, bond yields may be headed higher.
Russia-Ukraine talks meanwhile will remain in focus, with positive headlines likely to be a trigger for a fresh risk-on move.
Asia shares joined a global rally as hopes rose for a negotiated end to the Ukraine conflict. European stock futures are mixed and U.S. futures are a touch softer.
Equity markets appear to be in a rally on anything kind of mood but uncertainty remains high and that resilience will likely be put to the test soon.
German inflation data out later in the day is also one to watch.
Key developments that should provide more direction to markets on Wednesday:
- Japan boosts defence of benchmark yield as global pressures persist
- Auto manufacturers scramble as Shanghai locks down
- Euro zone consumer inflation expectations
- ECB President Christine Lagarde, Governing Council member Pierre Wunsch, ECB bank supervisor Edouard Fernandez Bollo, ECB board member Fabio Panetta speaks to European parliament
- Fed speakers: Kansas City President Esther George, Atlanta President Raphael Bostic, Richmond President Thomas Barkin
- Bank of England Deputy Governor Ben Broadbent
- US ADP private sector payrolls/Final PCE prices/final Q4 GDP deflator
- Emerging markets: Malaysia central bank annual report and economic review, Thailand, Georgia hold rate meetings
(Dhara Ranasinghe)
EUROPEAN SHARES SET TO OPEN WITHOUT DIRECTION (0630 GMT)
European shares are set to open without a clear direction as investors take a more cautious assessment of peace talks between Russia and Ukraine following optimism yesterday that took the STOXX 600 to reclaim pre-invasion levels.
Ukraine reacted with skepticism to Russia's promise to scale down military operations around Kyiv as some Western countries expected Moscow to intensify its offensive in other parts of the country.
Futures on the EuroStoxx50 and DAX indices were last down around 0.1% while FTSE contracts added 0.1%. Derivatives on U.S. stocks benchmarks were also little changed following four days of gains.
Over in Asia, hopes for a negotiated end to the Ukraine conflict drove shares higher, while bond markets signalled concern about the U.S. economy overnight after 10-year yields briefly dipped below two year rates.
The STOXX climbed 1.6% to its highest in nearly a month yesterday, extending gains to a third straight session.
(Danilo Masoni)
