Last checked at 
* STOXX 600 dips after weak Asian session
* Worries around China's slowing growth
* Luxury stocks take a hit
* Umicore falls after lowering forecast
* Wall Street futures in the red
Oct 18 - 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
GERMANY’S (MESSY?) FISCAL APPROACH (1043 GMT)
While Germany’s so-called ‘traffic-light’ coalition took a
significant step in forming a new government on Friday, the
country’s fiscal policy remains under the spotlight.
As Unicredit chief economist Erik F. Nielsen puts it, “they
agreed to stick with the debt brake (which will limit the
structural budget deficit to 0.35% of GDP from 2023) while
substantial increasing “public investment without raising taxes
or cutting pensions.”
“The same messy approach is implicitly reflected in their
outline for the European fiscal rules” as they stress the
importance of the Stability Pact while “they commit too much
higher public investment throughout Europe, particularly for
climate change,” Nielsen says.
So, the main question is if “there is enough wriggle room
here to declare the climate change a crisis which also justifies
flexibility,” he adds.
According to Nielsen, Germany seems ready to change its
attitude towards public investment and be more committed to
Europe. But, it will be done less transparently than it should
be, complicating European policies.
Olaf Scholz, the German centre-left Social Democrats (SPD)
candidate to succeed Angela Merkel, took a significant step
toward becoming chancellor on Friday, announcing that he and the
leaders of two smaller parties aimed to move into formal
coalition talks.
(Stefano Rebaudo)
*****
GILTS: WHEN WORDS SPEAK LOUDER THAN ACTION (1010 GMT)
Whoever first said 'action speaks louder than words'
probably wasn't a trader or familiar with how central banks
operate.
The 2-year gilt yield surged 16 basis points to reach a high
of 0.748% this morning, a level last seen in May 2019.
The jump has since lowered to 14 points but that's still the
biggest single day move since 2015.
Credit for that is due to BoE Governor Bailey who warned
that he and his policy maker colleagues "will have to act" on
the inflation front.
Investors are speculating that the BoE might become the
first of the world's biggest central banks to raise rates, later
this year or early in 2022.
A 15 bps rate hike is now fully priced in by the end of
2021, with further hikes taking the BoE's Bank Rate to 1% by the
end of 2022.
Of course, with the British economy struggling a bit more
than its peers to recover from the COVID-19 recession,
tightening monetary policy doesn't come without risks.
Michael Hewson, an analyst at CMC Markets noted that there
are concerns the BoE "might be about to make a policy mistake".
Post-Brexit trading tensions, resurgent COVID-19 infections,
surging energy prices and somewhat exacerbated supply chain
issues could make up a dangerous cocktail moving closer to the
festive season.
But what if Bailey is actually talking the market in a more
subtle way than meets the market's ears?
In a note this morning NatWest strategists formulated the
following hypothesis: "that the Bank of England and indeed other
central bankers are intentionally talking hawkish in order to
keep inflation expectations under control during this period of
supply-induced price pressures, potentially with no intention to
follow through".
See:
Bank of England will have to act to contain inflation
Investors double down on UK rate hike bets, bond yields soar
(Julien Ponthus)
*****
HOW MUCH IS A GOLDEN SHARE WORTH? (0857 GMT)
Well as far as Britain's THG is concerned and from
this morning's market price action, about 200 million pounds!
The British online retailer and tech group is up about 6%
this morning after announcing its founder would give up its
golden share.
While THG is the top gainer across the pan-European STOXX
600, the gain of a couple of hundred millions is small change
after the company saw its market capitalisation lose well over
ten times that amount in the past month or so.
Year-to-date, THG is down about 60% and it's fair to say
that the corporate governance change isn't a game changer just
yet.
At Markets.com, Neil Wilson says the move is no "magic
wand".
"Clearly governance concerns run much deeper than a quick
bit of airbrushing can cope with", he commented.
"And following the disastrous capital markets day last
week, there are obviously far deeper concerns about the state of
the business and a lack of visibility over how different parts
fit together".
The move nevertheless is being well received among brokers.
"This will allow the group to achieve premium listing, and
to qualify for index inclusion", Jefferies analysts commented
this morning, waiting for more details on further measures to
raise investors' confidence.
"We see this news as highly encouraging", Citi said, arguing
that "a potential inclusion in the FTSE index should drive both
passive and active investor interest".
Jefferies and Citi both have 'buy' ratings on the stock and
target prices of 920 pence and 900 pence respectively, about
three times the current price of 310 pence.
(Julien Ponthus)
****
BENELUX BLUES AND LUXURY GLOOM (0730 GMT)
The STOXX 600 has opened in negative territory with some big
setbacks coming from Belgium and the Netherlands.
Umicore is the main loser, down 4.5% with investors
obviously not taking kindly the Belgian materials technology and
recycling group making a downward revision to its profit
outlook.
Another big mover in Amsterdam is Philips, which also warned
markets of a lower 2021 outlook for sales and profit after a
massive recall of respiratory devices and amid a global shortage
of electronic components.
Among sectors, luxury is under pressure after the week macro
data coming out of China.
France's LVMH, Hermes and Kering are all losing close to 3%
which of course is a big burden for the Parisian CAC 40, by far
the biggest loser among European indexes with a 0.9% fall.
One stock is shining bright: THG is up close to 6% after the
British online retailer backed by SoftBank said it would remove
its founder's "golden share" after the stock collapsed last
week.
France's Valneva is also on a roll, up a whopping 30% after
reporting positive results for its inactivated, adjuvanted
COVID-19 vaccine candidate VLA2001.
(Julien Ponthus)
*****
WHAT COULD POSSIBLY GO WRONG? (0658 GMT)
Optimism for the third quarter earnings season has provided
a timely boost for equity markets, which flirted with correction
territory in September.
World stocks have just enjoyed their biggest one-week
rally since June with Wall Street's favourite gauge of
volatility, the VIX index, tumbling.
Earnings for the S&P 500 and Europe's STOXX 600 are
currently expected to rise 32% and 46% respectively and, so far,
companies which have already reported results have exceeded
expectations overall.
Goldman Sachs's 66% surge in profit on Friday, courtesy of
a big wave of M&A and IPOs, came after the four largest U.S.
consumer banks also shone.
But now as Europe waits on blue chips such as ASML Holding
and Unilever to enter the arena and for
Netflix to kick off the reporting for the 'FAANG' group, the
mood may be souring again.
Philips on Monday lowered its outlook as parts
shortages bite and over on Wall Street, there are now more
downward than upward revisions, suggesting Q3 enthusiasm may
have reached its peak.
Data showing that China's economy hit its slowest pace in a
year due to power shortages, supply chain bottlenecks and
property market wobbles, has dampened the mood and MSCI's
broadest index of Asia-Pacific shares outside Japan
is losing 0.4%.
Futures for European and U.S. equities are also in negative
territory while Brent crude oil prices are trading well
above $85 a barrel after hitting their highest price since
October 2018.
Elsewhere bitcoin is above $62,000 with the first American
bitcoin futures ETF expected to begin trading this week amid
global inflation worries.
Prices are rising too quickly for policymakers' tastes and
Bank of England Governor Andrew Bailey on Sunday warned
investors that he and his colleagues "will have to act".
Investors are speculating that the BoE might become the
first of the world's biggest central banks to raise rates, later
this year or early in 2022.
Central bank action will be closely watched this week with a
meeting in Turkey, Hungary expected to nudge up its benchmark on
Tuesday and Russia's central bank to follow on Friday.
Key developments that should provide more direction to
markets on Monday:
-- China's economy stumbles on power crunch, property woes
-- -Philips lowers outlook as recall, parts shortages bite
-- Bitcoin hovers near 6-month high on ETF hopes, inflation
worries
-- UK RightMove house prices
-- U.S. industrial production
(Julien Ponthus)
*****
DOWN WE GO (0648 GMT)
It's a new week and the mood couldn't be more different!
Futures are pointing to a grim session after last week's
rally and Philips lowering its outlook as parts shortages bite
isn't helping.
Data showing that China's economy hit its slowest pace in a
year due to power shortages, supply chain bottlenecks and
property market wobbles, has also dampened the mood and MSCI's
broadest index of Asia-Pacific shares outside Japan
is losing 0.4%.
(Julien Ponthus)
*****
