Utilities emerge as unlikely February winners

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UTILITIES EMERGE AS UNLIKELY FEBRUARY WINNERS (1117 GMT)

Utilities have been gradually gaining speed during morning trading are now outperforming European equity markets by quite a big margin.

The sector's index is up about 5% at the moment against 1.8% for the STOXX 600 as investors are looking for both defensive stocks and sectors, like renewables, which might benefit from rising energy prices due to Russia's invasion of Ukraine.

Yesterday, the sector limited its losses to about 1%, about three times less than the pan-European index.

As a result, utilities are emerging as unlikely February winners and look like they could even end the month in positive territory (currently -0.08%).

Only miners and oil & gas did better this month with a rise of 4.7% for the former and a flat performance for the latter.

Utilities were a losing trade in 2021, a year during which they gained only 5.4%, roughly four times less than the 22.4% rise enjoyed by the broader European market.

As you can see below, while European utilities completely missed out on the rally in 2021, they seem like they might have a shot at closing the gap if the trend persists.

(Samuel Indyk and Julien Ponthus)

NOT MUCH THRUST IN THAT REBOUND (0833 GMT)

As expected European stocks markets have opened in positive territory this morning but the 0.7% rise enjoyed by the STOXX 600 at the moment doesn't quite make up for the 3.2% drop the pan-European index suffered yesterday.

In the same spirit, the 7% rebound of London-listed Russian gold and silver producer Polymetal is small change in comparison to the stock losing over a third of its value on Thursday.

On the bright side, all regional trading centres on the continent are in the black and the chemical sector is the only one trading in red, courtesy of Germany's BASF which just made a forecast for lower 2022 operating earnings.

The earnings season, rather than war in Ukraine, seems to be the main driver at the open with Swiss Re standing out with a 7% fall after its results.

Among winners, Britain's Pearson is up a handsome 8.6% after announcing a share buyback.

That said, defence stocks are still in demand with France's Thales and Germany's Rheinmetall both gaining over 4%.

All in all though, the STOXX 600 is still trading over 10% below its January record high and many investors fear that there's more room to reverse should the sanctions against Russia be ratcheted up further and Putin's tanks keep rolling.

(Julien Ponthus)

A SEMBLANCE OF CALM BUT FOR HOW LONG? (0749 GMT)

World markets may have recovered some of their worst losses after Russia's attack on Ukraine but a sombre mood prevails as what was seen as tail risk event for investors just a few weeks ago became a reality.

Asian markets rebounded and European stock futures are sharply higher after U.S. stocks rebounded in late Thursday trade as the United States unveiled fresh new sanctions against Russia.

For many investors it's a case now of wait and see what unfolds in the days ahead, such as the extent of sanctions, where energy prices settle and how central banks react.

Comments in the last 24 hours suggest major central banks will stick to their plans to tighten monetary policy in the face of inflation running at its highest level in decades.

Fed Governor Christopher Waller on Thursday laid out the case for raising U.S. interest rates by a full percentage point by mid-summer.

Some European Central Bank officials have suggested the invasion doesn't fundamentally change the economic outlook.

Still, a fresh wave of uncertainty means caution is likely.

The most aggressive rate hike bets baked into markets have been dialled back further, lifting sovereign bond markets.

But no doubt, with oil prices shooting above $100 a barrel following the invasion, another upward near-term shock to inflation is likely.

European natural gas soared more than 60% at one point on Thursday before settling to close just over 30% higher.

Russia's rouble, which took a beating on Thursday, meanwhile clawed away from record lows and was about 0.7% stronger against the dollar at 84.72 early London trade.

Russia has spent the past seven years building up formidable financial defences, yet in the long run, its economy is unlikely to withstand the onslaught of coordinated sanctions from the West.

Key developments that should provide more direction to markets on Friday: - Companies shut Ukraine operations, assess impact of sanctions on Russia -ECB President Christine Lagarde speaks - Euro zone finance ministers meet - German detailed Q4 GDP - UK consumers suffer biggest confidence drop since start of pandemic - GfK - US core PCE index/durable goods/final University of Michigan inflation expectations - US earnings: Footlocker, Sempra - European earnings: Evraz, Pearson, Amadeus, BASF, IAG, Rightmove, SEB, Swiss Re, Holcim, Jupiter - Emerging market central banks: Colombia

(Dhara Ranasinghe)

IS THE UKRAINIAN CRISIS REALLY PRICED IN? (0735 GMT)

It's puzzling to say the least to see European markets set to open in positive territory while Russian missiles strike Kyiv.

Which begs the question: are markets being complacent or just doing their cold-blooded job in assessing the impact of the conflict on the global economy?

Oddo equity strategist Sylvain Goyon just issued a note in which he explains why chances are on the former proposition.

"The uncertainty created by the Russian invasion doesn't seem priced in by the market to us", he writes.

Looking at equity risk premium models, Goyon draws the conclusion that markets are not factoring in the risk that the conflict triggers a recession.

He notes that a ban on Russian energy and commodity exports would have a major impact on the European economy, hitting growth and propping up inflation further.

In such a scenario, stagflation would be on cards, which is a hostile environment for stocks.

What to do? Goyon says that if events were to follow that course, investors should reduce their exposure to value and cyclicals and rotate towards growth, quality, defensive and dividend stocks.

(Julien Ponthus)

EUROPE SET TO FOLLOW GLOBAL REBOUND (0659 GMT)

European stocks markets are set to track a fragile rebound in global financial markets which lifted Wall Street and Asian bourses after Western capitals announced sanctions against Russia overnight.

The mood is still cautious though and U.S. futures are trading in the red which suggests there are not that many investors willing to buy in what looks a temporary respite in the Ukrainian crisis.

A possible decision to disconnect Russia from the SWIFT international banking system or to target its oil and gas exports could have much bigger consequences for the world's economy.

In the meantime, oil is still over $100 a barrel and reports from Ukraine are really not encouraging with missiles pounding the capital as Russian forces advance.