LIVE MARKETS Beware: Risky stocks just got riskier

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  • European shares off lows, up 0.2%
  • Fed likely to hike rates in March
  • U.S. futures in the black

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The Fed's hawkish shift is creating a hostile environment for popular but risk-oriented stocks.

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While many pandemic darlings have already taken a beating from rising yields pushing investors out of tech, there's definitely room for more pain, David Trainer, Chief Executive Officer of New Constructs, told the Reuters Global Markets Forum.

Trainer expects a 50 to 60% downside for Netflix and Peloton (PTON.O) as he sees both stocks far above what the fundamentals of their businesses can justify.

"This kind of market is exactly what forces investors to wake up to the reality of the popular stock with bad businesses," Trainer added.

Netflix and Peloton shares took a hit after posting disappointing quarterly earnings, and this has spread to the wider stay-at-home sector as analysts judged the new Omicron coronavirus variant will not deliver the same economic headwinds seen in the first phase of the pandemic in 2020. read more

Based on the underlying economics, Trainer predicts Tesla (TSLA.O) will drop below $200 per share. Rivian (RIVN.O), Uber (UBER.N) and Beyond Meat also make it to Trainer's list of stocks to short.

(Sanjana Shivdas, Aaron Saldanha)



The vote for the new Italian president is definitely a hot topic for the euro zone government bond market.

The prospect of Italy losing the leadership of "Super Mario" Draghi is a worry for investors and has recently increased the spread between Italian and German yields.

What could cheer BTP (Italian bonds) investors, Citi analysts say, is the possibility of a compromise whereby outgoing president Sergio Mattarella stays on until the end of the mandate of the government currently led by Draghi in 2023.

“This will perhaps mean (prime minister Mario) Draghi is becoming president next year and could drive 10yr BTP-Bund tighter by 15 bps or so,” they say.

In the worst-case scenario, which consists of an impasse in the presidential election and an increased likelihood of snap elections, Citi analysts see the spread between 10-year German and Italian yields widening up to 200 basis points.

A fourth round of voting to elect a new Italian president was heading for failure on Thursday. read more

Mattarella has said he does not want another seven-year term, but if there is a political stalemate, the party leaders might ask him to continue for a short while. read more

The chart below shows that the Italian-German spread was above 200 bps during the pandemic crisis in 2020 and when Italian politicians clashed with Brussels in 2018, setting eurozone break-up gauges aflame.


(Stefano Rebaudo)



It's pretty evident that the tensions between Russia and the West over Ukraine had some negative impact on European stocks in the past month or so.

But given that equity markets had also other fish to fry in the form of the Fed's tightening cycle and the Omicron wave, it's quite hard to measure the stress.

On that note, Both Citi and Jefferies just released in-depth reviews of how the European stock markets are exposed to the geopolitical crisis.

We've selected a few stocks from different industries and countries that came up in both research notes and compared them to the pan-European STOXX 600 benchmark.

What appears quite clear is that the positive dynamic in some sectors, like the electric-vehicle frenzy for Renault, seems to have partially offset the negative impact of their exposure to the Russian market. read more


(Julien Ponthus)



Powell's hawkish tilt yesterday was music to the ears of the European bank index which is up almost 8% since Monday's close, set for best-three day run since Pfizer Monday in 2020!

European banks are emerging as clear winners of the Fed's tightening cycle and if the ECB follows suit in 2022, as some expect, the industry may be looking at an extended rally.

Euro zone money markets currently price more than 20 basis points of ECB rate hikes by December 2022.

With that in mind, stock pickers are increasingly looking for data on rate sensitivity across the space; and a timely Jefferies note on European banks has some interesting findings.

According to analysts at the U.S. investment bank, rate hikes would give a nice boost to profits -- estimating the net effect from a 50 basis points rate hike and removal of the cheap TLTRO loans at 16% on 2022 pre-tax profit.

So, who would benefit the most?

On Jefferies estimates, Italy's BPER Banca (EMII.MI), and Spanish lenders Bankinter and Caixabank (CABK.MC) screen as most geared.

"This is because liquid, retail-focused banks have seen margins negatively impacted given difficulty in passing negative rates on to depositors", they write.

"ECB policy tightening would support margins by reducing the cost of excess liquidity held at the central bank; driving higher Euribor rates; creating better reinvestment yield on bond portfolios", they add.

On the other hand, Credit Agricole (CAGR.PA), Societe Generale (SOGN.PA), and BNP (BNPP.PA) screen as least geared.

"French banks are diversified and therefore only partly geared to EZ retail banking (they also have asset mgmt, insurance, investment banking operations where the rate sensitivity is less direct)", read the note research note.

"Secondly, French banks have significant exposure to France, where lending is mostly at fixed rate, limiting the rate sensitivity".


(Danilo Masoni)



What about the Federal Reserve put, which some analysts mentioned recently as a possible last resort for equities?

As Joost van Leenders, senior investment strategist at Kempen Capital Management, explains, “the Fed put refers to the Fed supporting markets in times of big sell-offs by halting rate hikes or even cutting rates.”

“History has shown that rates hikes are unlikely if equity markets have dropped by 10% from recent highs,” he says.

Here are the reasons why this time the Fed is unlikely to make any move to support equities, according to Leenders.

Inflation is running at 7%, a severe limitation for the Fed not to tighten monetary policy.

The Fed funds rate is lower bound anyway, so the Fed can’t cut. It could slow its tapering process, but that is also highly unlikely given its recent hawkishness.

Monetary conditions haven’t tightened that much recently, as short term-rates hikes since early October resulted in a flattening of the U.S. yield curve.


Finally, political pressure on the Fed is currently to bring inflation down, not to rescue equity markets.

Check out this story for more background:

ANALYSIS-Stock selloff is far from forcing the Fed to blink read more

(Stefano Rebaudo)



Many pundits expected London's FTSE 100 to do quite well when the Fed decided to embarked in this new tightening cycle.

And it did!

Not only is the Footsie one of the only European benchmarks to trade in the black this morning, it's also outperforming the other blue chip benchmarks this year.

It's up 1.3% since the beginning of 2022, against a 4.5% fall for the pan-European STOXX 600.

The fact that London's star index is overweight on the value/cyclical side with big financials and commodities stocks while quite light on tech, makes it a good bet to trade rising yields, or so common wisdom goes.

As you can see this morning, so far, it's going according to plan:


Betting on UK PLC has been a losing trade for some years but it seems those advocating for a "Buy UK" strategy are finally being vindicated. For now.

Check out this story for more background:

ANALYSIS-Cheap and unloved UK Plc still can't shake risk discount read more

(Julien Ponthus)



That was close!

The Fed's hawkish stance sent the European tech sector just a whisker from bear market territory early this morning.

At the worst of its fall early this session the index was down 19.9% from its November highs, just 0.1% from what typically defines a bear market.

The index has now cooled down and is losing just about 2.1%.

But if Microsoft's results hadn't soothed investors yesterday, it's more than likely that this chart would be looking a tad different today.

As Brent Thill, an analyst at Jefferies said, Microsoft's "guidance for the third quarter really turned the tape around and saved the Nasdaq, if you will."


Check out our story on Microsoft's results:

Microsoft offers strong forecast, lifting shares read more

(Julien Ponthus)



A hawkish Fed is taking its toll on markets and in Europe equities kicked off the session in risk-off mode.

Tech is falling all the way down to the lowest since May 2021, down 2.7% on bets policy tightening will compress the industry's rich valuations, but rate-sensitive banks are taking that positively, climbing more than 1% to a one-week high.

Earnings updates also came in play. Deutsche Bank made its biggest annual profit in a decade, sending its shares rallying 4%, while software maker SAP slid 7% even as it confirmed its Q4 were boosted by growth at its cloud business.


(Danilo Masoni)



The world's largest economy is predicted torecord GDP growth at a 37-year high of 5.5%, with data due later on Thursday. Some such as JPMorgan reckon the figure could be as high as 7.5%. We will also likely see weekly jobless benefits claims dropping further.

That, in a nutshell, is why the U.S. Federal Reserve feels there is "quite a bit of room to raise interest rates".

Could there be more than four rate rises this year? Powell did not deny that possibility, so markets have started to price a fifth move.

Accordingly, Treasury two-year borrowing costs hit 23-month highs, shrinking the gap with 10-year yields. And on t-bills, the shortest-dated debt segment, Tradeweb notes a sharp steepening, with the gap between the three- and six-month yields at the steepest since 2015, and more than double from a month-ago period.

Similar steepening is notable between other bill maturities in a sign more tightening is being priced.

So the stock market selloff that had abated pre-Fed is back in full swing, with world stocks down 0.6%; European and Wall Street looking set for another tumble.

But if buyers are running scared, there are bargain hunters of a different sort -- billionaire William Ackman said he had snapped up $1 billion worth of Netflix shares since last Thursday's market tumble.

Companies, meanwhile, continue to deliver good news; Tesla for instance predicted 50%-plus growth this year, while Deutsche Bank posted its biggest profit since 2011. But with buyers still in hiding, Tesla shares tanked in after-hours trade.

Reuters Graphics

Key developments that should provide more direction to markets on Thursday:

-China's industrial firms saw December profits grow at slowest pace in 1-1/2 years read more

-German consumer morale improves slightly

-New Zealand inflation at three-decade high read more

-South Africa expected to raise rates by 25 bps

-U.S. durable goods/advance Q4 GDP reading/initial jobless claims

-U.S. 7-year note auction

-U.S earnings: Blackstone, Dow chemicals, Southwest airlines, McDonalds T Rowe Price, Mastercard, JetBlue, Apple, Visa, Mondelez

-European earnings: LVMH, Dr Martens, UniCredit Britvic, St. James's Place, STMicro, SAP, Deutsche Bank, IG Group, Diageo, Sabadell, SEB, Polymetal

(Sujata Rao)



Relief from a no-surprise Federal Reserve statement lasted only about 8 minutes yesterday but after that initial brief spike Wall Street headed south in wild swings that took the Dow Jones and the S&P indices in negative territory.

"Risk assets... reversed once Chair Powell began to speak. Investors inferred that his greatest concern is being behind the curve, and that policy will be tightened more rapidly than previously believed." said Ian Williams, analyst at Peel Hunt.

And world markets are taking notice. In Asia shares tumbled to their lowest in nearly 15 months and European equities look set to follow with futures down 1.4-2.1%. U.S. contracts meantime indicate the selloff is set to extend to a second day.

The Federal Reserve said it is likely to hike interest rates in March and reaffirmed plans to end its bond purchases that month in what U.S. central bank chief Jerome Powell pledged will be a sustained battle to tame inflation. read more

(Danilo Masoni)


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