LIVE MARKETS "Geopolitics are steamrolling over the inflation hawks"

  • STOXX 600 recovers, up 0.5%
  • Autos test bear market, oil stocks rally
  • Euro under pressure on economy worries
  • U.S. stock futures make tentative gains

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You wouldn't believe if you just had a glimpse over the bund's negative yield (-0.03%) but euro zone inflation actually just hit another record high!

That's right, inflation surprisingly jumped to 5.8% in February and with energy prices soaring due to Russia's war in Ukraine, it's unlikely to cool off anytime soon.

But despite fast-rising prices, money markets have dramatically scaled back their expectations for an ECB interest rate hike which a first one is now only expected in October.

There's indeed a strong assumption that policy makers need a clearer picture of how much economic damage the war in Ukraine will cause before they can go ahead and tighten.

But that doesn't mean inflation isn't a burning concern for the ECB.

"It's fair to say we have two huge conflicting forces here", Deutsche Bank Jim Reid wrote in his morning note.

"For this week though the geopolitics are steamrolling over the inflation hawks for which I will put my hand up and say I am one", he said.

As highlighted by Mark Haefele, CIO at UBS GWM, rising oil prices constitute a double whammy in that they both fuel inflation and drag growth down at the same time.

"On our calculations, if oil prices were to rise to USD 125/bbl or higher for two quarters, it would result in roughly half a percentage point lower in global GDP growth, and higher inflation affecting consumer spending power", he argued this morning.

Here's a telling chart from our euro zone inflation story which you can find here:


(Julien Ponthus)



Geopolitical uncertainty in Europe and waning conviction around macro scenarios may prompt a more active approach to stock picking as investors sift for opportunities.

Berenberg believes investors should be macro-agnostic and look for companies with self-help or capital return dynamics, honing in on cheap defensives, derated "whatever-weather" winners, and cheap income with fundamental support.

"These strategies use valuation, balance sheet, fundamentals or self-help qualities to build a hedge against macro risks and macro directionality," say strategists at the German investment house, highlighting 36 "DIY" stocks.

Healthcare players like AstraZeneca and Fresenius and insurers like Allianz and Sampo are amongst Berenberg’s stocks of choice, and so is the recently spun-off Daimler Truck which dropped below its spin-off price for the first time this week.

German defence group Rheinmetall, which has shot up 58% in the last week, is also there, along with Italian bank UniCredit whose recent underperformance outweighs its exposure to Russia.

Retailers B&M and Dunelm and telecoms players Freenet and KPN are also included, based on strong capital return profiles.

Below a snapshot of the full list.


(Lucy Raitano)



While most institutional investors have been scrambling to dump any kind of Russia-exposed assets, these have proved surprisingly popular among some DIY investors lately.

According to data published by investment platform interactive investor, the JPMorgan Russian Securities Investment Trust (JRS.L) moved into the top 10 most bought trusts among its clients in February.

The UK-based trust which primarily invests in Russian securities almost halved in value last month and has now fallen over 80% from its record high reached in October last year.

The investment platform also said Russia-exposed stocks were popular among DIY investors, with Evraz, Polymetal, and Eurasia Mining all in the top 10 most bought stocks last month.

"It is the inclusion of JPMorgan Russian Securities Investment Trust which is the standout, and may surprise some. There will always be some contrarian investors who seek to lean on the dips, a strategy not for the faint hearted," interactive investor head of funds research Dzmitry Lipski said in a note.

The data doesn't show when volumes were at the highest but the "24 February turned out to be interactive investor’s third busiest day ever for trades", the platform said.

The tech-heavy Scottish Mortgage Investment Trust held onto the number one spot, despite the selling pressure observed in US tech stocks since the start of the year.

See below for the top 10 most bought investments in each category on interactive investor in February.


(Samuel Indyk)



It didn't last long but during this morning's rough open Europe's fear index hit levels unseen since June 2020.

As you can see below the EURO STOXX 50 VOLATILITY index briefly reached a high of 42.932 before settling down a bit lower as the pan-European index made it back to positive territory.


(Julien Ponthus)



European automotive stocks have quickly become one of the proxies to trade the risks linked to Russia's invasion of Ukraine.

The sector is now down over 20% from its January highs and testing bear market territory.


While auto makers are clearly seen as cyclical stocks set to lose big if the COVID-19 economic recovery stalls due to the conflict, the sector is also seen as vulnerable given its large exposure to Russia.

Shares in Finland's Nokian Tyres, which produces approximately 80% of its annual capacity of 20 million tyres in Russia, have just sunk to their lowest level since 2009.

A useful factbox about companies cutting Russian operations can be found here read more but here are the main bullets for the European sector:

* Germany's Daimler Truck said it would freeze its business activities in Russia with immediate effect, including its cooperation with Russian truck maker Kamaz.

* Its unite Mercedes-Benz is looking into legal options to divest its 15% stake in Kamaz as quickly as possible.

* Germany's BMW has halted the export of cars to Russia and said it would stop production there.

* Sweden's Volvo Cars said it would suspend car shipments to the Russian market until further notice.

* French carmaker Renault will suspend some operations at its car assembly plants in Russia, where it makes 8% of its core earnings, due to logistics bottlenecks.

* British luxury carmakers Jaguar Land Rover (JLR) and Aston Martin (AML.L) paused vehicle shipments to Russia.

(Julien Ponthus)



European bourses opened about 0.9% down as sentiment soured in the last hour with Wall Street futures tipping in the red.

At about 438 points, the STOXX 600 was at this stage only 1% away from its May 2021 lows.

In about 20 minutes though the trend turned and the pan-European index was fluctuating above and below the floatation mark.

One thing is for sure: the autos and parts sector is yet again the worst performer with tyre maker Nokian Renkaat losing a whopping 17% at the open.

The pressure was also relentless on European banks shedding 1.5% and well into bear territory.

Not all market price action was linked to the war in Ukraine and France's pharma group Biomerieux is plunging 12% after it published a disappointing guidance for the year.

Sweden's Ericsson was also a top loser, -9.5%, after it emerged it had been informed that disclosures it made to the U.S. Department of Justice (DoJ) about an internal investigation into conduct in Iraq were insufficient. read more

Through all the gloom this morning, London's FTSE 100 (.FTSE) is in positive territory thanks to miners and energy being in high demand again this morning.


(Julien Ponthus)



When the yield on Germany's benchmark Bund, considered one of thea safest assets in the world, posts its biggest one-day fall since 2011 (as it did on Tuesday), something has changed.

The slide in borrowing costs in Germany, with 10-year yields back in negative territory where they remain this morning, echoes similar moves in other major bond markets and is symptomatic of a big shift in investor thinking.

German Bund yield, absolute change in bps

Russia's invasion of Ukraine almost a week ago changes the landscape for investors, stick with safety (read sovereign debt, U.S. dollar), stay away from risk assets.

Perhaps more notable is growing doubt over that overriding theme that central banks would step up their exit from post-pandemic stimulus. This is more complicated since inflation is high but the renewed surge in oil prices will likely slow growth and hurt consumption.

So yes, the Bank of Canada will likely hike rates later on Wednesday, with the U.S. Federal Reserve and Bank of England still tipped to follow later in March. But markets increasingly price a more cautious path ahead - especially in the euro area where market pricing took a dramatic turn on Tuesday.

Money markets now price in just 14 basis points worth of ECB rate hikes by year-end, down from 50 bps last month.

Flash euro zone inflation data due out later in the session therefore will unlikely change this view, even if it does show the headline inflation rate rising to new record highs -- as analysts forecast. read more

And with Russia bombarding Ukrainian cities and the United States banning Russian flights from its airspace, the mood in world markets remain sombre. read more

Japan's Nikkei closed almost 1.7% lower, U.S. and European stock futures are in the red, and oil prices have surged to a fresh 7-year higher above $110. A meeting of the Organization of the Petroleum Exporting Countries, Russia and allies, together known as OPEC+, later on could prove interesting. read more

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

- OPEC and non-OPEC Ministerial meeting via video conference.

German employment

- Euro zone flash HICP

- Bank of Canada policy meeting

- Fed speakers: Chicago President Charles Evans

- Fed issues Beige Book of economic conditions

- European earnings: Telekom Italia, Just Eat, Polymetal, Entain, Aviva, Persimmon,

- US earnings: Abercrombie and Fitch, Dollar Tree, American Eagle

(Dhara Ranasinghe)



Euro zone banks are down about 25% from their February 10 highs and there's a good chance their share price could dive even further as the sanctions against Russia continue to shake financial markets.

For Berenberg economist Kallum Pickering though, the risk posed to the sector is manageable and does not at this stage warrant fears of a banking crisis in Europe.

Pickering said that his firm's banking team sees a low contagion risk as direct and indirect exposure to Russia's economy is limited and that "generally, the most exposed firms are relatively small".

"In addition, the biggest banks are unlikely to fall below regulators’ capital requirements even in the event that they were forced to write-down or sell all Russian exposures", Pickering writes in a note today.

UK and EU banking regulators are also expected to have the means necessary to handle pressure on the banking system.

"This could include meeting any increase in demand for reserves, allowing banks to spread losses over several years, and providing some leeway for firms that are required to raise capital", the Berenberg economist argued.

"It seems unlikely, in our view, that potential problems for a handful of banks could threaten to disrupt the normal flow of credit to such an extent that policymakers could not, with relative ease, remedy such problems", he concluded.


(Julien Ponthus)



Missiles, tanks and fighter jets don't spontaneously come to mind when one thinks of stocks likely to benefit from the trend towards ESG (Environmental, Social, Governance) investing.

Yet, as much as Russia's invasion of Ukraine is quickly changing these last decades' geopolitical paradigm, so it could it be for this style of investing.

"We believe defence is likely to be increasingly seen as a necessity that facilitates ESG as an enterprise, as well as maintaining peace, stability and other social goods", Citi analysts wrote in a note this morning.

"Recent events in Europe, we think, will significantly increase the likelihood of defense's inclusion in the EU's Social Taxonomy", they also said.

Germany this weekend announced a sharp increase of its spending on defence to more than 2% of its economic output to face the challenges posed by Russia invading Ukraine which has boosted European defence stocks even further.


(Julien Ponthus)



There is no reason this morning for European stocks to rebound from yesterday's fall but by the same token, there's no sense the situation has worsened significantly overnight when it comes to the continent's equity markets.

Futures are trading about 0.3% in the red for European blue chips and up 0.4% for the FTSE 100. Contracts for Wall Street stabilised after sharp losses yesterday.

Asian bourses are ending on an orderly retreat of about 0.6% but oil prices are surging amid supply disruption fears from the heavy fighting in Ukraine.

If FX markets are to be taken as a risk gauge, then markets seem to be on risk-off with the dollar index up 0.26% and the euro losing 0.2%.

(Julien Ponthus)


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