LIVE MARKETS The rotation game

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  • European shares dip in choppy trade
  • Atos hammered after profit warning
  • U.S. stock futures in negative territory

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The rotation game (1300 GMT)

The Fed's signs last week that it may have to raise rates soon to fight inflation fuelled a rotation into value stocks as investors aren't particularly keen to pay a premium for expensive tech stocks in the face of rising yields. read more

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The year kicked off indeed with a rotation from momentum and growth stocks to economically-sensitive, global trade-driven, value stocks with markets seeing the Fed raising rates sooner than initially thought.

Markets now see a 90% chance that the Fed will raise rates in March with some like Goldman Sachs predicting as many as four hikes this year, a remarkable shift in expectations from three months ago when the first rate hike was seen in 2023.

The expectation for higher rates led to a "massive sector rotation last week, with banks outperforming tech by 15 percentage points," note Danske Bank analysts. "Valuation has been the key theme, while the segregation between defensive and cyclicals has played a less crucial role," they add. read more

Neil Wilson, Chief Market Analyst for Markets.com sees several mini rotations ahead and gains to be made.

"I think there is still a lot of rotation and churn in and out, and back in, growth vs value, cash-flow versus cash-burn names, and as long as the rotation trick works its magic then there are still gains to be had, albeit muted, for the broad indices," he says.

(Joice Alves)

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THE U.S. DOLLAR AND ITS YIELD-SENSITIVITY (1128 GMT)

Is there a disconnect in the correlation between U.S. yields and the dollar?

So it seems, as the greenback suffered its most significant drop in six weeks on Friday while U.S. rates were skyrocketing.

Commerzbank analysts sum up what matters and what doesn't when assessing future dollar moves.

Investors should look at real yields as they show “to what extent yields compensate for the loss of domestic purchasing power caused by inflation,” they say in a research note.

It’s not important when a central bank starts raising rates, but its “principal approach,” they add.

“The timing of lift-off (in rates) is a pretty poor indicator of that. That means that forward yields are a much ‘cleaner’ indication than yield to maturity.”

Investors shouldn’t worry too much about inflation as “the dollar can appreciate if inflation falls significantly while the Fed nonetheless insists on rapid rate hikes,” they argue.

“Real U.S. yields can then rise even more significantly leaving the euro equivalent well behind them.”

The chart below shows the U.S dollar index , which measures the value of the greenback against major peers, and the U.S. 10-year Treasury yield .

USdollar

(Stefano Rebaudo)

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STOXX HITS 2-WEEK LOW IN VOLATILE TRADE (0909 GMT)

European stocks kicked off the day on the right foot but the seemingly positive vibe didn't last long, making for a volatile start of the week ahead of key U.S. inflation data on Wednesday.

Concerns over interest rate hikes in the U.S. quickly took over, sending the STOXX 600 into reversal to its lowest in two weeks, down as much as 0.6%. The index however later recovered some lost ground and was last down just 0.1%.

Industrial and tech are the biggest negative weights while energy stocks managed to rise, as supply disruptions in Kazakhstan and Libya helped crude prices edged up. read more

Atos stood out with a 17% share price fall in Paris after the French technology consulting company issued its second profit warning in seven months. read more

(Danilo Masoni)

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IT'S GETTING REAL (0807 GMT)

As markets move to price a U.S. interest rate liftoff, possibly even from March, 10-year Treasury yields have risen a quarter point since the year started. Even more interestingly, "real", or inflation-adjusted U.S. yields are driving the moves with a 33 basis-point jump.

Real yields, while at the highest since last June, will remain deeply negative for a while. But their rise poses challenges for assets that benefited from the there-is-no-alternative reasoning. The past week saw stocks wobble, bitcoin tumble 8% and Nasdaq tech, the quintessential low-rate play, fell 4.5%.

Holders of longer-duration bonds are also likely nervous -- such assets saw big outflows in the past four weeks, Goldman Sachs notes.

Meanwhile, inflation isn't letting up; euro area prices rose 5% year-on-year in December and Wednesday's U.S. CPI reading is expected at 7%-plus. The ECB has stayed resolutely dovish however -- board member Isabel Schnabel did say on the weekend the bank may need to act if energy price rises prove persistent. The euro started Monday 0.3% lower read more .

Stocks are trying to claw their way back up -- U.S. and European equity futures are inching up even if Treasury yields, both real and nominal, are a touch higher.

So what happens to stocks if real yields continue rising? There have been episodes a-plenty when equities rose alongside real yields, most recently in the March 2020-February 2021 period when a 1.5 percentage real yield increase was accompanied by a 50% global equities return.

Noting this, Berenberg recently advised clients to stay put. The share of rate-sensitive tech however is now far higher than in the past which possibly changes the equation a bit.

Finally, let's not forget the worrying geopolitics and fast-spreading Omicron, both capable of adding to inflation and dampening economic growth. Oil prices are extending last week's 5% gain and U.S.-Russia talks look set to start later in the day with few expectations.

Real yields

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

-German Finance Minister Christian Lindner and Paschal Donohoe, Eurogroup president hold press conference

-NATO head Jens Stoltenberg meets with Ukrainian Foreign Minister

- Kazakh president steps up purge of security agency read more

-No concessions, no breakthroughs: Russia, U.S. cast pall on Ukraine talks read more

-Evergrande onshore bondholders to decide on extension; fellow developer Shimao puts all projects on sale read more

-UK manufacturers positive about 2022 read more

(Sujata Rao)

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EUROPE EYES CAUTIOUS GAINS (0724 GMT)

European shares look set to open up slightly this morning as global markets cautiously await another U.S. inflation print later this week that could push the Federal Reserve further into hawkish territory as price pressures grow.

Futures on the Euro STOXX 50, DAX, FTSE and IBEX were up between 0.3% and 0.6% following losses last week when concerns over rising inflation and COVID-19 infections dragged the region's top equity benchmark to nearly two-week lows.

Over in Asia, major share markets made cautious gains while S&P 500 and Nasdaq futures added 0.2% and 0.4% respectively. On bond markets, 10-year Treasury yields edged back up towards two-year highs of 1.8% hit on Friday.

U.S. inflation figures are due on Wednesday, with headline CPI seen climbing to a red-hot 7% year-on-year.

(Danilo Masoni)

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