LIVE MARKETS Sticking with the rotation

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STICKING WITH THE ROTATION (1301 GMT)

There was a pretty clear consensus until just recently on how to ride the current inflation and rate hike cycle.

Portfolio managers had operated a swift rotation to cyclicals and value shares from tech and growth stocks which typically suffer when bond yields rise.

But as it was demonstrated yesterday by the counterintuitive market price action when data showed U.S. CPÏ hit 7% in December, there's a growing feeling that much of the inflation has already been priced in.

Indeed, the Nasdaq closed higher last night and European tech stocks are leading the market today, not exactly a textbook reaction to an inflation surge.

Anyhow, moving forward, Amundi's multi-asset team believes that for stock investors, the past rotation is still a good call for 2022 in the current inflationary environment.

"Among equities, investors may consider increasing exposure to cyclical or value sectors, such as energy, materials and financials, and playing their relative value against those sectors which are more vulnerable to interest rate increases", like tech, they wrote in their January Investments Insights Blue Paper.

Stockpicking companies with higher pricing power also makes sense they add.

There is also a risk that higher inflation doesn't peak as soon given persistent supply bottlenecks, the energy transition and other factors.

"Withstanding our central inflationary scenario, the risk of remaining in a hyperinflationary scenario for longer than expected is not negligible", Amundi analysts warn, adding that hedging some of that scenario through cyclical commodities and commodity currencies made some sense.

(Julien Ponthus)

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BIG OIL: REASONS TO BE BULLISH (1215 GMT)

As central banks pull the plug on stimulus, putting upwards pressure on yields, investors are increasingly engaging in portfolio switches. Energy and financials are among the new must haves after years of tech dominance in investor portfolios.

Oil stocks have already had a stellar run from the 2020 lows when the COVID-19 shock drove crude prices sub zero, but the Fed's upcoming tightening cycle and also the transition of COVID from pandemic to endemic should give the rally further legs.

"Given the large negative betas Financials and Energy have to USTs, we expect them to continue to outperform," says TS Lombard's head of research Andrea Cicione.

"In this cycle Energy has had the advantage of starting from low valuations and while it has risen significantly over the past year, it remains cheap. As long as oil prices stay in the current range, we see more upside," he adds.

TS Lombard is buyer Energy & Financials vs Real Estate & Utilities, he also says.

For those with a more equity-centric mindset, it's worth pulling out a note from Morgan Stanley analysts numbering seven reasons to invest in European oil majors, singling out Shell and Eni as their top picks.

Here you go:

The MSCI AC Oil & Gas index trades at 6.8 times 12-month forward earnings, which is a record 63% valuation discount to world stocks, charts from Refinitiv Datastream show.

(Danilo Masoni)

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U.S. INFLATION AND THE DOLLAR (1208 GMT)

Higher inflation = hawkish Fed = rate hikes = stronger dollar, common wisdom goes.

So the dollar falling sharply yesterday when data showed a December CPI reading of 7% left many investors scratching their heads.

But according to Commerzbank, the "higher inflation rates might be more likely to have a USD-negative effect".

Why? Because the Fed is unlikely to speed up its rate hiking cycle which, it's expected, will consist of a first hike in March and 100 bp over this year, Commerzbank analysts argue.

In the "long term, the market will continue to expect negative real interest rates,” they explain.

MUFG analysts also point out that a lot was priced in.

The "FX market is certainly well-positioned for the commencement of Fed tightening", they wrote.

Indeed, the latest weekly data shows long U.S. dollar positions amongst leveraged funds to the 4th January at the largest seen since January 2019.

For the dollar to strengthen further, it would take data showing more robust than expected U.S. growth.

That would trigger terminal fed funds rate to shift higher, MUFG analysts argued.

There's another straightforward way to explain the surprise decline of the dollar yesterday.

As Berenberg puts it, the dollar reacted to inflation “in the beautiful ‘buy the rumours - sell the facts’ pattern.”

U.S. consumer prices increased solidly in December, culminating in the most significant annual rise in nearly four decades. read more The chart below shows U.S dollar index moves after data.

(Stefano Rebaudo)

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STOXX DIPS, UK RETAILERS UPGRADES NOT ENOUGH (0906 GMT)

European equities are off to a tepid start this morning as investors take a break following a wild start of the week that saw them recover from their initial heavy losses as fears over rate hikes in the U.S. eased.

The STOXX 600 was down 0.3% in early deals after a strong two-day bounce and while moves across sectors showed no clear direction, single stock moves offered some excitement, specially in the UK with some trading updates.

Among the highlights were retailer stocks Tesco and Marks & Spencer which fell 1.7% and 6% respectively, despite improving their profit outlook on strong Christmas performance.

"Retailers have been strong thus far and Tesco and Marks have continued the theme, although the anticipated full-year profit upgrades were rather mild... Investors were primed for a bit more," said Neil Wilson at Markets.com.

(Danilo Masoni)

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BUSINESS AS USUAL (0759 GMT)

It's business as usual on Wall Street it seems, in a show of confidence the Federal Reserve can smoothly turn off the tap on stimulus with little damage to the economy and company profits.

A U.S. inflation headline print at its highest since the 1980s at 7% came as no shock on Wednesday and risks the macro cycle faces from the upcoming rate-hike round, starting as early as March, look to be tomorrow's problem.

The Nasdaq has clawed back more than half of this year's losses caused by the spike in real yields paid by bonds, with the retail crowd jumping back in to buy the dip. This time they have concentrated on the megacaps they see as safer.

And following an initial jolt, the TINA argument that "there is no alternative" to the equity market staged a comeback, while 10-year U.S. government bond yields are down more than 5 basis points from this week's peak just above 1.8% .

The day ahead could be less lively, though.

World stocks flat-lined in Asian trading hours after jumping 3% from Monday's lows, and futures point to slight declines across European equity markets and in the U.S. later on.

Still, China's short-term money rates jumped to four-month highs, on rising seasonal cash demand, as the market's focus shifts to whether the central bank will trim policy rates to cushion the economic slowdown. read more

Oil is also set for a break after reclaiming pre-Omicron highs this week, in a blistering recovery that saw Brent prices jump 30% from December lows to near $85 a barrel.

The data calendar is light, but there is plenty of central bank speakers to focus on. Fed Governor Lael Brainard appears at Congress for a hearing into her nomination as deputy chair.

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

EUROPE SET FOR A BREAK (0753 GMT)

European shares look set for slight losses at the open after two days of strong gains driven by commodity stocks and helped by easing bond yields that took pressure off the tech sector.

Futures on the Euro STOXX 50, DAX and FTSE indices were last trading down around 0.2% and 0.3%, with similar moves seen in U.S. equity derivatives.

Over in Asia, shares were dragged lower by weakness in Chinese economic data although investors seemed relieved that U.S. inflation data was not hot enough to force even faster monetary tightening by the Fed. read more

(Danilo Masoni)

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