MARKET WRAPS
Stocks:
European stocks gain as markets respond positively to signs of a potential easing of political tensions in eastern Europe.
The threat of war between Ukraine and Russia has, in recent days, added a geopolitical element to investors' already troubled outlook. Warnings from the U.S. and its allies about the likelihood of a Russian invasion have grown louder, spooking investors concerned about the economic hit from such a conflict or the resulting sanctions on Russia's economy.
Those fears abated somewhat Tuesday, after Russia's Defense Ministry said some troops on the Ukrainian border were returning to their bases after completing training, according to Russian media.
"Nervousness towards the possibility of a Russian invasion of Ukraine continues to dampen risk appetite, with European markets opening on a mixed note," Interactive Investor said. "However, more positive comments this morning from IFAX, which said Russia's military says some units are returning to their bases, have lifted market sentiment. While these comments are encouraging, further confirmation is required to ensure the validity of these remarks."
"The market is believing what it is hearing in the headlines, but you do have to be careful with these things," said Hani Redha, a multiasset fund manager at PineBridge Investments. "We have to be cautious on news like this in the so-called fog of war."
Russia is among the world's largest suppliers of oil, as well as the biggest exporter of wheat and a major producer of key metals, such as palladium, aluminum and nickel, while Ukraine is a key transit route for Europe's natural gas supplies.
"The biggest impact this thing has had has been in commodities and the feed through of that into inflation," said Mr. Redha. A conflict which pushes energy prices and inflation higher could push central banks to raise interest rates faster than planned, he added.
Shares on the move:
Banco BPM shares rose 2.6%, and Jefferies analyst Benjie Creelan-Sandford said M&A speculation could be one of the factors supporting the stock. The Italian bank's shares rose 9.8% Friday after a report in newspaper Il Messaggero suggested larger peer UniCredit could be weighing an offer.
It isn't the first time such speculation has arisen, Jefferies said in a note, adding that BPM looks like an interesting target for UniCredit.
Given the supportive current environment for banks and BPM's own potential, Jefferies says BPM shareholders would require a solid premium to convince them to sell.
However, there might be other factors supporting BPM shares, including follow-through from good 2021 results and outlook published Feb. 8, Creeland-Sandford said. BPM shares were up 24% on week.
Stocks to watch:
While tensions in Ukraine and Omicron fears have hit European steel stocks recently, the outlook offered by fourth-quarter earnings remains robust, Jefferies said.
German steeler Salzgitter last week reported the first quantitative full-year guidance, projecting upbeat earnings before tax of EUR600 million to EUR750 million, implying a 35% upgrade to consensus, Jefferies said.
Demand from the auto sector looks positive into the second half of 2022, with Austria's Voestalpine noting a current run-rate at 90% of normalized performance, the bank said.
With increased raw-material costs and supply-chain issues, working capital built up in 4Q 2021 at SSAB, Aperam, Thyssenkrupp and Voestalpine, though this should unwind from 2Q onwards, Jefferies said, adding that 2022 will still be a record year for free cash flow in the sector.
Data in focus:
Norwegian mainland GDP grew solidly in 3Q, supported by the reopening of society which boosted service sector activity, SEB said. "Activity in the mainland economy has fully recovered from the pandemic."
With national restrictions imposed in mid-December, which implicitly led to a shutdown in parts of the service sector, mainland GDP growth is expected to be weak in December, it said.
However, the largest effect will come in January so sequential growth in 4Q should hold up rather well, it added. SEB notes that adjusted monthly data showed stable mainland GDP growth in October and November, and the bank expects mainland GDP growth in 4Q of 1.2% on quarter against Norges Bank's estimate of 1.3%.
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Europe's construction sector has overcome its coronavirus-induced slump, the Ifo Institute said. Construction activity will grow 3.6% in 2022, after expanding 5.6% in 2021 and contracting 4.7% in 2020, Ifo estimated.
At the same time, construction services became more expensive in 2021: in eight countries, construction prices increased by at least 5% year-on-year. Residential construction grew the most in 2021, up 7.1%, after slumping 4.4% in 2020.
European residential construction is expected to grow only marginally in 2023, Ifo said. Non-residential construction was hit the hardest by the pandemic, with a 7.3% decline in 2020, and continued to lag behind 2019 pre-crisis levels in 2021.
Civil engineering showed a negligible dip in 2020 and exceeded its pre-crisis levels in 2021, Ifo said.
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The U.K.'s labor market appears to have suffered little from the Omicron wave of the coronavirus, paving the way for the Bank of England to increase rates again in March, ING said.
However, it is unlikely that the country is headed for a wage-price spiral that would justify the six rate increases that markets are now expecting from the BoE this year, the Dutch bank said. "Policymakers are likely to hike more gradually than investors expect," it said.
Market Insight:
Fitch Ratings' revised projections point to lower gross financing needs in Greece in the next four years, cumulatively 4.5% of GDP, it says in a new sovereign dashboard.
"The revision of the outlook on Greece's ratings to positive reflected strong economic growth and a narrowing fiscal deficit that supports a faster-than-expected fall in public-sector debt, amid rising but still historically low borrowing costs," Fitch said.
The revision also reflects repayments of outstanding IMF loans and prepayments of 2022 and 2023 instalments of the Greek Loan Facility, amounting to 3.8% of forecast GDP, Fitch added.
Fitch Ratings affirmed Greece's 'BB' rating but raised the outlook to positive from stable in January.
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The fact that both equity and bond markets are declining is a problem, as traditional diversification does not work in this environment, said Michael Strobaek, global chief investment officer at Credit Suisse.
Another point of concern for him is that the reasons driving the setback are "serious and potentially long-term in nature," he said, pointing to reasons ranging from economic to geopolitical ones.
The economic drivers, such as the continued upward surprise in inflation that has forced central banks to change course are "quite well understood," but the geopolitical reasons--the escalation of tensions between NATO and Ukraine on the one side and Russia on the other, are "less predictable, complicated and more difficult to price for markets," Strobaek said.
U.S. Markets:
Stock futures rose following days of losses, while energy prices slumped and bonds sold-off, after reports that Russia was pulling back some troops from the Ukrainian border.
The U.S. Producer Price Index, which covers prices that suppliers charge businesses, is due at 8:30 a.m. ET, and could offer investors' further insight into inflation. Last month's figures showed price rises cooling, a sign that supply-chain bottlenecks may be easing.
Earnings season continues, with quarterly results due from companies including Marriott International ahead of the opening bell. Airbnb will post earnings after markets close.
Forex:
The dollar fell after Russian President Vladimir Putin signaled he remains open to a diplomatic solution to the country's standoff with Ukraine, reducing demand for safe havens.
Indications of a diplomatic resolution to the Ukraine crisis could help risk-sensitive currencies recover and weaken safe havens including the dollar, ING analysts said in a note.
However, the "narrative around frontloading of tightening by the Federal Reserve" should limit the dollar's depreciation in the near term even if the geopolitical risk is priced out, they say.
Other Currencies:
The latest U.K. employment figures support the case for the BOE to raise interest rates further but sterling shows little reaction as investors await inflation data on Wednesday, Silicon Valley Bank said.
"Another solid employment report further justifies the BOE's projected path for raising interest rates this year, as the central bank battles with persistent inflationary pressure," Silicon analysts said in a note.
"FX markets will maintain their focus on tomorrow's CPI reading before adjusting any GBP/USD positions."
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The Czech koruna could fall as the Czech National Bank has started to hint that interest rates could be lowered by late 2022 or 2023 after its current rate-hiking cycle ends, Commerzbank said.
"It is very likely that Czech inflation in the medium-term would moderate to even below the current 4.50% policy rate--and then, the rate could be cut back--but, at this time, to start signalling that the rate may not be hiked too much beyond 5.00%, or that it may be cut again in coming year, could prove counter-productive from a monetary policy effectiveness and credibility point of view," Commerzbank analysts said.
Commerzbank expects EUR/CZK to rise to 25.00 in coming quarters from 24.4448 currently.
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The Russian ruble rose after reports that Russia's Defence Ministry announced the pullback of some troops in Russia's military districts adjacent to Ukraine after completing drills.
Some units of the Southern and Western military districts will return to their bases after completing their exercises, Russia's Interfax news agency reported, citing the ministry.
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02-15-22 0631ET
