MARKET WRAPS
Stocks:
European markets fell amid ongoing economic uncertainty ahead of an expected slightly lower U.S. open.
Inflation remains in the spotlight as markets consider how much the Fed will raise interest rates to rein in higher prices. St. Louis Federal Reserve President James Bullard said on Monday that a 75-basis point interest-rate increase wasn't out of the question; the Fed raised rates by a quarter-point in March, and is expected to hike by a sizable 50 basis points at its next meeting.
"Fortunately, markets do not pay too much attention to Fed President Bullard," said Paul Donovan, the chief economist at UBS Global Wealth Management. "Assorted other Fed speakers are scheduled this week, with the Beige Book of anecdotal evidence due tomorrow."
The global economy was also under scrutiny, after the World Bank cut its 2022 global economic growth outlook to 3.2% from 4.1% on Monday, citing uncertain geopolitics from the Russia-Ukraine war and rising inflation. Analysts are watching whether the International Monetary Fund will follow suit when it meets later this week.
"Ukraine-Russia tensions have escalated once more, with a Russian offensive under way in the crucial Donbas region," said Sophie Lund-Yates, an analyst at broker Hargreaves Lansdown.
"Any suggestion that tensions are going to be prolonged, or more violent, is enough to mute sentiment in western markets."
Stocks to Watch:
Italian infrastructure company Atlantia continues to be eyed up by suitors, with its stake in Eurotunnel owner Getlink in sights, Equita Sim said.
Spain's ACS Group, alongside private-equity firm Brookfield, may acquire Atlantia's 15.5% stake in Getlink, which it would sell as part of its delisting process should Benetton family holding company Edizione and investment fund Blackstone's takeover bid proceed, according to press reports. At current market value, the Getlink stake is worth EUR1.5 billion, Equita said.
Any Edizione and Blackstone bid would reportedly be governed by a five-year agreement that provides for a Blackstone right of veto over extraordinary transactions by Atlantia, Equita said, citing Italian media reports.
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Danone should face short-term challenges associated with inflation and the war in Ukraine but long-term prospects look brighter, said Stifel's Pascal Boll in a research note.
"The global environment worsened recently and high cost inflation, related supply-chain issues...and a geopolitical crisis increased the challenges for Danone to transform its business," he said.
However, Boll said CEO Antoine de Saint-Affrique has taken the right steps in terms of growth initiatives and personnel changes and "the mid-to-long-term prospects outweigh the short-term worries."
Stifel expects Danone's gross margin to recover by 100 basis points in 2023 and 70 bps in 2024, partly supported by pricing, and operating margin to reach 13.2% by 2024.
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Roche's compound annual growth rate in earnings per share won't be able to reach the sector average unless the company is able to deliver a high hit rate in products currently in the later stage of the pipeline, said Michael Leuchten, an analyst at UBS.
"Much depends on gantenerumab in Alzheimer disease," he says, adding that Roche will have to face fierce competition from makers of other drugs for the same disease.
In general, the Swiss pharma major is expected to deliver a 5% EPS compound annual growth rate over the next five years, which lags behind European pharma peers, Leuchten said.
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Carrefour's focus on growing its free cash flow gives the French grocer scope for delivering additional capital returns, Berenberg analysts said in a note as they raise their recommendation on the stock from hold to buy.
The German brokerage said Carrefour is well positioned for the inflationary environment and expects it to maintain its French market share while continuing to grow profits.
Going forward, Berenberg sees Carrefour's Brazil business gaining market share and sheltering it from macro headwinds, with the acquisition of Grupo BIG supporting its future profit growth.
Berenberg expects free cash generation to be stronger, which will support buybacks. Any asset sales would offer scope for additional capital returns, it says. Berenberg raises its target on the stock to EUR23.10 from EUR18.80.
Economic Insight:
Berenberg has lowered its forecast for eurozone GDP growth in 2022 from an above-consensus 4.3% to 2.8%. This revision reflects the impact of Russia's invasion of Ukraine, whereas 0.3 percentage points are the consequence of new supply-chain problems due to regional Chinese lockdowns.
Putin's war hurts European economies through various channels: the shock of war, the surge in energy and food prices, temporary shortages of key inputs for manufacturing and construction and further strains on supply chains, Berenberg said. So far, Western sanctions against Russia play only a modest role.
"They have been designed to hurt Russia with no dramatic impact on Western economies for whom Russia is no major market."
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The annual growth in U.K. house prices is set to slow over the remainder of the year due to rising mortgage rates and falling real incomes, said Gabriella Dickens, senior U.K. economist at Pantheon Macroeconomics.
U.K. house prices could be supported if consumers used some of the savings accumulated during the Covid-19 pandemic to buy a home or if households were willing to dedicate a larger portion of their incomes to housing, but the low confidence level suggests that this is unlikely to happen, Dickens said.
"We expect year-over-year growth in the official measure of house prices to slow to around 4.5% in the fourth quarter. Mortgage approvals, meanwhile, likely will drop back to their 2017-to-2019 average of 66,000 in the second half," Dickens said.
U.S. Markets:
Stock futures wavered, as investors looked ahead to a cross-section of corporate earnings reports for insights on how businesses were weathering a period of rampant inflation.
Earnings season is set to continue with Johnson & Johnson, Travelers and Lockheed Martin due to report before the opening bell. Netflix and IBM are expected to release earnings after markets close.
Twitter shares fell 1.3% premarket. The Wall Street Journal reported Monday that Apollo Global Management was considering joining Tesla Chief Executive Elon Musk's bid to take the social-media company private.
Concerns about inflation-which has soared to multidecade highs-and how central banks might respond have dominated investors' thinking for months, but so far corporate finances have been protected as firms have largely managed to pass higher costs on to consumers. Investors say they are expecting earnings to moderate this quarter as it becomes harder for companies to continue raising consumer costs.
"The longer prices stay high, the longer the war in Ukraine continues, the higher likelihood that something has to give. Corporations cannot continue to pass on input costs forever," said Brian O'Reilly, head of market strategy at Mediolanum International Funds. "There has to be a tipping point."
Mr. O'Reilly said he favors companies with strong balance sheets that can continue to pass on higher input costs, such as healthcare firms. "We want to be investing in companies that have been able to keep margins relatively stable and high," he said.
Data on the housing market is also due Tuesday, with housing starts and building permits figures for March expected at 8:30 a.m. ET.
Forex:
The dollar, which rose to its highest in two years against a basket of currencies in early European trade, looks set to remain strong given prospects of multiple interest-rate rises to come from the Fed, said UniCredit Research.
At this stage, it would take very negative U.S. economic data to even scratch the dollar's firmness, although slightly softer housing data due later might provide some relief to the euro against the dollar, UniCredit said.
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The euro could fall versus the dollar this week on an unsupportive policy differential between the ECB and the Fed, uncertainty over the French presidential election and the Russia-Ukraine conflict, ING said.
A key takeaway from the ECB's policy meeting last Thursday is that the Fed-ECB gap is set to remain wide for longer, ING analysts said. Meanwhile, the second round of the French election is on April 24 and there is growing concern about the Ukraine war, they said.
"A combination of these factors continues to argue against a recovery in the euro, in our view, and EUR/USD may test 1.0700 in the coming days."
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The cryptocurrency space has seen a volatile 24 hours, with Bitcoin-the largest digital asset-dropping below $39,000 at points on Monday. Bitcoin prices were up almost 5% over the past day to near $41,000, with smaller peer ether also 5% higher to around $3,050.
Bonds:
In bond markets, the yield on the 10-year Treasury note hovered close to its highest level since December 2018.
The yield on the benchmark bond stood at 2.861%, unchanged from its closing level on Monday. Investors have been selling bonds on expectations of high inflation and interest-rate increases from the Federal Reserve.
"Fixed income has been a particular point of pain. This is the worst bear market in bonds we've seen in a generation," Mr. O'Reilly said.
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Neuberger Berman expects a selloff in the eurozone government bond market to halt.
The European Central Bank has postponed any new decisions to the June meeting, which Neuberger Berman views as a signal that "there is no emergency in the fight against inflation."
The return of short-term eurozone government bond yields to positive territory offers an investment opportunity for the coming quarters, said Patrick Barbe, head of European investment grade fixed income.
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A win for Marine Le Pen in the French presidential elections could cause a knee-jerk 50 basis point widening in the 10-year French OAT-German Bund yield spreads, said NatWest Markets.
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04-19-22 0633ET
