MARKET WRAPS
Stocks:
Stocks slipped Friday as investors monitored the latest developments in the Russia-Ukraine war, with energy politics and Europe's reliance on Russian gas driving sentiment.
On the ground, the two countries remain locked in conflict. But this week has seen developments on the diplomatic front with meetings focused on the war from the NATO Western military alliance, G-7 group of countries, and the European Union.
While the EU has failed to ratchet up sanctions on Russian energy, the U.S. has pledged to increase liquified natural gas (LNG) shipments to the EU by 15 billion cubic meters this year. "The U.S. finally seems to be getting its act together around supplying Europe with more natural gas," said Jeffrey Halley, an analyst at broker OANDA. "They could do much more still."
In the commodity space, oil prices fell back. "The EU declining to sanction Russian oil has been given as the main reason, but I believe that a possible coordinated [U.S. Strategic Petroleum Reserve] release, and news that the Caspian CPC pipeline is resuming partial production are the more likely reasons for the fall," noted Halley.
Russian stocks fell 2.5% a day after the Moscow stock exchange partially reopened after a month-long closure, reversing some of Wednesday's 4.4% jump. Gazprom slid 3.4% and Russia's largest lender Sberbank declined 4.5%.
The ruble appreciated 4% against the dollar, trading at around 98 rubles to $1. It has weakened nearly 24% since the start of the year.
Stocks to Watch:
Next remains very well positioned to deliver solid double-digit returns to investors over the next few years despite its downgraded outlook for fiscal 2023, Liberum said.
The clothing retailer's store profitability declines have been halted and its online business has reached material scale, the U.K. brokerage noted, adding that sales so far in fiscal 2023 are growing ahead of expectations in the U.K. Liberum reiterates its buy recommendation on the stock but lowers its target price to 8,400 pence from 8,900. Shares were up 2.4%.
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Heineken's 1Q is expected to show a continued recovery--consistent with its peers--as it starts to build a strong growth strategy, Jefferies said.
The U.S. bank forecasts a 4.3% organic increase in beer volumes, driven by a 11% increase in Europe and 4% in the Americas. Revenue could reach near to double digits due to pricing, channel recovery and premiumization, despite inflation volatility, it added.
Jefferies noted the recent business transformation plan would not only boost reinvestment but also enable cost discipline, generating further growth. Shares were up 0.05%.
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Bayer has the potential to increase Ebitda in its agricultural division in 2023 on the back of strong pricing, mix and volumes, Jefferies said. Further upside is also expected for the German pharmaceutical-and-agricultural company from cost savings, Jefferies added.
Still, investors continue to see barriers due to the continuing litigation over glyphosate, according to the U.S. bank. Whether Bayer comes out of the litigation successful or not, it should all be over around year-end, Jefferies said. Bayer traded down 0.2%.
Economic Insight:
The plunge in Germany's corporate sentiment reflected by the Ifo index doesn't necessarily mean that the economy is heading toward a recession, KfW's chief economist Fritzi Koehler-Geib said.
For now, it is clear the war in Ukraine will take a lot of momentum out of the expected recovery, but the effects of it will largely depend on the duration of the war and the escalation of sanctions, she said.
"After all, with the removal of the majority of Covid-19 restrictions, services have considerable recovery opportunities as a counterweight to the war-related burdens, especially with a view to spring and summer," Koehler-Geib said.
However, a precondition for this scenario is that an energy embargo against Russia is avoided, she said.
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The 0.3% on month fall in U.K. retail sales in February is a sign of what is to come in the next few months, when further rises in both inflation and interest rates are likely to hit consumer spending, Capital Economics said.
Households are in for a prolonged period of negative real wage growth, and in this context it seems inevitable that consumers will continue to pare back spending in the coming months, the economic-research firm said.
"It is hard to see how overall consumer spending growth will make much headway over the remainder of this year," CE said.
Market Insight:
Rates markets remain focused on pricing in tighter monetary policy, rather than thinking more clearly of the consequences for the real economy over the medium term, and therefore for medium-to-long term rates, Mizuho's rates strategists said.
Macro data releases are showing more signs that elevated inflation pressures and lingering supply-chain issues are weighing on European sentiment, they added.
The eurozone's economic recovery lost pace in March, dragged by high energy prices and uncertainties related to the war in Ukraine.
U.S. Markets:
Stock futures wavered as investors monitored the latest developments in the Russia-Ukraine war, with energy politics and Europe's reliance on Russian gas driving sentiment.
The S&P 500 has moved more than 1% in either direction every day this week since Tuesday and is currently up 1.3% for the week so far.
The recent rebound in stocks has been driven by investors buying the dip, amplified by the bout of high inflation, said Fahad Kamal, chief investment officer at Kleinwort Hambros.
"Every time there's a significant fall, you see cash rushing in and that has continued to a large degree. When you've got inflation at 8%, cash is being crucified and needs a place to go," Mr. Kamal said.
President Biden said the U.S. will respond if Russia uses chemical weapons and called for the country to be expelled from the G-20, spurring fears of further escalation.
"Markets are trying to price something that is basically impossible to price, as part of what's going on in the world depends on Putin's thinking which nobody knows," said Fahad Kamal, chief investment officer at Kleinwort Hambros.
"The longer the conflict lasts, the higher the upside to inflation, the lower the downside to growth. It's massively, radically uncertain."
A survey of consumer confidence in the U.S. for March is set to go out at 11 a.m. ET. The metric has been slipping in recent months as consumers, particularly lower-income households, had more pessimistic outlooks on the economy.
Forex:
The dollar edged down slightly in Europe but is likely to be supported by ongoing geopolitical risks that underpin the safe-haven appeal of the greenback.
Maybank said there are fears of Russia resorting to chemical or nuclear attacks, noting NATO leaders' pledge to ramp up defenses against the threat of such attacks. Markets appear to be awaiting the next catalyst from Russia-Ukraine developments, Maybank said.
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The euro pared gains against the dollar after a key survey showed German business morale weakened in March as expectations collapsed due to concerns about the potential economic impact of the Ukraine war.
The ifo business climate index dropped to 90.8 in March from 98.5 in February, missing the 93.5 reading forecast in a WSJ survey of economists.
"Expectations dropped to the lowest level since the start of the pandemic as German businesses seem to be realising that the war is more of a game-changer for the German economy than Covid has ever been," ING analysts said.
Bonds:
Eurozone government bond yield spreads have held their ground despite a hawkish repricing of rates and the end of the European Central Bank's quantitative easing in sight.
Societe Generale said one supportive factor is the EU's unity in the current Russian-Ukrainian conflict. "A general sense that the EU stands united in this crisis and a higher tolerance for fiscal profligacy may be behind this."
SocGen also pointed to higher demand from investors seeking yield.
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SocGen maintains a positive view on French government bonds in the eurozone space, with France's less pronounced need for energy transition compared to other countries seen as a positive factor.
"The war in Ukraine boosts support for Macron in the presidential race, and France should be less impacted than other countries by a stepped-up energy transition," SocGen said.
Separately, SocGen said the European Central Bank is moving ahead with a faster tapering of asset purchases and countries might need to issue more debt than planned this year. This could put pressure on country spreads.
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The 10-year Italian BTP-German Bund yield spread, which trades at 152 basis points, is now closer to SocGen's target in the downside scenario of 150-170 bps. It finds it difficult for the spread to narrow below 140 bps, given the ECB's intention to move toward tightening monetary policy.
SocGen expects a risk for the 10-year BTP-Bund spread to widen to 190 bps in late 2022.
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European corporate bonds have recovered recently despite lingering uncertainty as Russia's military assault on Ukraine continues, said UniCredit.
"Despite the upward pressure on risk-free yields and lingering geopolitical uncertainty, European corporate credit markets have shown some sign of improvement in recent days."
A recent move lower in euro investment-grade corporate bond spreads has helped companies to return to debt capital markets to raise funds, said UniCredit's research team.
"Following the recent tightening, credit spreads are not too distant from the levels prevailing before the outbreak of the crisis," analysts at the Italian bank said.
This normalization favored a return of activity on the primary market, with investment-grad companies raising about EUR 25bn so far this month, more than twice as high as last month, they said.
Commodities:
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03-25-22 0638ET
