MARKET WRAPS
Stocks:
European stocks were little changed Tuesday in a cautious session so far, as investors awaited a host of central bank decisions later this week that will likely shape how markets trade for the rest of the year.
First up is the Federal Reserve, whose officials meet Tuesday and Wednesday for the first time since Jerome Powell said last month that the central bank needed to shift its focus toward preventing higher inflation from becoming entrenched and away from fostering a rapid rebound in hiring from the pandemic.
The pivot raises the prospect that the Fed's postmeeting statement-a document parsed by markets as a signal of likely future policy-could be overhauled at the conclusion of their meeting Wednesday.
"There are meetings where you make small changes, and there are meetings where you make larger changes. And this feels to me like a meeting where they're making larger changes," said William English, a former senior Fed economist who is now professor at the Yale School of Management.
Investors are also watching to see if the uptick in Covid-19 cases and the new Omicron variant changes how quickly the Fed will wind down easy-money policies that have helped fuel this year's stock rally. The central bank is expected to move more quickly to wind down its bond-buying program and signal that it will raise interest rates next year to curb inflation.
Shares on the Move:
BT shares fell almost 7% % after Altice increased its interest in the U.K. telecom to 18% from just over 12%.
ING said Altice could push for some form of infrastructure separation at BT to profit from its investment. Altice will also likely be interested in acquiring further shares, according to ING's Jan Frederik Slijkerman, but such a move is now restricted for six months under U.K. takeover regulations after Altice said it doesn't intend to make an offer.
An infrastructure separation, partial or otherwise, "would create transparency around the valuation for BT, because the sum of its parts is probably worth more than the current value of BT [despite all of the issues around its pension plan]," said Slijkerman.
Jefferies said the move underlines the serious intent of the Patrick Drahi-owned company, contrasting with the lack of clarity in the government position on BT.
Jefferies said Altice has engaged constructively with BT, but there is always scope to make an offer if the BT board recommends it, or a third party presents one. The bank has a buy rating on BT and a target price of 260 pence.
---
Ocado shares topped the FTSE 100 risers, up 8%, after the company reported strong underlying fourth-quarter demand. Ocado also said the U.S. had ruled in its favor in a patent case.
"The announcement has provided some relief to Ocado's share price, which is down more than 30% year-to-date. That's partly due to concerns the firm is continually loss-making, despite posting large gains in revenue and customer numbers in recent years," said eToro analyst Adam Vettese. "That's to be expected of a company in the growth phase, but seeing as it's 20 years-old, you would expect that to have changed by now."
---
Shares of Rentokil Initial fell more than 5% after the pest-control company said it would buy U.S. peer Terminix. Jefferies said the acquisition for $55 a share will cement Rentokil's leading position in pest control and hygiene and wellbeing.
It added that although the transaction should be over 20% EPS accretive with a full synergy run-rate, it may take just over five years to cover the weighted average cost of capital. Jefferies has a buy rating on the stock and a 650-pence target price.
Economic Insight:
Muted U.K. labor figures may support a delay of an interest rate rise until next year, said Derrick Dunne, chief executive officer of YOU Asset Management. "When it comes to interest rates, today's data might just constitute a mandate for delay."
Official data showed the U.K. unemployment rate eased to 4.2% in the three months to October, down from 4.3% the previous quarter, with the small decrease likely to set the tone for the BOE's rate decision this Thursday, Dunne said. In his view the labor market seems to have weathered the storm after the furlough scheme ended in September, though fresh Omicron-related restrictions could still hurt the jobs market.
J.P. Morgan Asset Management also said the BOE is set to hold off on raising interest rates this Thursday despite describing the labor data as strong.
"With Omicron posing near-term risks to the growth outlook, and still much to learn about the real-world efficacy of vaccines, we expect policymakers to instead opt to keep rates on hold this week in the hope that the outlook has become clearer by February," said Hugh Gimber, global market strategist.
Barring the emergence of this new strain, today's labor market report would likely have been enough to convince the BOE to raise interest rates this week, as the unemployment rate continues to fall, Gimber added.
U.S. Markets:
Stock futures edged into the red, with investors looking ahead to the Fed meeting.
"It's a fairly challenging backdrop for the market," said Hani Redha, a portfolio manager at PineBridge Investments. "Things have been fairly directionless in the lead-up to this. The market wants to see confirmation of what they're going to do."
In premarket trading, shares of meme-stocks GameStop and AMC Entertainment continued recent falls, declining 1.7% and 5.5%, respectively. Both companies reported news last week that hurt their share prices, with GameStop posting a widening quarterly loss and AMC disclosing that its chief executive and chief financial officer had sold a combined $10.2 million of stock. Tesla shares edged down 0.8% premarket Tuesday after CEO Elon Musk sold more stock Monday.
Forex:
The dollar is likely to continue rising ahead of Wednesday's Fed meeting, taking the DXY Dollar Index toward the upper end of its recent 95.50-97.00 range, said ING.
The index was last up 0.1% at 96.4480, as the dollar remained supported on expectations of an upbeat Fed announcement.
ING expects the Fed will accelerate tapering of its bond-purchase program, enabling it to end the program by the beginning of March. The Fed is also expected to flag "earlier and swifter" interest-rate increases, with its forecasts set to point to at least two rises in 2022, ING said.
The Bank of England may leave interest rates unchanged on Thursday but this isn't likely to have much impact on sterling, said Argentex.
"The BOE's 'wait and see' approach---previously deeply unpopular--is likely to be the preferred option ahead of Thursday's meeting, given the resurgence in Covid-19 cases since the previous meeting in November," said Argentex forex analyst Joe Tuckey.
Expectations for a rate rise on Thursday have "largely dissipated" due to coronavirus with more aggressive policy tightening anticipated in 2022 to compensate for these pauses, he said. That means sterling could "hold" following a decision to keep rates steady.
Separately, ING said the Hungarian forint could strengthen before year-end as the National Bank of Hungary looks set to tighten policy again in a decision later.
The NBH is likely to raise its base rate 30 basis points to 2.40% while also taking the interest rate corridor 30 basis points higher, said ING. The bank could also further reduce quantitative easing and end its corporate bond buying program.
"On balance we see the NBH rate move plus HUF liquidity draining measures [forex swaps, NBH bills] as providing some support to the forint into year-end and prefer to see EUR/HUF drifting towards the 360 area." EUR/HUF was last down 0.2% at 367.040. The rate decision is at 1300 GMT.
Bonds:
The only decision that looks "close to certain" ahead of the European Central Bank's meeting is the end of the Pandemic Emergency Purchase Program in March 2022, said Frederik Ducrozet, strategist at Pictet Wealth Management.
The ECB's statement could include the possibility of resuming net purchases in 2022, should the pandemic worsen, he says. Pictet expects up to EUR150 billion to be left unused in the PEPP at the end of March, following a final reduction in the pace of monthly net PEPP purchases to around EUR50 billion in 1Q 2022, Ducrozet said.
Regarding the regular Asset Purchase Program, Pictet sees risks tilted toward a smaller expansion of the APP for a more limited period of time.
Although the ECB's policy offers more support, the correlation of German Bunds with Treasurys is too strong, and thus, Bunds aren't immune to rising yield curves, said Mark Holman, chief executive of TwentyFour Asset Management.
The market will keep an eye on the expected termination of the ECB's QE at the end of 2022, he added, with TwentyFour AM expecting 10-year Bund yields to reach 0% by the end of next year.
J.P.Morgan's cautious stance and poor market liquidity makes it keep a light intra-eurozone government bond portfolio ahead of the ECB's meeting on Thursday.
"A lack of clear ECB guidance on possible QE delivery at the December meeting still keeps a spectrum of possible hawkish/dovish outcomes on the table along with potential challenges," said strategists Aditya Chordia and Elisabetta Ferrara.
The current poor market liquidity would further magnify the market reaction in the potential scenario, making risk-reward in active intra-eurozone positioning less attractive, they added.
The ECB's policy remains supportive of risk assets as a reduction of asset purchases will be gradual, but valuations offer limited room for spread compression, said Pimco.
The asset manager doesn't have a strong view on the ECB's mix of asset purchases beyond March--when the PEPP is set to expire--but it expects the ECB's Governing Council to choose a gradual reduction of the pace, said Pimco's portfolio manager Konstantin Veit.
(MORE TO FOLLOW) Dow Jones Newswires
12-14-21 0625ET
