MARKET WRAPS
Stocks:
European stocks rose as investors stayed upbeat amid Ukraine-Russia peace talks in Turkey.
Investors are monitoring peace talks between Russia and Ukraine which resumed in Istanbul Tuesday for the first time in two weeks. Ukraine has in recent days signaled an openness to a neutral status as part of a peace deal with Russia.
"Negotiations between Russia and Ukraine continue and the latter has signaled its willingness to consider a neutral status," IG analysts said.
"Russia is reported to have dropped its demand that Ukraine be 'denazified' and appears to be shifting its efforts towards securing the Donetsk and Luhansk republics, after its initial all-out assault stagnated over the past month."
Shares on the move:
Mulberry Group's unscheduled trading update was encouraging, with the strong first-half sales trend continuing throughout the second, Shore Capital said.
Group revenue for fiscal 2022 is now seen as being moderately ahead of current expectations and the British luxury brand also says that gross margins have been maintained on year.
Fiscal 2022 profit is set to be ahead of current expectations despite increased marketing investment in the latter half of the year to build global brand awareness further, particularly in Asian markets, the U.K brokerage said. Shares trade up 6.9%.
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Barclays faces reputation issues following a bond blunder, said Hargreaves Lansdown. The British bank said it issued more securities than it had registered for sale in the U.S., meaning it will have to repurchase the affected bonds at their original price, taking a loss of GBP450 million.
"This is a highly embarrassing turn of events for Barclays," HL said, adding that stock investors are clearly irked about the mismanagement of the structured product sales and the quick fire purchase, which sees the bank nursing a heavy loss.
The blunder has also delayed the bumper GBP1 billion share buy back, adding toshareholders' angst, HL said. Still, underlying performance of the business is positive, and the bank is well capitalised, with a CET1 radio higher than the regulatory minimum, it adds. Barclays' shares fell 3.3%.
Stocks to watch:
A.G. Barr sales and profits are now ahead of pre-pandemic days, and the drinks manufacturer is doling out more generous dividends once again, AJ Bell said.
However, while the company is sitting pretty, sustaining this momentum won't be easy, the investment platform said. There are considerable uncertainties about the strength of U.K. consumer spending once energy prices are raised in April, AJ Bell said.
"A.G. Barr will no doubt be banking on the consumer continuing to find some cash for small treats like its range of fizzy drinks including Irn Bru, as well as people refusing to give up small luxuries such as a night out with friends which is relevant to its Funkin cocktail brand," AJ Bell said.
Market Insight:
S&P said the outlook for emerging markets in EMEA has changed considerably because of the Russia-Ukraine conflict.
Emerging Europe is "highly exposed to the fallout from the conflict because of its geographical and economic proximity," S&P said. It expects sanctions and disruptions will lead to a "deep recession" in Russia this year, revising its forecast for that nation's real GDP to decline by 8.5% in 2022 and remain flat next year. S&P cautioned that there was a high degree of uncertainty surrounding the forecast.
S&P also said it shaved off more than 1 percentage point from previous GDP growth forecasts for Poland and Turkey. A worsening inflation outlook and swifter policy tightening by the Fed also pointed to higher policy rates in most key emerging markets in EMEA, S&P said.
Economic Insight:
Pantheon Macroeconomics said the U.K.'s GDP likely increased 1% in the first quarter despite the hit from Omicron at the beginning of the year, but the cost-of-living crisis will weigh on the economic recovery in the second quarter.
Pantheon said consumer spending will be hit by a 2% fall in real household incomes due to the rise in utility bills and the higher tax burden.
"We think GDP will fall by 0.3% in 2Q, reversing one third of 1Q's increase, and then rise slowly in the second half of the year. We think the Monetary Policy Committee will refrain from hiking bank rate further in 2H, after increasing it to 1% in May."
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The drop in the GfK consumer sentiment headline to a 22-month low is a clear sign that the war in Ukraine and higher inflation are weighing heavy on consumer sentiment, Pantheon Macroeconomics said.
The details of the indicator show that the surge in energy prices and overall inflation is putting a strain on general consumer sentiment, Pantheon said.
The willingness-to-buy index edged down, reaching its lowest level since April 2020, which Pantheon said is unsurprising given the drop in income expectations by 25 points, falling to its lowest level since January 2009. "Consumers are seeing their purchasing power melt away," Pantheon said.
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The U.K.'s GDP likely increased 1% in 1Q on-quarter despite the hit from the Covid-19 Omicron variant at the beginning of the year, but the cost-of-living crisis will weigh on the economic recovery in 2Q, Pantheon Macroeconomics said.
Consumer spending will be hit by a 2% fall in real household incomes due to the rise in utility bills and the higher tax burden, the economic-research firm said.
"We think that GDP will fall by 0.3% in 2Q, reversing one third of 1Q's increase, and then rise slowly in the second half of the year," Pantheon said. "We think that the Monetary Policy Committee will refrain from hiking bank rate further in 2H, after increasing it to 1.00% in May."
U.S. Markets:
Stock futures inched higher and bond yields edged closer to flashing a recessionary warning signal Tuesday, as investors girded for a period of slower growth and higher interest rates.
Stock indexes have rallied in recent weeks, reversing much of the losses that came in the wake of Russia's invasion of Ukraine. Investors have shown calm despite concerns including multidecade high inflation, fresh Covid-19 lockdowns in China and a Federal Reserve which has begun raising interest rates for the first time since 2018.
"Markets seem to have become much more comfortable with the idea that the hiking cycle is here, that it won't derail economic growth and that equity markets are still the place to be," said Altaf Kassam, head of investment strategy for Europe, the Middle East and Africa at State Street Global Advisors.
President of the New York Federal Reserve John Williams is set to speak later Tuesday, with investors likely to parse his comments for further clues about the central bank's approach to rate increases. Mr. Williams last week said he was open to a half-percentage-point interest rate increase if warranted by the economy.
Market Insight:
Expectations the Fed will raise interest rates by 50 basis points in both May and June meetings suggests credit spreads trade too tight, Mizuho said.
"A quick U.S. tightening like this over the next quarter leaves credit spreads still too tight, and equities slightly stretched," analysts at Mizuho said. They expect the combination of lower economic growth and elevated inflation coupled with tighter monetary policy to weigh on companies.
"The stagflation theme will erode corporate earnings, and the tighter monetary policy will increase the cost of funding for corporates."
Economic Insight:
S&P said the U.S. economy remained largely healthy through early March, but the war in Ukraine is worsening pricing pressures tied to continued supply-chain disruptions. S&P expects the economy to grow 3.2% this year, down from the 3.9% forecast in November.
"The main drivers for weaker than expected growth this year and the next are continued supply chain disruptions, exacerbated by the Russia-Ukraine conflict; higher prices, particularly for food and energy; and much more aggressive Fed policy to fight these higher prices."
S&P expects seven rate increases this year, and a 50-basis point raise in May.
Forex:
The dollar looks undervalued in the near-term after failing to rise materially on the recent sharp gains in short-term Treasury yields, ING said.
The dollar has only received moderate support from the jump in short-term yields, driven by market bets for multiple 50 basis points interest rate rises by the Federal Reserve, ING said.
"Looking at short-term valuation, the dollar is looking cheap against most G10 currencies following the recent moves in yields." However, the dollar should ultimately catch up with the move in yields, ING said.
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The euro will struggle to climb sustainably above $1.10 against the dollar without positive news on negotiations between Ukraine and Russia, Commerzbank said.
The war has increased pressure on prices, fueling expectations the European Central Bank may look to tighten monetary policy more quickly.
However, as long as the war in Ukraine continues and the risk of further sanctions remains, the ECB is likely to continue to seem "hesitant" compared with another central banks, which won't help the euro, Commerzbank said.
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The ruble rose to a four-week high versus the dollar on hopes for a breakthrough in peace talks, with USD/RUB falling to as low as 92.4999.
The ruble is supported by optimism surrounding the talks as well as mandatory sales of Russian exporters' foreign currency revenues, Unicredit Research said. "At the same time, however, investors remain prudent about new effective steps towards a diplomatic solution to the conflict."
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Sterling could fall below the key 1.30 level versus the dollar in the near-term as the Bank of England is expected to raise interest rates by less than the Federal Reserve, MUFG Bank said.
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03-29-22 0632ET
