LIVE MARKETS-U.S. equities: real yield worries
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U.S. EQUITIES: REAL YIELD WORRIES (1221 GMT)
Inflation took centre stage yesterday and once again a familiar pattern emerged: U.S. equities closed sharply lower as real rates drifted higher from an all-time low reached during the session.
Looking at the past two years, there seems to be quite a clear correlation between rising real rates and falling U.S. equity markets.
As you can see in the chart below, S&P index .SPX corrections took place while U.S. real yields US10YTIP=RR were rising:
Now, the crucial question for U.S. equities is whether real rates are on their way up and how bad this could hit stocks still within striking distance of recent record highs.
"Higher inflation and pricing of aggressive Fed tightening was not a good combination for U.S. risk," Deutsche Bank analysts say, mentioning yesterday’s fall in the S&P index.
So far, it's still not clear whether the Fed will decide to accelerate monetary tightening.
"The only signal we got came from San Francisco Fed President Mary Daly (one of the most dovish FOMC members)," DB analysts add.
She referred to inflation as “eye-popping” but asserted that it would be premature to “start changing our calculations about raising rates” or accelerate the pace of tapering when asked about changing the course of Fed policy.
Have a look below at how U.S. real rates are now much lower than emerging market economies:
(Stefano Rebaudo with Marc Jones)
STOXX BULLS: GAME ON? (1024 GMT)
Looking at today's price action one may wonder whether the bull run for European stocks has its days numbered, as rate hike risks take centre stage and the boost from earnings fades out.
But U.S. investment bank Goldman Sachs is upbeat and believes the positive ride for the STOXX 600 .STOXX can continue into next year, albeit at a slower pace.
GS lifted this morning its 12-month target for the pan-European index to 530 points from 520 previously and compared to 484 currently, which implies a 9.5% upside. nL4N2S21PU
"Despite record returns, Europe equity now looks cheaper than at the outset of 2021. With a forward P/E of 16x and a dividend yield of 3%, it represents good value versus the US and excellent value versus other assets," say GS strategists.
"Investors know this – hence, we are seeing buying from equity mutual funds, multi-asset/balanced funds, private equity bids, M&A and companies themselves, which are using their growing cash piles to buy back shares," they add.
As you see in the snapshot European equities currently trade at a 15.4% forward PE discount compared to global stocks. That is exactly twice as much the 20-year average discount of 7.7%.
STOXX FLAT, BUT UNDER THE SURFACE... (0855 GMT)
It seems that equity trading is a zero-sum game if you look at where European indices stand at the open today with the STOXX 600 kicking off the day firmly anchored around parity.
But under the flat surface moves in stocks are huge. So while the pan-European equity benchmark was last down 0.04%, its top-five biggest movers were seeing pretty significant swings.
Johnson Matthey is down 17% on plans to exit its battery business and news of its CEO departure; a share placement is sending Aker BP down 12%, while a strong guidance likely to move consensus estimates upwards is boosting Auto Trader by 11%.
Sika is up 10% to a record high after a $6 billion deal to buy construction chemicals maker MBCC, and finally Burberry is down 9% as in-line H1 sales gave no reason for excitement.
RATE HIKES BACK ON MARKETS' RADAR (0816 GMT)
Ouch. For all the central bank assurances about the inflation spike being transitory, investors are struggling to look past the biggest annual rise in U.S. inflation in 31 years.
A stampede for inflation-protected Treasuries (TIPS) sent 10-year yields on such securities to new record lows below -1.2% US10YTIP=RR.
That's roughly 70 basis points below this year's peak.
Wednesday's 1% dollar surge and an 11 bps rise in nominal Treasury yields has been followed up today by Japanese data showing wholesale inflation at 40-year high. Wall Street took a beating unsurprisingly; the Nasdaq, laden with tech stocks sensitive to higher longer-term yields, lost 1.7%.
World stocks have stabilised though, after the previous day's 0.7% tumble, supported by news that stricken Chinese developer Evergrande had come good on bond coupons, dodging default for the third time in a month. The bonds in question have risen around half a cent in price.
While money markets are betting central banks will get more aggressive next year -- the first Fed and ECB rate rises are now seen in July and September respectively -- shares have for now at least support from the deeply negative "real" interest rates.
On an inflation-adjusted basis, 10-year U.S. yields plunged to a new record low below -1.2%, keeping alive the there-is-no-alternative (TINA) narrative.
Cue, Bitcoin hitting new record highs and Amazon-backed EV firm Rivian valued at $100 billion after this year's biggest IPO nL4N2S13XS.
And how worrying really is the inflation picture?
Forward inflation indicators may offer reassurance. Ten-year breakevens, the level of expected inflation, is 2.7% and 5-year breakevens are 3%. Well above the Fed target, yet nowhere near the current 6.2%.
European shares are opening weaker but companies from a range of sectors -- Burberry, Siemens, Arcelor Mittal, Delivery Hero and Generali -- continue to deliver upbeat Q3 earnings.
Finally, not much cheer for Britain where the economy grew 0.6% in September. It remains smaller than where it was in February 2020 nL8N2S22CO.
Key developments that should provide more direction to markets on Thursday:
-Swiss National Bank governing board members Andréa Maechler and Thomas Moser speak 1730 GMT
-Emerging markets: South Africa budget 1200 GMT; Mexico, Peru central banks expected to raise interest rates
- U.S. markets closed
EUROPE: SEARCHING FOR DIRECTION (0741 GMT)
European shares look set to start the day without clear direction as investors ponder the impact on policy and economic growth of the strongest U.S. inflation print in three decades.
Following weakness in Asia and losses on Wall Street overnight after the U.S. CPI for October came in stronger than expected, futures on main European benchmarks are trading between a fall of 0.1% and a gain of 0.2%.
Earnings continue to flow in abundantly. Here some of the main early headlines:
Siemens posts sales and orders beat during fourth quarter
Arcelor Mittal reports strongest quarter in more than a decade
RWE posts 9-month profit rise on trading, nuclear, coal
Delivery Hero sees 2021 revenue at higher end of outlook range
Generali profit beats consensus on strong life, asset management segments
Burberry's revenue rebounds from pandemic
Beyond results, Aker BP AKERBP.OL is also on the watchlist after a discounted share placement overnight that could send its shares down as much as 8%, while Renault RNLSY could also suffer after Daimler sold shares it holds in its French partner. nL8N2S20XO nL1N2S12E2
On a positive note, Goldman Sachs upgraded its 12-month STOXX 600 target to 530 points from 520 previously and compared to yesterday's close at 483.