EUROPEAN MIDDAY BRIEFING – Oil Stocks Gain as Crude Prices Rise

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MARKET WRAPS

Stocks:

European stocks rose to start the week as energy stocks gained on the back of higher oil prices.

BP, Eni, Repsol, Shell and TotalEnergies are all higher as the price of a barrel of Brent crude gained. London-listed power utilities National Grid and Centrica also advanced.

“While last week saw some doubts creep in for bulls, they’re likely to get back in the driving seat before long, with rising demand being met by an unwillingness to ramp up output in both the U.S. and OPEC,” IG analyst Joshua Mahony said.

Stocks to watch: Bouygues has agreed to a steep price in the acquisition of energy company Engie’s technical-services arm Equans, Bryan Garnier analyst Eric Lemarie said.

The French conglomerate will pay EUR7.1 billion for Equans, well above previously reported price ranges, Lemarie noted. While Bouygues is right to focus on the attractive sector, with the merged division to become the group’s largest by revenue, the low implied profit multiple makes the deal an expensive one, Lemarie said.

“We suspect the temptation was just too strong for Bouygues to pay a serious price,” he said.

The large and sprawling unit will moreover be complicated to absorb, with governance issues to boot, Lemarie said. Bouygues slid more than 3%.

Shares of Abrdn rose 2.2% after the Scottish fund manager said it was in talks to acquire online broker Interactive Investor.

Data in focus: Investor sentiment in the eurozone has turned a corner as investors seem to think the current slowdown in activity will be temporary, Pantheon Macroeconomics said.

The Sentix investor sentiment index in the eurozone jumped to 18.3 in November from 16.9 in October. The rise in the headline was good news, albeit not enough to reverse its fall in October, Pantheon’s senior Europe economist Melanie Debono said.

“It is difficult to tell where the sentix index will go in the coming months, but with downside risks to the economic outlook rising, especially now that virus cases are rising sharply across Europe, we think it is more likely than not that the sentix will fall back again in December,” Debono said.

U.S. Markets:

Stock futures wavered and Tesla shares fell in premarket trading after Chief Executive Elon Musk asked Twitter users if he should sell some of his stock.

A strong earnings season has helped push stocks to new highs. About 82% of S&P 500 companies that have reported results this season have topped analysts’ earnings forecasts, according to FactSet data. The spate of earnings have helped offset concerns that higher-than-anticipated inflation could hurt corporate profits.

“It’s been a really good earnings season so markets continue to power ahead driven by earnings growth,” said Altaf Kassam, head of investment strategy for State Street Global Advisors in Europe. “What we’re seeing is companies do have the pricing power they need and consumers are spending some of the cash they’ve saved up over the pandemic.”

Companies including Roblox, PayPal Holdings and retail trader favorite AMC Entertainment Holdings are set to report earnings after the closing bell.

In premarket trading, Tesla shares declined 6.7% after Twitter users said Mr. Musk should sell 10% of his Tesla stock, after the chief executive polled them and pledged to abide by the outcome of the vote. The stake could amount to around $21 billion, based on the stock’s Friday closing price.

Forex:

The potential appointment of Federal Reserve Governor Lael Brainard as the central bank’s chair poses the main “downside risk” to the dollar in the near-term, MUFG Bank said.

“Market participants would expect the Fed to be even more cautious about tightening policy under her leadership,” MUFG currency analyst Lee Hardman said.

President Joe Biden reportedly met with Fed Chair Jerome Powell and Brainard separately on Thursday as he considers who will lead the central bank next year.

Bitcoin jumped on expectations that the era of cheap money will remain for longer and inflation will continue to accelerate, said Hargreaves Lansdown analyst Susannah Streeter.

“The recent surge in the crypto asset partly seems to have been caused by investors piling in, seeing it as a hedge against inflation.” Some investors seem enticed by the view that huge monetary stimulus programs are fuelling inflation, which lowers the value of money over time, whereas bitcoin has a fixed limit on the number of coins that can be created, Streeter said.

However, investing in bitcoin is “highly risky” given how volatile it is, she said. Bitcoin rises 8.7% to $66,715 after earlier hitting a two-and-a-half-week high of $66,955, according to FactSet.

The Bank of England may have caused lasting damage to sterling by leaving interest rates unchanged last Thursday, despite talking up the prospect of a rate rise to come, Commerzbank said. The BOE has “damaged confidence” by allowing the market to “move in the wrong direction” with its rate-rise expectations, Commerzbank currency analyst Ulrich Leuchtmann said.

Any “hawkish” comments about lifting rates by BOE Governor Andrew Bailey and other policymakers in the near future will sound “insipid,” he said. “Everyone is likely to remember for some time that hawkish comments by this governor don’t mean very much.”

Sterling fell on concerns about rising tensions between the U.K. and EU over the protocol agreed as part of the Brexit deal to prevent a hard border between Northern Ireland and Ireland.

“This issue has been bubbling since the summer but has failed to hit GBP too severely,” ING analysts said. “And we suspect that GBP can hold up ok, assuming that the prospect of a Bank of England rate hike in December remains live.”

EUR/GBP is unlikely to rise above 0.8600 and should end the year around 0.8500, the analysts said.

Bonds:

The current rise in inflation is temporary, said Carmignac, adding that deflationary factors are still in place. The rebound of the global economy after the pandemic crisis has fuelled price increases due to supply bottlenecks, including in labor, but “the fact that the end of these bottlenecks is foreseeable argues for inflation being only temporary,” said Frederic Leroux, member of Carmignac’s strategic investment committee.

An ageing population and unprecedented debt levels in the global economy in the post-war period are among the factors which suggest that the current inflation is temporary. Assuming inflation will be permanent is “still like a bet with little chance of success,” he says, but added that central banks should also pay attention to this risk.

European government bond markets look set to move into calmer waters this week, said Commerzbank. “The sharp countermoves in yields, curves and spreads amid waning rate hike expectations face a reality check also given the light agenda over the next few days,” said Commerzbank’s rates strategist Rainer Guntermann.

The 10-year German Bund yield might test the zero mark, but a sustained rise significantly above that is unlikely, said LBBW. “Growing speculation about lasting reflation and an earlier rate hike by the ECB are shaping the trends in the euro bond market,” LBBW said.

The 10-year Bund yield hit approached the 0% level after the European Central Bank’s October meeting, and LBBW says some market players might also be eager to test the ECB’s tolerance for yield increases.

“Its tolerance is likely to be greater than in the spring because inflation expectations are higher,” LBBW said.

Euro-denominated high-yield corporate bonds issued by non-financial companies continue to lag markets, said UniCredit. Risk premiums on this type of debt shrank by two basis points on Friday, a lower reduction than in other credit assets, analysts at the bank said.

Supply has picked up, with EUR6.4 billion of euro high-yield nonfinancial corporate bonds hitting the market so far this month, compared with EUR13 billion issued in the entire month of October, they said.

However, they see the net supply pressure in high yield market “to be rather limited” taking into account “decent” redemptions of EUR4.8bn this month and EUR7.9bn next month, far above the EUR3.5 billion monthly average this year.

Commodities:

Oil prices rose after Saudi Arabia raised its official selling prices and amid tight supplies. Saudi Arabia late Friday raised the price for the oil it sells to Asian customers in December.

State-owned oil giant Saudi Aramco more than doubled the premium buyers pay for its Arab light crude, over a regional benchmark. The hike comes after the Saudi-led OPEC producers group last week rebuffed pressure to increase output at a faster rate.

“With OPEC+ sticking to its output strategy, we estimate an undersupplied oil market until year end,” said Helge Andre Martinsen, oil analyst at DNB.

Natural gas prices rose as traders wait to see whether Russia opens the taps and eases Europe’s energy shortage. Dutch benchmark natural gas futures rise 6.4% to EUR78.76 a megawatt-hour.

Russia, Europe’s biggest gas supplier, had promised to send more gas to the region starting Monday. A lack of supply from Russia was one-factor traders and analysts had attributed as being behind last month’s rally, which sent European gas prices to record highs.

Late last month, Russian President Vladimir Putin ordered gas suppliers to begin rebuilding inventories in Europe. However, reports Monday suggested little extra supply had yet begun flowing westward.

Copper prices edged higher after Chinese trade data suggested the world’s second-largest economy was in good health. Data on China’s trade released over the weekend showed exports grew by over 27%, more than economists had been forecasting, on booming demand for goods and easing energy and supply chain issues.

Keeping prices in check, however, were expectations that tightness in the market should ease. Chinese smelters are raising output while supply challenges show signs of easing, said analysts at J.P.Morgan in a note.

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November 08, 2021 06:46 ET (11:46 GMT)

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