Flat start to European trade

Chop chop: After what started as a generally positive session, European markets largely fell yesterday but have opened mildly in the green this morning after Wall Street managed to deliver wins across the board. We had a sharp sell-off on omicron on Nov 26th, a couple of really volatile days and then a steady march back to where we were before – now markets are seeking fresh direction and the path of least resistance appears to be sideways for a bit until there is a bit more known about omicron, inflation and the Fed. This is true of other assets, too – look at gold, Bitcoin etc, which are trading in narrow ranges the last few days.

Positive vaccine news from Pfizer – three shots to beat omicron they say - saw rates move higher – markets think this means the Fed is not going to worry about tapering more quickly, potentially raising rates three times next year. The market is pricing in a first hike for May, second in September and even a third in Dec – market is well-positioned and fully discounting a pretty aggressive Fed hike cycle now and stock markets seem unperturbed. Reflation trade did well with the Russell 2000 leading with a +0.9% gain vs +0.3% for the S&P 500, albeit from more oversold levels overall. Apple continues to do a huge amount of lifting – up another 2% on Wednesday and is now up +10% for the last 5 sessions. Market cap is now approaching $3tn.

In London this morning, Watches of Switzerland rallied over 3% after yet another strong update. Group revenue in the first half of FY22 rose to £586.2 million, +44.6% vs H1 FY21 and +40.8% vs H1 FY20. Adjusted EBITDA rose 58.8% to £82.8 million, with margins improving to 14.1% from 12.6%. Management stuck to the upgraded full-year guidance offered in November. Fewer chances to spend on experiences like travel means more money to spend on stuff like watches. Rolls-Royce shares fell over 3% despite the company saying free cash outflow is expected to be better than the previous guidance of £2.0bn. However, the company warned on the “uneven” pace of travel recovery affecting its Civil Aerospace division. DS Smith rose 2.5% on record corrugated box volume growth of 9.4% in the first half of the year which saw pre-tax profits jump 88% to £175m.

Tomorrow’s CPI inflation print for the US could upset the recent recovery – looks like 7% for annual inflation would not be far off the mark. This would cement the Fed’s hawkish pivot. Overnight data showed China’s CPI rose by 2.3% in November from a year earlier, up from 1.5% in October. Chinese PPI – a main leading indicator for global inflation – cooled, rising by 12.9 percent in November from 13.5 percent in October.

WTI is also fairly steady this morning as it struggles to mount a serious bid at $73. Crude oil inventories drew down by less than expected but US production rose to its highest since May 2020. Gasoline and distillates also notched larger-than-expected stock builds, although we note that Gulf Coast distillate stocks fell to the lowest level since Dec 2019. Though WTI is encountering some near-term resistance around this $73 handle we should note that it’s rallied about 17% off the lows a week ago.

In FX, sterling has recovered a little ground after sinking to a fresh YTD low yesterday on the government’s decision to go for Plan B. After dropping to under 1.3160, cable is back to 1.32. Sellers remain in charge until 1.3370 is cleared on the upside – signs of bottoming but strong enough to be confident of a rally just yet. The euro is handing back some of yesterday’s gains versus the dollar in early trade, with EURUSD at 1.1320. Canada’s dollar is weaker versus the greenback after the BoC left rates on hold – some partial unwinding of very limited market pricing an early hike perhaps. The outlook for the central bank is still seen as quite hawkish with several hikes expected in 2022.