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A DIVORCE BETWEEN EZ YIELDS AND BANK STOCKS (1151 GMT)
It might be of some interest to understand what’s going on with the historical liaison between bank stocks and interest rates, which is not in sync particularly in Europe.
The chart below shows a declining correlation between 10-year German Bund yield and the euro zone bank stocks index.
Though not unusual in a reflation trading phase as economies look to bounceback from the pandemic-led damage.
What's going to happen in the future Investors perhaps think eurozone banks will now move more in tandem with U.S. Treasury yields with stimulus bets helping steepen the curve.
"In the current situation I am more inclined to watch the 10-year U.S. Treasury yield as well as 5-year inflation expectations as a proxy for bank valuations," Giacomo Tilotta, head of European equity at Italian fund manager AcomeA.
Bank stocks tend to use local bond markets, in Europe's case German bonds as a proxy for the health of the economy.
"We expect this relationship to be less powerful in the future, particularly in Europe," Jason Napier, head of European bank research at UBS, told us.
One of the main reasons is that policy rates will be slower to react to higher inflation, Napier added. Besides that, excess liquidity risks keeping "lending spreads under pressure driven by a continued imbalance between liquidity supply and credit and consumption demand".
(Stefano Rebaudo)
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DRAGHI'S MAGIC AND ITALIAN STOCKS (1132 GMT)
Draghi's magic touch is not just for the bond market.
The former ECB boss tasked of bringing Italy out of its latest political crisis may also have beneficial effects on the country's stock market.
How According to AcomeA fund manager Antonio Amendola, it all boils down to equity risk premia (ERP), a key metric used by investors to decide whether a market is expensive or not.
Italian equities command the second largest ERP in Europe, which penalises them by making them look more expensive, but for Amendola the ERP could fall in the near future to levels of France and the UK, assuming Draghi stabilises the country.
That in turn would trigger a re-rating of Italian stocks, starting from the Large Caps.
"To quickly gain tactical exposure to a country, international operators tend to position themselves on stocks with a big market cap like Enel and Stellantis," he says.
"Only later and if interest in the country is concrete they would move down to the mid and small-cap stocks," he adds.
That being said, Amendola singles out 13 stocks he believes would benefit the most from the ERP effect: Poste Italiane, Buzzi Unicem, Leonardo, Technogym, Webuild, Datalogic, Biesse, El.En, Prima Industrie, Openjobmetis, B&C Speakers, Fos and DHH.
Here below you can see these stocks charted.
(Danilo Masoni)
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WHAT'S EATING OCADO (1128 GMT)
Ocado, the ultimate UK pandemic stock darling, is way at the bottom of the FTSE 100, losing over 3% in the aftermath of its 2020 results in an otherwise slightly negative London market.
While the online grocer hit its EBITDA target, its strategy of spending money to make money seems to have a sour after taste for some investors.
Writing ahead of the opening bell, UBS analysts warned that the higher capex spending was "likely to be taken negatively".
And it was.
"It appears investors have potentially been put off by Ocado’s planned £700 million in capital expenditure, wrote Connor Campbell at Spreadex.
The irony of course is that the appeal of Ocado, isn't simply delivering food to customers - as ever seducing that might be in a time of pandemic - but its capacity to sell the technology to do so.
"Ocado earnings are always interesting - profits depend on U.K. retail performance, but valuations depend on selling its tech abroad", noted Neil Wilson at Markets.com.
That valuation has been mainly driven by demand for its state-of-the-art robotically operated warehouses from supermarket chains around the world, including Kroger in the United States, Casino in France and Aeon in Japan.
And it's precisely the massive investment in its tech business which is testing investors' patience.
"Investors will be forgiven for asking when they will get some kind of return", Wilson argued, adding that "Amazon faced similar questions for years".
For BofA analysts, there's not much to wait for: "2022 is when the profit growth kicks in", they wrote, adding the 2020 results have fully validated its business model.
A look at how Ocado has been faring versus UK retailers since 2020 shows that there's indeed clearly more to its business model than selling groceries, be it online.
(Julien Ponthus)
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EQUITIES: A LIST OF WHAT COULD GO WRONG (1049 GMT)
Though today European stocks are taking a breather, everything seems to be fine for risk-appetite in the foreseeable future with a huge U.S. stimulus package on its way and the ongoing vaccine rollout.
But Credit Suisse rated some of the risks which might cloud the horizon.
Here is the list:
Excessive exuberance: "no danger signals"
According to CS, retail flows are quite muted compared with money market inflows, index call/put ratios are normal, the bull/bear ratio is only just above average and overall tactical indicators are not sending sell signals.
Disappointing EU GDP: "medium risk and rising"
The EU Recovery Fund is key, but will be slow to disburse, while some furlough schemes/fiscal policy are less generous than in the first lockdown (in contrast with the U.S.).
A less dovish Fed: "high risk in the second half 2021"
It should be the consequence of a 6-7% U.S. GDP growth, higher inflation as well as concerns about asset bubbles.
China slowdown: "low to medium risk"
The recent tightening of policy looks like fine-tuning, though some housing market indicators (property developers and turnover) imply a sharp slowdown. “If house prices were to fall sharply, excess leverage would start to unravel.”
A profit margin squeeze: "low risk"
Market is already pricing in a slowdown in earnings revisions.
(Stefano Rebaudo)
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TESLA, BITCOIN AND VOLATILITY FOR BREAKFAST (0925 GMT)
Cryptocurrency has just hit fresh highs today, extending gains after billionaire Elon Musk's Tesla bought $1.5 billion of bitcoins, saying it will soon accept it as a form of payment.
Tesla's step is making people wonder how exactly the company will deal with the high volatility of cryptocurrencies.
From its March 2020 lows, bitcoin jumped more than 1000%, with the currency making headlines over the past few weeks after celebrities endorsed cryptocurrencies on twitter.
The chart below shows that bitcoin's value has gained a whopping 68% year-to-date.
But what goes ups may come down, some say.
"If bitcoin’s price was almost multiplied by five over the past year, it doesn’t mean that it won’t come down crushing," says Ipek Ozkardeskaya, senior analyst at Swissquote.
Accepting cryptocurrency for the payment of electrical vehicles will "inevitably inject a certain volatility in Tesla’s revenue, and decrease the predictability of the company’s performance," she adds. Bitcoin surged to a record high of $48,216 in early trade today. While Rival cryptocurrency ethereum also made a record high of $1,810.40.
(Joice Alves)
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EUROPE BACKS DOWN, BUT JUST SLIGHTLY (0844 GMT)
European stocks are backing down slightly this morning as they have probably priced in an almost full U.S. stimulus package coupled with a vaccine roll-out that is expected to provide herd immunity in the region by fall this year.
The STOXX 600 index falls 0.2%. The oil and gas index .SXEP is holding its ground in positive territory, up 0.5%, helped by expectations of strong demand from China where the pandemic seems to be under control.
China’s stocks surged by 2% after COVID-19 cases were unchanged from a day earlier in the second day of no locally transmitted infections.
On the pandemic front most worries remain in place in Europe, with Britain looking at greater testing to defend against new variants of the virus.
Shares in Demant are the best performers of the STOXX, up 9% after better than expected results, while AMS stocks fall 5.3% on profit taking as the company reported an 86% increase in sales helped also by Osram acquisition.
(Stefano Rebaudo)
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REFLATION TRADES OR MORE BUBBLES BEING MADE (0808 GMT)
News of Tesla's $1.5 billion bitcoin investment and its plans to begin accepting the digital asset as payment for its products "in the near future" sent the world's most popular cryptocurrency surging more than 20% to $48,000.
The algorithm-defined scarcity of bitcoin may generate a wider appeal for it but euphoria continues to spill into traditional markets too with Wall Street hitting new record highs.
Global policymakers show no signs in tightening the money spigots any time soon. Cleveland Fed president Mester for instance reiterated monetary policy would stay accommodative for 'very long time' while Chinese authorities also effectively promised there would be no policy U-turns.
There are of course some signs of broadening confidence in economic recovery but there are disconnects too -- UBS analysts highlight that bottom-up earnings estimates have risen by 3.5% since the beginning of the year, markets are up nearly 6% percent since then.
The gains come even as economic surprise indicators on both sides of the Atlantic are struggling to push higher. Bond yields have retreated overnight, pushing the dollar weaker across the board, though it retains its 1.5% year-to-date gain against the euro.
Key developments that should provide more direction to markets on Tuesday:
-Swedish central bank monetary policy meeting -Spending by British consumers plunged in January at the fastest rate in seven months -ECB chief economist Philip R Lane speaks -St. Louis Fed President James Bullard speaks -Europe results: Total posts $7.2 bln loss for 2020; TUI, the world's biggest holiday company, sunk to a 699 million euros loss in its first quarter; British online grocer and technology group Ocado reported a 69% increase in 2019-20 core earnings -US results: S&P Global, Dupont, Jones LaSalle, Fox, Twitter, Cisco, Mattel, Lyft
(Saikat Chatterjee)
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MORNING CALL: SOME CAUTION NEEDED (0628 GMT)
European stock futures are almost flat as some enthusiasm is fading away after equities rose around 4% so far this month, with major indexes hitting or close to new record highs.
Reflation trade fuelled by stimulus and vaccine hopes seemed very much alive in Asia and on Wall Street overnight, but some U.S. analysts warned about too much speculation.
Goldman Sachs economists said additional fiscal measures in the U.S. are likely to be valued at $1.5 trillion.
(Stefano Rebaudo)
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