LIVE MARKETS EZ bonds: comfortable with flat yield curve, peripherals – Reuters

  • European shares up 0.6%
  • Omicron fears ebb, travel stocks fly
  • U.S. stock futures rise

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EZ BONDS: COMFORTABLE WITH YIELD CURVE, PERIPHERALS (1240 GMT)

Inflation, the pandemic, the economic rebound, central banks tapering their monetary stimulus… It might be challenging to put all things together and make sensible forecasts for 2022.

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Columbia Threadneedle sees as “reasonable” the market’s failure to steepen yield curves, favours “the 3-5y segment of curves, where rate pricing seems full and carry attractive” and is “comfortable to own Italian and Spanish bonds” as the ECB will be sensitive to fragmentation risks.

“We feel this extraordinary type of inflationary pressure is unlikely to be repeatable and will not be met with sustainable pay rises,” Adrian Hilton, Head of Global Rates and Currency at Columbia Threadneedle Investments, says in a research note.

“Negative real wage growth, fiscal headwinds – particularly in the UK – and tighter monetary policy at the margin will weigh on economies after the strong rebound of this year,” he adds.

Bottom line, “structural drivers of low inflation and low bond yields remain in place, and that neutral rates of interest will not prove to be any higher in this cycle than in previous ones.”

(Stefano Rebaudo)

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SANTA RALLY CARRIES TRAVEL STOCKS INTO BEST MONTH IN 10 (1118 GMT)

It looks like investors are getting even this year their Santa rally, and that’s especially true for European travel and leisure stocks which despite the Omicron uncertainty are on course for their best monthly performance since February.

Their index (.SXTP) is up more than 12% in December, by far the biggest sectoral gainer in Europe with a nine percentage point outperformance versus the broader market.

That indicates optimism about a limited fallout of the new variant as markets look past any short-term economic damage from restrictions implemented to fight the virus, encouraged by studies showing how Omicron is less lethal than Delta.

No surprise then that IAG (ICAG.L), Wizz Air (WIZZ.L), Lufthansa (LHAG.DE) and Tui are all extending this week’s gains, up between 2 and 4% on the day to the top ranks of the STOXX 600 (.STOXX) regional equity benchmark.

Traders of course, do not rule out more turbulence ahead but surely travel is one sector to keep a close eye on next year. Following steep declines in November, the STOXX Travel and Leisure Index has fallen back below prepandemic levels.

“It looks like either the market is quickly shelving Omicron (worries) or it’s a mega short squeeze. I think it is very early to position on these businesses. But it is also true that they have been avoided (be investors) for a couple of months at least,” said Giuseppe Sersale, strategist at Anthilia.

Meantime, the U.S. Global Jets ETF that tracks airline companies is up 8% so far this month, while the S&P 500 has risen only 2.8%.

snapshot

(Danilo Masoni)

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DRAGHI PRESIDENT? MAYBE IT’S JUST BUSINESS AS USUAL (1059 GMT)

What if the former ECB boss Mario Draghi becomes Italian president and leaves his prime minister job?

Now it’s worth asking, as Draghi said on Wednesday, he would be willing to become head of state when the position falls free early next year. read more

Some analysts warned about a potential increase in Italian risk premium as Draghi’s arrival in February 2021 has boosted confidence in the country’s debt-ridden economy. But things might be different.

Berenberg economist Guido Giorgio Bodrato draws three scenarios.

He calls the first one “business as usual.” Draghi could appoint a senior minister from his cabinet as his successor, and “Italy could enjoy a relatively stable politics in 2022 upon the start of Draghi’s seven-year reign as president.”

The most worrying scenario for investors in Italian assets is the second one: snap elections. “With polls projecting a substantial draw, parliamentary elections held in late spring could open a new period of political uncertainty,” he says in a research note.

“In a third unlikely scenario, Draghi could refuse to call early elections, leaving the caretaker cabinet in charge,” if the Parliament disagrees with his claim that the government can continue without him personally heading the cabinet, he adds.

(Stefano Rebaudo)

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TRAVEL AND LEISURE STOCKS LEAD GAINS (0849 GMT)

The pandemic is stealing the stage once again, with some positive vibes for risky assets driving European stocks higher after a study suggested reduced risks of hospitalization and severe disease with the Omicron variant.

The STOXX 600 (.STOXX) is up 0.2%, with the travel and leisure stock index (.SXTP) — which is the most sensitive to the risk of pandemic restrictions — leading gains, up 1.9%.

Autos stock index (.SXAP) is up 0.8%, with Continental stocks (CONG.DE) among the best performers after the CEO Nikolai Setzer was quoted as saying the company could hit the upper end of its profit margin outlook in 2021.

Analysts remain cautious about the medium-term impact of Omicron as a potential reduction in hospitalisation needs to be balanced against the larger risk of infection.

snapshot

(Stefano Rebaudo)

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THE FAIRY TALE OF WALL STREET (0818 GMT)

Omicron spreads faster than Delta but is less likely to land you in hospital. The UK now has more than 100,000 cases of Omicron. China’s Xian city has locked down 13 million residents. But a third Astra Zeneca shot offers protection. And so on.

But… whatever. Markets seem to be reposing their trust in companies, politicians, central bankers and doctors to ensure Omicron doesn’t get in the way of fat investment returns and economic recovery. Wednesday’s U.S. data painted a picture of a highly resilient economy expanding at the fastest since 1984.

Even Japan upgraded growth projections for the next fiscal year starting in April to 3.2% versus the previous 2.2% forecast.

For U.S. equity investors at least the COVID years have been a time of scintillating returns; the S&P 500 (.SPX) is is up 25% in 2021 and 87% since end-2018. This year alone the biggest five lockdown beneficiarines have added almost $4 trillion in market capitalisation. Just to compare, the entire global equity complex is up $10 trillion.

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Markets seem to be winding down for the year however; stock futures are flatlining, the dollar is near one-week lows.

Even the Turkish lira is staying calm for now and its sovereign risk insurance costs have declined in the CDS market. They remain however some 400 basis points above similarly rated South Africa.

Key developments that should provide more direction to markets on Thursday:

– Russsian president Vladimir Putin’s annual news conference

-U.S. core PCE price index/durable goods/initial jobless claims/new home sales

-U.S. 5-year TIPS auction

(Sujata Rao)

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EUROPE IN THE BLACK, EYES OMICRON (0818 GMT)

European stock futures are in positive territory after hopeful developments about the Omicron variant in typically thin holiday season trading.

Research by London’s Imperial College said the risk of hospitalisation for patients with the Omicron variant of COVID-19 is 40% to 45% lower than for patients with the Delta variant. However, the reductions in hospitalisation must be balanced against the larger risk of infection

Also, a batch of U.S. economic data released Wednesday suggested the economy would continue to expand in 2022.

All that is providing support to risk sentiment. One must recall however that the unpredictable path of the pandemic and its impact on the economy are bound to keep investors on edge well into next year.

(Stefano Rebaudo)

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