Stocks in Europe slumped in early action Thursday while bonds continued to rally, as investors assessed central bank developments and anticipated how the economy will behave next year without as much stimulus.
The Stoxx Europe 600 moved 1.2% lower after closing Wednesday at its second highest level on record. Miners including Rio Tinto and banks including HSBC Holdings led the downturn.
It was the first opportunity for overseas investors to react to the latest minutes coming from the FOMC, which showed division on the timing for reducing the rate of bond purchases. That didn't come as a surprise since officials have been airing their disparate views in public.
The European Central Bank meanwhile is going to announce the results of its strategy review, in which the central bank is expected to move from targeting inflation below but close to 2%, to a symmetric 2% target, which is in line with other central banks. The announcement is set for 1100 GMT, followed by a press conference with ECB President Christine Lagarde.
"In practice, it will make no major difference in our view as the majority of council members has probably been aiming for that anyway," said Holger Schmieding, chief economist at Berenberg. He did think the press conference could shift markets. "It could reveal more about the current balance between hawks and doves on the council," he said.
Software maker TeamViewer was the worst performer in the Stoxx 600, losing more than 13% after saying its second-quarter billings would come in below its target.
Stock futures fell as investors continued to pull back from bets on a spell of high growth and inflation.
Stocks have powered to a series of record highs this year, but some investors have grown concerned about the outlook for the economy on signs that labor shortages and supply-chain bottlenecks may crimp the pace of recovery. The spread of the highly contagious delta variant of coronavirus globally is adding to worries. Investors also are gearing up for a spell of potentially volatile summer trading, when trading desks tend to be lightly staffed.
"There is a bit of a recognition that things aren't looking as economically positive as they were in mid-June when everything seemed to be hitting that Goldilocks middle ground," said Edward Park, chief investment officer at Brooks Macdonald. "Delta, or the next delta, will be a recurring risk in markets," Mr. Park said, adding that surveys of U.S. activity had fallen short of expectations in recent days.
Commerzbank said the ECB's strategy review will likely to be non-event for the euro.
The most important aspect of the review has already been leaked: the inflation target will be raised to 2% from the current "below but close to 2%," said Commerzbank currency analyst Thu Lan Nguyen. "That makes one thing clear: there will be no major surprise for the market."
The outcome of the review also means nothing changes for the foreign exchange market with monetary policy likely to remain ultra-loose for some time given long-term inflation expectations remain well below 2%.
Sterling may struggle against a stronger dollar and trade sideways versus the euro in the near term due to concerns about rising coronavirus cases, said Rabobank.
Rising cases could restrain the expected boost to economic activity from the removal of most coronavirus restrictions in England on July 19, said Rabobank forex strategist Jane Foley.
"Although there is evidence that the vaccination program has significantly diluted the link between vaccination and hospitalisation, this has the potential to impact consumer confidence and activity." That will underpin the Bank of England's cautious tone and its expectation that higher inflation will be temporary, she said.
After a nearly 5 basis point decline on Wednesday, the yield on the 10-year Treasury fell to 1.27%. The yield on the U.S. 30-year, which on Wednesday fell to the lowest level since Feb. 10, declined to 1.89%. The yield on the 10-year German bund fell to -0.32%.
"The primary message being sent by the bond market seems to be one that investors believe future inflation is likely to become more muted, and future growth more subdued, meaning that monetary policy will not have to tighten as much in order to keep a lid on price pressures," said Michael Brown, senior market analyst at Caxton FX.
Ahead of the ECB strategy review, UniCredit said the key point for financial markets will be whether the ECB is willing to increase the flexibility of its regular asset purchase program, the APP, along the lines of the Pandemic Emergency Purchase Programme, adding that it will be easier to predict there will be a change of the definition of price stability.
The ECB is likely to target an inflation rate of 2%, shifting away from its current target of "below, but close to 2%."
Separately, UniCredit said Wednesday's rally in sovereign bonds appears to have been driven by investors buying back borrowed securities in order to close out open short positions.
"Short-covering is most probably at work here since fundamentals and market sentiment was at least constructive," said UniCredit analysts. The release of the FOMC minutes didn't change the overall picture in markets.
PGIM Fixed Income said the ECB's inflation targeting framework will likely be less radical than the Fed's flexible inflation targeting.
"In contrast to the Fed's stated aim to target inflation moderately above 2% for an extended period in order to achieve a 2% average over time, we expect the ECB to update its framework in line with established best practise," said Katharine Neiss, chief European economist. This would imply an emphasis on a flexible 2% inflation target in order to meet its mandate of symmetric responses to inflation overshoots and undershoots.
Neiss said the ECB's policy will need to remain exceptionally accommodative so as not to risk a further de-anchoring of inflation to the downside.
Euro-denominated high-yield corporate bond issuance hit record highs in the three months to June, as companies ramped up transactions before the summer, according to Covenant Review's sister company CapitalStructure.
European high-yield deal volume in June was about EUR18.05 billion, well exceeding the EUR12.6 billion printed in May, it said. This propelled the market to its busiest quarterly volume since the opening of 2016. "With a record-setting year taking shape, and no sign of the torrid pace abating at month's end, truly it was a breathless sprint into summer."
Oil prices retreated as traders prepared for a potential rise in production from members of OPEC after the cartel failed to strike a deal on a gradual increase in output earlier this week.
Base metals prices were lower in Europe slip after the latest Fed meeting minutes. Three-month copper on the LME was down 1.3%, with aluminum 1.2% lower and nickel off 0.4%.
Inventors are jittery about when and how quickly the central bank will end its bond-buying program and while some officials said the economy was recovering faster than they anticipated others stressed caution due to recent reports of weaker-than-expected hiring.
Stellantis Expects Strong First-Half Margins
Stellantis NV expects to post strong margins for the first half of the year but warned that production volumes below planned levels will hit its cash flows.
The auto maker, created through the merger of Fiat Chrysler Automobiles NV and Peugeot SA, said that adjusted operating income margins in the first half of the year should be above the full-year margin guidance range of 5.5% to 7.5%. This result comes thanks to positive pricing and product mix and despite lower-than-expected volumes, it said Thursday.
Persimmon 1H Revenue Rose
Persimmon PLC said Thursday that revenue for the first half rose, and that the longer-term fundamentals of the U.K. housing market remain strong.
The U.K. home builder said revenue was 1.84 billion pounds ($2.54 billion) for the period compared with GBP1.19 billion for the first half of 2020.
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AstraZeneca became a household name last year with its swift roll out of a Covid-19 vaccine, one of only a handful still available globally. It has now made over 500 million doses for more than 165 countries -- and did it at cost, for zero profit.
But the publicity hasn't all been good. The Anglo-Swedish drugmaker got caught in political fights between the United Kingdom and European Union, while rare side effects and production delays have attracted criticism.
Stellantis to Detail Electric-Vehicles Strategy
Stellantis NV, the world's third-largest auto maker by sales, plans to lay out its strategy on electric vehicles Thursday, a crucial moment for Chief Executive Carlos Tavares as he articulates his vision for the company.
Mr. Tavares has made providing a clear path forward on electrification a priority for Stellantis, which was created earlier this year through a trans-Atlantic tie-up of Fiat Chrysler Automobiles NV and France's PSA Group.
Bang & Olufsen CFO Sets Price Range for Purchases of Microchips
Nikolaj Wendelboe, the chief financial officer of Danish electronics company Bang & Olufsen A/S, in recent months has acquired a new responsibility: setting the price range for what the company is willing to pay for semiconductors, a tactic aimed at securing supply in a tight market.
Bang & Olufsen, which needs microchips for many of its products-including speakers and television sets-has a handful of employees working in Singapore who acquire these crucial components from suppliers, depending on what is available in the market, Mr. Wendelboe said Wednesday. "When you are able to locate 10,000 or 20,000 components, you need to make the call straight away," he said.
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