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EUROPEAN MIDDAY BRIEFING: Stocks Drift Higher in Muted Trade

MARKET WRAPS

Stocks:

European stocks posted modest gains on Thursday after a mostly positive Asian session, with miners rising on firmer base and precious-metal prices.

"Looking ahead, the U.S. Thanksgiving celebrations should ensure a relatively muted affair later into the day. Appearances from European Central Bank President Lagarde and Bank of England Governor Bailey thus make up the main events of note," note IG analysts.

Shares on the move:

Spanish hotel chain Melia rose almost 3% after Jefferies upgraded the stock to buy from hold saying its valuation looks attractive. Jefferies said Melia has a strong exposure to leisure which is an advantage as vacation travel is recovering faster than others, such as international and corporate.

"Roughly 80% of all bookings are leisure, making it the best positioned covered hotel company for recovery and beyond, given our positive leisure travel view," Jefferies said. Furthermore, previous liquidity concerns have faded as Melia now has EUR440 million in liquidity and hasn't burned cash since May.

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Shares in Remy Cointreau rose more than 10% after the drinks group posted consensus-beating first-half profits and said it expected higher full-year earnings than previously expected.

Looking ahead, Remy said the exceptionally strong first half means it now sees "very strong" organic growth in current operating profit for fiscal 2022. It had previously guided for "strong" growth. The company didn't set out any numerical guidance, but a likely figure is in a range of 40%-45% organic growth, above existing consensus, analysts at Citi said in a note after the release.

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Swiss Life rose nearly 4% after the insurer released strong new mid-term targets at its investor day and revealed plans for higher shareholder payouts and buybacks. Its expected fee results of CHF850-CHF900 million by 2024, were above consensus of CHF830 million, Citi said. Cash remittance of CHF2.8-CHF3 billion were also above Citi's expectations.

"The CHF1 billion buyback to be executed by May-23 is also greater than our expectations as we had assumed recurring buybacks of CHF200 million [per annum] over the three-year period," Citi says.

Economic Insight:

Sentiment in the German export industry has improved, the Ifo Institute said. In November, the Ifo's export expectations indicator rose to 15.8 points from 13.1 points in October, having stood at 20.6 points in September.

"Despite supply problems for intermediate products and raw materials, the German export industry is in a robust position," Ifo's president Clemens Fuest said.

The automotive industry and manufacturers of electrical equipment are expecting significant growth in international business. Among manufacturers of machinery and equipment, expectations slipped slightly but are still at a good level, Ifo said. Food and beverage manufacturers are cautiously optimistic about winning additional export orders. Only printing companies are expecting a decline in exports, Ifo said.

Fidelity International said the German coalition agreement is a positive first step for the German economy and the capital markets, but the future government must now deliver swiftly.

"It is a good sign that there have been relatively swift results--despite the very different parties," said Fidelity's portfolio manager Christian von Engelbrechten and capital markets strategist Carsten Roemheld.

Clear and rapid decision-making is "elementary" in the global context, they said, adding that if the coalition negotiations are a harbinger of things to come in this respect, this is cause for optimism.

The fact that the Free Democratic Party is taking over the Ministry of Finance "is likely to be very positively received by the markets, as the FDP is perceived as the coalition party with the most conservative and solid financial policy."

Forex:

The dollar has consolidated some of its recent gains but still has every reason to rise further after Fed minutes showed various members proposed more flexibility on faster tapering and earlier rate increases if inflation warranted it, said ING.

In addition, data showed high U.S. PCE inflation, the Fed's preferred measure, and better-than-expected U.S. trade data, ING noted.

"Expect quiet markets today for the Thanksgiving holiday and no obvious reason for the dollar to hand back recent gains."

The krona was little moved but remained firmer after the Riksbank left interest rates at 0% as expected and inserted a rate increase into its forecasts for the fourth quarter of 2024.

Higher rates are still a long way off but this does mean the central bank "is no longer as decidedly dovish," David Oxley, senior European economist at Capital Economics, said.

Ahead of any rate increase, the central bank will begin reducing its balance sheet. The asset purchase program initiated in March 2020 will end after 2021, though the Riksbank will buy more bonds in the first quarter of 2022. Risks are that the Riksbank shrinks its balance sheet faster than currently indicated, Oxley said.

SEB said the Riksbank decision was slightly more hawkish than expected as the central bank expects an increase in the repo rate in the latter part of 2024 with the repo rate forecast indicating a 25 basis-point rate hike evenly distributed between April and December 2024.

"The Riksbank board is gradually tightening monetary policy but...a repo rate hike still is distant."

If inflation surprises on the upside in 2022, SEB predicts the board to move a rate increase closer in time and also lower the QE purchases already in 2022. "We stick to our forecast of a rate hike by end-2023."

Bonds:

Eurozone 10-year government bond yields dropped in early trading on collateral scarcity and renewed pandemic waves, even as the focus remains on central-bank policy tightening and the future of the ECB's asset purchases.

"There could be more clues about what options the ECB is considering--and the shifting balance of power among the hawks and the doves--in today's ECB accounts for the October meeting, which provide only a very timid pushback to the hawkish re-pricing," Citi's rates strategists said.

The economic backdrop implies an underweight position in government bonds for UBS Asset Management, whose focus is on the more cyclical areas of the global equity market.

"The rates market has priced in earlier and sooner central-bank rate hikes, but remains pessimistic on how much central banks will ultimately be able to tighten this cycle," said UBS AM's Evan Brown, head of multi-asset strategy investment solutions and Luke Kawa, director for investment solutions.

The asset manager disagrees with market pricing and views the backdrop for economic growth in this cycle as structurally better than the last one.

Returns on inflation-linked bonds are unlikely to match this year's strong performance next year, said UniCredit. Mounting bond-market-derived inflation expectations have boosted returns on this asset class. The Bloomberg U.S. Govt ILB Index 1-10Y returned nearly 5% year to date, almost seven percentage points more than a similar index of nominal Treasurys, which is currently delivering a negative return of over 2%, UniCredit analysts said.

"With breakeven inflation [rate] close to a twenty-year high and real yields at record lows, ILBs are unlikely to deliver a similar outperformance next year." The analysts regard current 10-year breakeven inflation as expensive and expect some moderation going forward, suggesting ILBs are likely to deliver negative returns in the future.

Commodities:

Oil futures were flat in early action, with trading volumes likely to be thinner due to the U.S. holiday and with investors already looking ahead to next week's OPEC+ meeting.

Prices have risen this week in the wake of a coordinated strategic petroleum reserve release by several major consuming nations that was smaller than the market had priced in. Now investors are looking to the OPEC+ meeting next week, with The Wall Street Journal reporting the alliance is considering pausing its plan to relax production curbs.

Elsewhere, the EIA's weekly inventory report was "fairly neutral," said ING's Warren Patterson.

Three-month copper on the LME was up 0.3% after a mostly-positive batch of U.S. economic data, with metals also being supported by reports that Indonesia plans to limit exports of many raw materials.

That could include bringing a ban on bauxite exports forward by one year to 2022. Bauxite is the primary material used to make aluminum.

DOW JONES NEWSPLUS

   
 
 

EMEA HEADLINES

Germany's Economy Grew Slightly Less Than Initially Estimated in 3Q

Germany's economy grew less in the third quarter than initially reported, German statistics office Destatis said Thursday.

Gross domestic product rose by an adjusted 1.7% from the previous quarter, according to Destatis in its second estimate for the period. This expansion was less than economists' expectations of 1.8% growth in The Wall Street Journal's survey.

   
 
 

Riksbank Pencils in First Rate Hike Toward End of 2024

Sweden's central bank on Thursday kept its key repo rate at 0%, as expected, and indicated that a first rate hike will likely come toward the end of 2024.

The Riksbank had previously said it expected the repo rate to remain unchanged at zero throughout its forecast horizon that ran to the third quarter of 2024, but updated forecasts presented Thursday show a rate hike in the fourth quarter of 2024.

   
 
 

Remy Cointreau Shares Rise as 1H Beat Heralds Sunnier FY 2022

Shares in Remy Cointreau SA trade sharply higher in early trade Thursday after the French drinks group posted consensus-beating first-half profit figures, and said that it anticipates higher full-year earnings than previously expected.

At 0832 GMT, shares traded more than 10% higher at EUR206.80.

   
 
 

Swiss Life Targets Midterm Fee Growth; Plans Higher Dividend, CHF1 Bln Buyback

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November 25, 2021 06:26 ET (11:26 GMT)

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