- European shares edge up 0.2%
- Risk appetite recovers after Covid scare
- Takeover approach boosts Telecom Italia
- Nasdaq futures hit record high
BUYING THE COVID DIP?
Looking at price action this morning, it seems like dip buyers are already at work scouting for stocks that may have been excessively penalised by the COVID-19 scare that rocked markets last week.
So while the euro EURUSD, European debt and travel stocks .SXTP are still under pressure, signalling that concerns over a winter wave of infections have not entirely dissipated, other sectors like banks and energy are trying to shake off those worries.
Indeed, some stay-at-home names like Deliveroo are heading south after Friday’s bounce, indicating perhaps that COVID-19 risks fuelled gains may be over exaggerated.
“A number of Western European countries have recently tightened mobility restrictions and it is likely that we will be getting more news on this front over the coming weeks,” say strategists at JP Morgan.
“Still, we do not think that these will happen everywhere, nor will they be comparable to the ones seen last winter, in terms of either duration of strictness,” they add.
According to strategists at the U.S. bank, people mobility fell 40-50% last year, while this time it is down just 6% from highs. And vaccines have significantly reduced hospitalizations.
JP Morgan is keeping its constructive stance on stocks, “looking to use any dips to add”.
The most popular hedge fund trades have suffered a record streak of underperformance this year compared to the broader market, according to an Goldman Sachs analysis of 799 hedge funds holding $2.9 trillion of gross equity positions at the start of the fourth quarter.
The U.S. investment bank’s Hedge Fund VIP list of the most popular hedge fund long positions has lagged the S&P 500 SPX by 16 percentage points as weakness of China ADRs weighed on long portfolios earlier in 2021 while several popular growth stocks underperformed.
The underperformance has forced hedge funds to reshuffle their positions with Microsoft now ranking as the top stock in its VIP list, unseating Facebook while at a factor level, funds are more tilted towards value relative to growth.
U.S. equity hedge funds have returned 13% YTD but just 3% during the past 6 months, according to Goldman Sachs.
The underperformance comes at a time when short interest for the median S&P 500 stock declined from 2.2% of market capitalisation at the start of 2020 to 1.5% at the start of 2021 and has remained roughly stable since.
This matches the degree of short interest during the Tech Bubble in 2000 as the lowest in at least 25 years. Short interest in every sector ranks below the 25-year average.
TELECOM SENSATION AT THE OPEN
A whopping 30% surge in Telecom Italia shares following KKR’s $12 billion takeover approach has ignited the whole telecom sector in Europe with its index .SXKP surging as much as 1.6% to its best day since March.
Five out of the top eleven gainers on the STOXX 600 .STOXX were telcos, a rare sight for an industry plagued by years by stiff competition and regulation. Communications services provided the second biggest positive weight to the pan-European benchmark, just after financials, in early trading.
Banks .SX7P and oil stocks .SXEP recovered part of last week’s drop, suggesting investors were taking a more balanced view of COVID-19 risks following Friday’s scare on Austria’s shock move to impose a national lockdown.
Markets have suddenly woken up to COVID-19 risks, and after Austria imposed 10-days of nationwide restrictions to fight the winter virus wave, investors swiftly shifted to lockdown trading mode.
Oil hit 7-week lows in Asia hours, and equities in Europe look set for a muted start after clocking on Friday their first weekly decline in seven weeks, as bond yields and banking stocks tanked. The euro is also under pressure at 16-month lows.
Concerns are that Germany and other countries could follow suit, forcing million of people to stay at home, hitting tourism-dependent economies and outdoor businesses just before key Christmas holidays and spending.
Little wonder then that Italian and Spanish stocks look particularly vulnerable at this stage, while Big Tech and online economy names are once again in favour, sending Nasdaq futures to new record highs overnight.
Shares in vaccine makers meantime could also benefit. German politicians are debating making COVID-19 vaccinations compulsory, and other countries are also pondering what to do with the unvaccinated.
On the corporate front, eyes are on Telecom Italia after KKR made a $12 billion approach to take the Italian phone group private. Ericsson is also on the watch-list after the equipment maker agreed to buy cloud communications firm Vonage for $6.2 billion.
Key developments that should provide more direction to markets on Monday:
- Chinese loan prime rate
- Euro zone flash consumer confidence
- ECB speakers: ECB Vice President Luis de Guindos, ECB board member Andrea Enria, ECB Governing Council members Robert Holzmann, Peter Kazimir and Martins Kazaks
- Emerging markets: central bank meetings in Israel and Ghana
- WTO meeting
- U.S. existing home sales Oct
- U.S. Treasury 2-year and 5-year debt auctions
- Europe earnings: Nasper/Prosus
- U.S. earnings: Urban Outfitters, Zoom
EUROPE: EDGING UP
European shares look set for modest gains at the open today after suffering on Friday their first drop in seven weeks as fresh COVID-19 concerns sent bond yields and banking stocks tanking.
Futures on main regional benchmarks were last trading up between 0.1% and 0.3%, while in Asia, stocks made a wobbly start to the week and oil prices slid as the return of restrictions in Europe and talk about hastened tapering from the U.S. Federal Reserve put investors on guard.