LiveWire

The euro-area economy is entering a challenging phase of its recovery. Surging energy costs are crimping spending power and the latest developments around Ukraine are weighing on the sentiment. Despite yesterday's solid and encouraging February PMIs print, in particular on the services sector as the economy is benefiting from the easing of COVID-linked restrictions, the Stoxx50 is extending losses this morning, down 0.51%. The index has fallen more than 8% year-to-date and is reaching a critical level. Currently, trading around 3'957 level, this level has been useful to provide some relief during previous pullbacks. Markets will continue to follow the Ukraine crisis closely. Any mere sign of stabilization, if not improvement, could perhaps ignite a rally in assets prices.

Russian stocks tumbled for a third day on Monday on fears the escalating tensions could lead to an armed conflict and a wave of severe Western sanctions aimed at Russian interests, which would hurt Russian banks particularly. Option traders also positioned for further declines in the ruble, with the most bearish bets on the ruble since February 2015. News around tensions continues to drive market sentiment. News of Donetsk separatist demanding military and financial aid from Russia sent markets in the red, giving up earlier gains based on hopes that a Macron-Putin discussion could lead to a meeting between Biden and Putin in an attempt to de-escalate tensions. 

Celanese agreed to buy the majority of DuPont's Mobility and Materials arm for USD11 billion in cash, the company’s biggest-ever acquisition. Texas-based Celanese provides materials that are critical to the global chemicals and paints and coatings industries, while the DuPont unit it is buying produces polymers and resins for vehicles, electronics, consumer products. The acquisition is an important strategic step forward as it establishes Celanese as the preeminent global specialty materials company. Celanese predicts the purchase will generate about USD450 million of synergies and add USD4.00 to EPS by 2026. Celanese jumped to USD157.50 in premarket trading.

The volatility index (VIX) seven week average rises to highest level since 2020. Behind the weak investor sentiment lays disappointments over earnings in the TMT sector, high uncertainty over inflation and the pace of tightening of the Federal Reserve that includes raising rates and QE unwinding, as well as quickly escalating geopolitical tensions in Ukraine. While it is unclear how long these issues will remain, the market is re-pricing lower expectations for corporate earnings and financial conditions are tightening, which could help tame inflation going forward. Stocks typically see healthy returns in a rising interest rate environment, but the magnitude of interest rate re-pricing this year has left many high multiples stocks, vulnerable due to the effect of higher rates on their discounted cash flows far away in the future. A wide range of names from Palantir, Shopify, to luxury names this morning (Hermes), which have benefited during the pandemic, show some weakness, as they fall short of meeting investor expectations, after their valuation expanded greatly in the last 2 years. 

The Stoxx Europe 600 is finding technical support around the 200-day moving average. The European benchmark is benefitting today from Kering up 6.4% and Carrefour up 5.3% after posting better than expected earnings. Stoxx 600 is down about 4.9% year-to-date on rising worries over tighter financial conditions and Ukraine tensions. Nonetheless, policy from the ECB remains supportive.