EUROPEAN EQUITIES UPDATE: Stocks fade early gains ahead of the FOMC Minutes

Analysis details (10:22)

The early optimism across the equity complex faded in early European hours following a mostly positive APAC handover after Wall Street saw another downbeat session. Fundamental drivers in the European morning have been light, suggesting the narrative continues to be driven by the broader macro environment, as central banks' battle with elevated inflation increases the risk of a global recession. Meanwhile, the geopolitical space remains hot – barring the Russo-Ukrainian war, reports suggested North Korea fired a missile and is gearing up for nuclear weapons testing (shortly after US President Biden departed from the region), whilst China's PLA conducted military exercises around Taiwan. US equity futures have trimmed earlier gains, with relatively broad-based gains seen across the ES (+0.1%), NQ (+0.2%), YM (+0.1%) and RTY (+0.2%), with traders looking forward to commentary from Fed Vice-Chair Brainard after the European close ahead of the FOM minutes– note, Brainard hasn't made any notable remarks since April 12th. Back in Europe, major indices post mild broad-based gains with no real standouts. Sectors initially opened with an anti-defensive bias but have since reconfigured to a more pro-defensive one, with Utilities (after yesterday's heavy underperformance), Food & Beverages, and Telecoms among the winners alongside Basic Resources and Energy. The downside sees Travel & Leisure, Tech and Consumer Products. Analysts at Barclays believe Europe could be gearing up for further declines amid capitulation from real money "remains elusive". The analysts note that volatility remains attractive, which has likely prevented investors from selling equities outright, but if volatility increases further, investors may have to offload cash equity exposure more meaningfully. Meanwhile, Bernstein sees potential upside from here "if we avoid recession and add that Europe's market multiple of 13.6x 12-month forward P/E is "currently between historical slowdown and recession levels". The desk also suggests that consumer staples, utilities and defense stocks are still expensive, whilst Consumer cyclicals, health care and capital equipment have priced in a slowdown. Still, the tail-risk of further downside remains if a recession hits. In terms of individual movers, Marks & Spencer (+1.0%) recovered from the early losses despite negative market commentary in which it noted, "Given the increasing cost pressures and consumer uncertainty, we do not currently expect to progress from this lower profit base in 2022/23". Ocado (-4.0%) is hit after Marks & Spencer cut the sales growth for its JV with the online grocer. Elsewhere, and of note for the broader tech sector, Apple's (+0.1% pre-market) iPhone development schedule is reportedly hit by lockdowns in China, according to Nikkei citing sources.

25 May 2022 - 10:22- Fixed IncomeEconomic Commentary- Source: Newsquawk