EUROPEAN EQUITY UPDATE: Caged trade across equities with news flow quiet and mass closures

Analysis details (10:16)

Stocks in Europe remain contained to overnight ranges but came off lows in early trade (Euro Stoxx 50 +0.7%; Stoxx 600 +0.4%), with little by way of fresh newsflow coinciding with price action. This caged session follows an indecisive APAC handover which failed to gain impetus from the lead on Wall Street as investors cheered the FOMC minutes after the risk event passed and the release contained no hawkish surprises. US equity futures are similarly contained with no firm direction – the RTY (+0.3%) narrowly leads vs the ES (+0.1%), NQ (+0.1%) and YM (+0.2%). Analysts at Citi recommend buying the dip, based on their “Bear Market Checklist”, which shows 6 out of 18 red flags, a level that has generated 31% gains on average over the next 12 months, even in multi-year bear markets. The strategists however caveat that the checklist is not a market timing indicator and thus patience may be needed. The desk assigns more weight to Europe as the US is showing more red flags than Europe or EMs. For context, Citi notes that “only 8.5 out of 18 red flags, well below the 13/18 reached immediately before 2007-2009 bear market and 17.5/18 prior to the 2000-2003 drawdown”. On volatility, the desk at Morgan Stanley highlights that long volatility is an expensive hedging strategy and participants should position themselves for a peak in price swings in some assets. “Options markets across equities, credit, rates and foreign exchange imply a broader range of outcomes”, MS adds. Back to the session, major bourses are mixed with no real standout performers, with volumes also anaemic on account of Europe observing Ascension Day – although market closures are limited to Scandi and Swiss markets. Sectors are mostly firmer with no overarching theme. Retail resides at the top of the table as the sector nurses some recent losses inflicted by the recent inflation-driven guidance cuts. Tech fails to fully benefit from the decline in yields as NVIDIA (-6% pre-market) guided a decline in sales of video game chips and suggested "Overall the gaming market is slowing". STMicroelectronics (-1.9%) sees losses in sympathy. However, Ubisoft (+1.4%) is firmer whilst Sony's gaming chief says PS5 purchase interest is almost double the same point in the PS4 cycle. Furthermore, Apple (-1.6% pre-market) is said to be planning to keep iPhone production flat in 2022, according to Bloomberg sources – which is framed as a conservative stance and follows recent Nikkei source reports that iPhone production has been hit by China’s lockdowns. Utility names sit at the bottom of the pack, with United Utilities (-8%) at the foot of the Stoxx 600 post-earnings. In terms of some other movers, BT (-4.4%) fell amid reports the UK is to review Altice's stake increase in BT (to 18.0% from 12.1%) under the National Security Act. HSBC (-0.4%) is softer on yields as it overlooked reports it is mulling an IPO of its Indonesian unit. Stateside, Twitter (+4.9% pre-market) sees pre-market gains as Tesla (-0.6% pre-market) CEO Musk commits to provide an additional USD 6.25bln in equity financing, boosting the aggregate amount of equity commitment to USD 33.5bln.

26 May 2022 - 10:16- EquitiesResearch Sheet- Source: Newsquawk