EUROPEAN EQUITY UPDATE: Equities attempt a recovery following earlier weakness

Analysis details (09:59)

Equities in Europe trade mixed following a similar APAC handover which saw sentiment dampened by fears of a geopolitical escalation (amid Finland and Sweden’s NATO bids) and the poor Chinese data overnight reaffirming global slowdown fears. US equity futures post mild losses across the board at the time of writing, with the NQ (-0.6%) narrowly lagging vs the ES (-0.3%), YM (-0.1%) and RTY (-0.4%) as yields are on the rise. Analysts at Morgan Stanley believe the Friday rebound in US stocks is a bear market rally and there is more downside ahead - “With valuations now more attractive, equity markets so oversold and rates potentially stabilizing below 3%, stocks appear to have begun another material bear market rally… After that, we remain confident that lower prices are still ahead.” The bank believes “the risk of a recession has gone up materially. That is just another reason why the equity risk premium is too low, and stocks are still overpriced in our view”, and believes the SPX could fall to as low as 3,400 (vs Friday’s ~4,024 close). Meanwhile, analysts at Goldman Sachs (in a note dated 13th May) cut their year-end SPX target to 4,300 from 4,700, based on earnings, interest rates, and the yield gap. GS adds that in one downside scenario, a recession would push the S&P 500 lower to 3,600, whilst “in another downside scenario if the economy avoids recession but real rates continue to march higher, a lower valuation multiple would push the S&P 500 index down by 6% to 3,800.” The analysts also highlight two price dislocations in equity markets worth bearing in mind - (1) Dividends; and (2) High vs. low margin growth stocks. Back to the session, Europe kicked off trade with broad-based losses but later found some composure (Euro Stoxx 50 -0.2%; Stoxx 600 -0.1%) whilst equities overlooked hawkish but familiar commentary from ECB’s Villeroy who suggested the central bank should at least move towards the neutral rate and warned a EUR that is too weak would go against the objective of price stability. Sectors are now mixed after opening lower (ex-Telecoms) with no overarching theme. Basic Resources top the charts as base metals edge higher amid hopes of a revival in demand from China’s plans to ease COVID restrictions. Aside from that, the rest of the sectors trade within a relatively narrow market breadth. The Telecoms sector is propped up by Vodafone (+3.1%) amid reports UAE's state-controlled Emirates Telecommunications Group has bought a 9.8% stake in Vodafone for some USD 4.4bln. Emirates Telecommunications has no plans to make a takeover offer. Sticking with M&A, Casino (+3.2%) has confirmed it has begun the sale process for GreenYellow and views a potential transaction by year-end. RWS (-17%) is hit as Baring Private Equity Asia Fund said it does not intend to make an offer for RWS. Telefonica (Unch) expects the first round of non-binding bids for 45% of its fibre optic subsidiary on May 19th. Renault (-0.3%) has confirmed it is to divest Renault Russia alongside its interest in Avtovaz and reaffirms its FY outlook. For Holcim (-0.9%), India's Adani Group has acquired a controlling stake in the Co's Indian cement businesses for USD 10.5bln. In state-side stocks news, JetBlue (-0.1% pre-market) is to launch a tender offer for Spirit Airlines (+18.4% pre-market). JetBlue is to offer USD 30/shr, but is prepared to pay USD 33/shr if Spirit provides JetBlue with requested data, WSJ reported. Elsewhere, Elon Musk tweeted that Twitter’s (-3.4%) legal team called to complain that he violated their NDA by revealing the bot check sample size and he also tweeted there is some chance that over 90% of Twitter’s daily active users might be bots.

16 May 2022 - 09:58- EquitiesResearch Sheet- Source: Newsquawk