EUROPEAN EQUITY UPDATE: Equities plumb the depths as Russia/Ukraine and stagflation weigh on pre-NFP sentiment

Analysis details (10:25)

European equities trade in a sea of red (Euro Stoxx 50 -3.8%; Stoxx 600 -3.0%) as APAC sentiment reverberated into Europe, with the region anxious over escalating tensions with Moscow after Russia seized Europe’s largest power plant overnight. Furthermore, fears of stagflation shocks from the war have been on the rise, whilst the myriad of commentary from the Fed this week suggested the central bank is sticking to its hawkish script. Analysts at SocGen succinctly summarizes: “for the monetary authorities, this complicates the question of whether to front-load monetary tightening in light of strong demand, tight labour markets and strained supply chains or to delay because of headwinds for household consumption, trade and growth.” Meanwhile, the US funding stress indicator, the 3-month FRA-OIS spread has expanded to its widest since May 2020 above 25bps - the wider spread point towards rising interbank lending risk or USD hoarding. US equity futures are softer, with the RTY (-1.1%) narrowly lagging the ES (-0.8%), NQ (-0.8%), and YM (-0.7%) in the run-up to the US Labour Market Report. Traders will use the February jobs data to update the debate on how the Fed will normalise monetary policy (markets have coalesced around a 25bps incremental move after the Russia-Ukraine crisis escalated) and see around five hikes in 2022. However, with the Biden administration making inflation its "top priority". Many suggest the Fed will have to stay in inflation-fighting mode; accordingly, the central bank will be data-dependent about future policy moves, including the increment of rate rises (full Newsquawk preview available on the Research Suite) – US CPI is due next week(March 10th). Back to Europe, equities have been on a continued grind lower after seeing a mild and fleeting bid at the cash open. On that note, Deutsche Bank’s asset management arm – DWS – has cut its 12-month Stoxx 600 target to 437 from 460 (vs around 425 at the time of writing) and Euro Stoxx 50 target slashed to 3,742 from 3,900 (vs around 3,620 at the time of writing), with the desk citing support from persistent negative real yields and a rebound in the economy, but caveat that there is a wide range of outcomes. Losses thus far are slightly more pronounced in Euro-bourses vs the FTSE 100 (-3.0%) and SMI (-2.5%) amid the latter two’s heavier composition of defensive sectors – which are faring better than their cyclical peers. Utilities, Healthcare, Food & Beverages and Personal & Household goods reside in the red but at the top of the sectoral table, whilst Banks, Insurance, Retail and Energy sit on the other side of the spectrum. Individual movers are taking a cue from the broad macro picture. Russia-linked Polymetal (+26%) and Evraz (+27%) surge intraday following back-to-back sessions of detrimental losses – with the stocks still at a fraction of the value they were last week. Finally, in terms of the DAX reshuffle, Daimler Trucks (-5.3%) and Hannover Rueck (-4.0%) will replace Beiersdorf (-2.9%) and Siemens Energy (Unch) in the DAX 40. Meanwhile, Sixt (-3.3%), Siltronic (-1.9%), RTL Group (-5.3%) will replace CompuGroup Medical (-0.3%), Hella (-3.0%) and AUTO1 (-1.3%) in the MDAX - effective on 21 March 2022.

04 Mar 2022 - 10:25- Fixed IncomeData- Source: Newsquawk