EUROPEAN EQUITY UPDATE: Europe underpinned by Wall Street but gains fade ahead of BoE

Analysis details (10:15)

Equities in Europe have trimmed gains but remain underpinned by tailwinds from yesterday’s rise on Wall Street after Chairman Powell ruled out the use of 75bps hikes and offered no hawkish surprises, whilst participants have been picking up on the fact the decision was unanimous, with hawk Bullard refraining from dissenting for a larger hike. Analysts at Rabo suggest “If we take this [Powell’s guidance] at face value, it implies that the five remaining FOMC meetings in 2022 will see total hikes of 175bp (i.e. 2x 50bp hikes and 3x 25bp hikes). This would take the targeted Fed Funds range to 2.50%-2.75% (this compares to the neutral rate implied by the most recent dot plot of 2.25%-2.50%).” Meanwhile, Fed watcher Tim Duy’s prognosis is “While 75bp might be off the table, Powell’s message overall message was clearly hawkish… The Fed has provided lots of near-term forward guidance but less in the way of longer-term guidance, albeit that is also drifting higher.” Nevertheless, APAC markets saw some tailwinds overnight upon China’s return from Labor Day, but gains were to a lesser extent, whilst US equity futures trade subdued in early European hours whilst global yields also recover; with the NQ (-0.9%) narrowly lagging the ES (-0.7%), RTY (-0.6%) and YM (-0.5%). European markets have also been coming off best levels since the cash open. Sentiment tilted to the downside in conjunction with reports via Russian press that two villages on Russian territory have been shelled by Ukraine. As a reminder, although denied by the Kremlin, there is speculation that Russia will officially declare war on Ukraine on May 9th (Russia’s “Victory Day” holiday) – currently Russia classifies its action in Ukraine as a “special military operation”. Major indices in Europe now see relatively broad-based gains (Euro Stoxx 50 +1.3%; Stoxx 600 +1.0%) as Euro bourses wane off best levels, whilst the FTSE 100 (+1.0%) is on standby for the latest BoE announcement and press conference (full preview available on the Newsquawk Research Suite). Sectors are mostly positive with Tech leading the charge, closely followed by Real Estate and Basic Resources, whilst defensive sectors reside at the bottom of the table – Health Care, Personal Goods, Telecoms and Utilities lag.  Strategists at Goldman Sachs continue to see European equities as a value trade: “The discount of European equities to the U.S remains significant even on a sector-equivalent basis”. The desk recommends long stocks with high and stable margins, strong balance sheets, and energy, adding that consumer cyclicals are at a deep discount, but it is too soon to rotate. In terms of some earnings highlights, AB InBev (+1.5%) topped expectations in Q1 amid beer price hikes in the US and Europe. Air France’s (+1.9%) earnings beat expectations and the Co. highlighted constructive summer trends, whilst Deutsche Lufthansa (+0.1%) saw a recovery in Q1 but warned on 2022 uncertainties. Meanwhile, Airbus (+7.5%) confirmed it was delaying its A321XLR over safety talks but was ramping production of the A320 jets. BMW’s (+0.7%) and Stellantis’ (+1.2%) earnings were up after they navigated the chip shortage, with the former supported by its Chinese JV and higher car prices. Credit Agricole (-3.1%) was hit by Russia-Ukraine and Credit Suisse (+0.7%) recorded net litigation provisions of CHF 703mln in 2022. For Shell (+3.5%), higher energy prices helped the firm post record profit levels.

05 May 2022 - 10:14- Fixed IncomeResearch Sheet- Source: Newsquawk