EUROPEAN EQUITY UPDATE: Sentiment cautious amid hot EZ CPI, ahead of the US return and the Biden/Powell/Yellen confab

Analysis details (10:23)

Stocks in Europe trade mostly lower but off worst levels, with volumes picking back up on the last trading day of the month following the US Memorial Day holiday yesterday. Overnight, Chinese markets were supported as China's Cabinet issued a series of policies to stabilise the economy, whilst the Chinese NBS PMIs topped forecasts, albeit remained in contraction territory. The focus throughout the European morning has been on the sixth Russian sanctions package compiled by EU leaders after overcoming the oil embargo obstacle. Long-story-short, Hungarian demands were met resulting in a more watered-down proposal than originally unveiled by the European Commission President; with the legalities yet to be inked by the Council. State-side futures are choppy but within narrow ranges on either side of the unchanged mark – but the NQ (-0.2%) has piggy-backed on the softer yields and has been the relative outperformer vs the ES (-0.3%), RTY (-0.3%) and YM (-0.2%) throughout the European morning thus far. Analysts at Citigroup believe the bearish momentum in US futures has partly reversed as investors unwound short positions. “New long flows were added across US markets in the latter part of the week amid the slowdown in bearish positioning”. The desk adds that “Nasdaq’s short profit levels have diminished and average short positions are currently marginally at a loss… As such, there’s a lesser near-term risk to force unwinds, but this could rapidly change, given that most short positions are in a very narrow 12,000-12,500 trading range”. In terms of European markets, Citi says “rising net notionals could be seen across all indices, with FTSE and banks in particular extended long…Profit-taking risk is emerging for European lenders”. Meanwhile, UBS strategists believe the equity risk/reward is improving and they see the best opportunities “within cyclicals and quality stocks, including sectors such as Consumer Durables & Apparel, Transportation, Media & Entertainment and Tech Hardware.” The Swiss desk sees a “disconnect in equity markets between recessionary fears and the current fundamental backdrop”. In terms of today's trade, European cash bourses have bounced off worse levels but remain in negative territory at the time of writing (Euro Stoxx 50 -0.6%; Stoxx 600 -0.4%) with most Euro bourses in the red. The region also experienced some modest downside after EZ May CPI saw a marked uptick to 8.1% in the Y/Y headline (vs exp. 7.7%; prev. 7.4%) – although it is unlikely that this will shift the ECB’s course of action for next week’s meeting - for reference, market pricing via Reuters continues to imply four 25bp ECB hikes by end-2022. The UK’s FTSE 100 (+0.3%) and the Dutch AEX (+1.1%) buck the trend – with the common denominator being Unilever (+6.7%) as investors cheer Trian Fund Management confirming that it holds an interest of around 1.5% of Unilever's share capital, whilst announcing activist investor Nelson Peltz as a non-executive director. Unilever holds a 4.4% weighting in the FTSE 100 alongside a 13.1% weighting in the AEX. The Dutch index is boosted further by DSM (+7.0%) whose shares rose over 13% at one point after DSM and Firmenich agreed to merge in a cash and stock deal and are expected to be completed ultimately in the first half of 2023. Analysts at Morgan Stanley believe the FTSE 100’s valuations are low and attractive. In the EU, MS says Spain is currently the most overbought country and looks vulnerable at overbought levels against the backdrop of weak relative EPS. In terms of the majors, MS posits that German has continuously lagged whilst the Netherlands looks expensive. European sectors are mostly softer and portray a defensive bias – but Energy remains the clear outperformer as crude prices march higher, whilst Basic Resources are supported by underlying prices. Sectoral laggards include Real Estate, Construction and Travel & Leisure – with the latter hit by a string of negative press reports in the UK alongside higher fuel prices, whilst IAG (-3.8%) was also downgraded at MS. In terms of individual movers: Credit Suisse (-3.0%) is pressured after Reuters sources suggested the bank is mulling options to strengthen its capital following recent losses, with the size of the capital increase likely to exceed CHF 1bln. Telecom Italia (+3.7%) is bolstered by Bloomberg source reports that it is seeking a valuation of around EUR 20bln for the landline network. GSK (+0.1%) is relatively tame despite pre-market reports that GSK is to acquire clinical-stage biopharmaceutical company Affinivax and is paying USD 2.1bln upfront and up to USD 1.2bln in potential development milestones. Finally, in terms of the FTSE quarterly reshuffle, Royal Mail (-2.3%) and ITV (-0.8%) are poised to be replaced by Centrica (+1.0%) and Johnson Matthey (+0.7%), with the formal review will take place today using data after the market closes.

31 May 2022 - 10:22- EquitiesEconomic Commentary- Source: Newsquawk