EUROPEAN EQUITY UPDATE: Sentiment tilts higher up after a brief pause on month-end, and with news flow light

Analysis details (09:53)

The equity complex had been consolidating within tight ranges throughout the early hours following the prior day’s continuation of the post-FOMC minutes rebound on Wall Street, whilst US traders also gear up for a long weekend on account of the Memorial Day holiday. The early mood across equities was tentative as the global upside momentum from Wall Street somewhat paused with APAC markets closing in the green but off best levels - Hong Kong’s outperformance was spearheaded by its tech exposure. According to Citigroup’s prognosis - “uncertainty is very high, and the Fed seems to guide for recession is not reassuring. While typically equities only peak shortly before the start of a recession, this time it may happen earlier than we expected, potentially because we have elements of a deflating bubble. We, therefore, cut our US equity allocation back to neutral but stay long China and UK against Europe.” Meanwhile, Credit Suisse highlights that “twice recently, the S&P has flirted with a 20% fall from the peak (which would be 3,837 on the S&P 500). In our recent piece on equities, we highlighted that bear markets (i.e. falls of 20% or more) tend to last around 12 months, and involve greater declines on average of 31% (which would equate to 3,325 on the S&P500). If there is a recession, then bear markets tend to last 16 months and on the average decline by 39% (this would equate to 2,925 on the S&P 500) … We have had four occasions in the last 35 years when the S&P fell nearly 20% and entered a new very strong bull market: 1990, 1998, 2011 and 2018. Only the 1990 near miss bear market occurred against the backdrop of a recession (the S&P fell 19.9%)”. Elsewhere, the weekly BofA Flow Show indicated that equities saw the largest inflows in 10 weeks. The week to May 25th saw around USD 21bln inflows into US equities, whilst Japan and Europe saw outflows. US large-caps experienced inflows of USD 19.6bln whilst the sectoral breakdown saw inflows into Consumer Goods and outflowed out of tech. Back to today’s session, an initial non-committal tone was observed before the complex saw a mild bid despite a lack of news flow at the time (Euro Stoxx 50 +0.9%; Stoxx 600 +0.8%), with the pick-up in sentiment also pushing the US contracts into positive territory – the NQ (+0.5%) narrowly outperforms the ES (+0.3%), YM (+0.2%), and RTY (+0.3%). Sectors are now mostly in the green with a mild anti-defensive/pro-cyclical tilt. Healthcare, Media, Food & Beverages reside towards the bottom of the pile, but Energy and Utilities underperform as they experience headwinds from the UK’s windfall tax announced yesterday. On the other end of the spectrum, Consumer Products and Services lead the charge following the recent underperformance, whilst Tech and Basic resources reside among the current winners. Individual movers are less interesting today as the broader market move dictates price action.

27 May 2022 - 09:52- EquitiesResearch Sheet- Source: Newsquawk