EUROPEAN EQUITY UPDATE: Stocks attempt to claw back recent losses as H2 gets underway

Analysis details (10:20)

Equities in Europe kicked off the session with losses across the majors after futures guided a softer open; however, the region has since nursed losses with cash bourses moving into the green one at a time. There has been little in terms of fresh fundamentals to spur the upside, but a mixed picture is seen across Europe. That being said, US equity futures remain in negative territory but off worst levels as the contracts coat-tail on some of Europe’s upside – with a relatively broad-based performance seen across the ES (-0.2%), NQ (-0.2%), YM (-0.3%) and RTY (-0.3%). Analysts at Goldman Sachs warn that stocks are facing an elevated risk of further selling in the near term, citing the market pricing of only a mild recession. “Unless bond yields start to decline and buffer rising equity risk premiums due to recession fears, equity valuations could decline further”, GS said, adding that earnings revisions are likely to turn negative in H1 and volatility is expected to stay high as investors juggle inflation and recession risks. Meanwhile, JPM favours energy stocks as they offer the most risk/reward – with prices more attractive after the latest sharp correction. “Energy is a deep Value sector that is simultaneously improving on Quality, Growth and Income factors (a rare combination). The sector should deliver strong relative growth (with upside to current consensus estimates) and rising capital return (S&P 500 Energy dividend yield ~4% + growing buybacks) at very cheap valuation (PE 7.9x, assuming crude price of $60-70bbl implied by consensus for oil majors)”, JPM explains. Meanwhile, this week’s BofA Flow Show (to Wednesday) showed all asset classes posting a week of outflows – “Inflows to stocks are flat for the past 4 months, in contrast to notable credit redemptions”, BofA strategists said. BofA’s Bull & Bear indicator remains at “maximum bearish” for a third straight week. Back to the session, European indices are now mostly in the green to varying degrees (Euro Stoxx 50 +0.2%; Stoxx 600 Unch). The morning saw the release of final manufacturing PMIs from the EZ and the UK – which offered little in terms of surprises but a common theme being softer demand amid higher prices and uncertainty. EZ Flash HICP for June topped expectations at 8.6% Y/Y (vs exp. 8.4%; prev. 8.1%) – although this does not shift the dial much with regards to the ECB’s next meeting, the upside momentum in EZ stocks did briefly pause following the release. The reversal in bond yields throughout the morning has propped up the banking sector – with the heavily exposed IBEX 35 (+1.2%) and FTSE MIB (+0.5%) the main beneficiaries. Conversely, Tech remains the sectoral laggard as chip stocks are short-circuited after sources suggested contract-chip manufacturer TSMC (ADR -3.9% pre-market) has seen its major clients adjust downward their chip orders for the rest of 2022, which could lead to a profit warning – the Co’s top clients (as of December 2021 include) Apple, AMD, Qualcomm, Broadcom, Nvidia, Sony, STMicroelectronics. Add to that, Micron (-3% pre-market) issued downbeat guidance alongside earnings yesterday, in which it noted that the industry demand environment has recently weakened and is taking action to moderate supply growth in fiscal 2023. As such, ASM International (-4.0%), ASML (-2.8%), Infineon (-2.0%), STMicroelectronics (-0.9%) are all hit but off worst levels. Elsewhere, the Travel Sector sees a boost from airliners cheering the recent slide in oil prices, whilst the UK yesterday unveiled a 22-point plan to tackle aviation disruptions.

01 Jul 2022 - 10:20- EnergyResearch Sheet- Source: Newsquawk