EUROPEAN EQUITY UPDATE: Stocks endure Monday blues as IFO delivers more bad news

Analysis details (09:35)

• European equities (Eurostoxx 50 -0.5%) trade on the backfoot following on from the soft close in the US on Friday with losses having picked up since the cash open. In terms of broader macro drivers for the region, focus has been on the latest IFO data from Germany which saw the Business Climate metric dragged lower by a large miss on the expectations component and therefore added to the gloom painted by last week’s PMI releases. Focus ahead for the Eurozone will be on events at the Sintra Forum with ECB President Lagarde due to give opening remarks at 18:30BST. Commentary over the weekend was dominated by the failed Russian uprising over the weekend. However, this has not had a marked impact on global equities given companies have exited Russian operations, and Europe has shifted its energy reliance away from the country. It remains to be seen if events over the weekend will change the overall dynamic of the Russia-Ukraine war, though some speculate that Russian President Putin may have to raise his intensity in a show of force after the Wagner Group chief’s challenge to his authority.


• Asia-Pac stocks were mostly subdued after Friday's losses on Wall St with weekend newsflow dominated by the brief uprising of the Wagner Group in Russia. ASX 200 (-0.5%) was lacklustre with price action rangebound as weakness in the top-weighted financial sector offsets the modest gains in real estate and tech. Nikkei 225 (-0.3%) was choppy as participants digested the latest BoJ Summary of Opinions which mostly stuck to the dovish script. Hang Seng (-0.4%) and Shanghai Comp. (-1.5%) were somewhat varied with the Hong Kong benchmark kept rangebound, while the mainland underperformed on return from the Dragon Boat Festival where travel spending was below pre-COVID levels to add to the weak domestic demand and slower consumption narrative.


• US equity futures (ES -0.2%, NQ -0.2%, RTY -0.2%) are extending on Friday’s losses as traders continue to debate whether the pullback is a consolidation of recent gains or a more sinister reversal. Tesla is lower by some 2.1% in the pre-market after being downgraded to neutral from buy at Goldman Sachs with GS of the view that the Co.’s long-term outlook is already priced in and also noted the challenging pricing environment. Note, today’s data docket is a light one for the US with the main highlight being the Dallas Fed Manufacturing Business Index for June.


• Analysts at JP Morgan are of the view that “the broadening in market leadership that was seen at some points this month is unlikely to have legs” on the basis that it does not expect bond yields to move higher. As such, JPM remains overweight growth vs. value and thinks that pure Defensives (Staples, Utilities and Healthcare) could catch a bid given its projection of “falling bond yields in 2H, risk of weaker PMIs and challenging EPS revisions”. From a regional perspective, the desk thinks that the trade of overweight UK or overweight Switzerland vs. underweight Eurozone should be put on in H2; reiterating last month’s downgrade of the Eurozone to underweight.


• Equity sectors in Europe have a slight negative bias with underperformance in the banking sector. Losses have been relatively broad-based across the industry, however, Commerzbank (-3.4%) is a standout after adding a EUR 342mln provision related to the CHF loan portfolio at MBank, whilst Lloyds (-1.9%) is also on the backfoot following negative commentary from JPM and a downgrade to underweight. Defence names are also enduring a session of losses with downside in Rheinmetall (-5.7%), Leonardo (-5.2%), BAE Systems (-3.2%), Thales (-3.1%) and others potentially as a read-across from events in Russia which could bring the end of the Russia-Ukraine conflict nearer. On a more positive footing, outperforming sectors include Chemicals and Basic Resources. In terms of individual updates, Vodafone (-1.5%) shares have been pressured by reporting in The Times that the Co’s GBP 18bln merger with CK Hutchison’s Three is facing cross-party scrutiny over its links to China. Finally, SES Imagotag (+16.1%) shares are attempting to claw back recent losses after the Co. refuted recent claims made by Gotham Research.

26 Jun 2023 - 09:35- Research Sheet- Source: Newsquawk