EUROPEAN EQUITY UPDATE: Stocks fade earlier gains and slip to new lows ahead of Wall Street’s return

Analysis details (10:05)

The earlier upside seen across the equity space has faded, with European cash markets now posting and extending losses across the board. US equity futures similarly lost momentum to now trade with a firm negative bias (ES -0.6%, NQ -0.8%, RTY -0.9%, YM -0.6%) ahead of the US’ return from Independence Day. In terms of analyst commentary, strategists at Morgan Stanley believe the US economy is “firmly” in the middle of a slowdown that is worse than expected – “If macroeconomic data don’t confirm a recession, equity markets could rally further… but if growth were to indeed contract, the S&P 500 may sink to 3,000 points -- about 22% below its latest close”, according to Morgan Stanley’s Wall Street bear Wilson. He sees the SPX's fair value at around 3,400-3,500. Meanwhile, Berenberg believes the equity market is pricing in a macro slowdown as opposed to a recession, with the analysts favouring “sell the rally” rather than “buy the dip.” The desk sees relative value in the UK and Germany, while US stocks remain “expensive and vulnerable generally”, with tech and consumer cyclicals looking expensive in most regions. Back to the session, stocks have extended on the earlier downside (Euro Stoxx -0.7%, Stoxx 600 -0.4%), with varied losses seen across the majors. The findings from the EZ PMIs were mixed but largely pointed to inflation remaining elevated and downside risks to growth, with the EZ release suggesting “The June PMI reading is indicative of quarterly GDP growth moderating to just 0.2%, with forward-looking indicators such as the survey’s new orders and business expectations gauges pointing to falling output in coming months… The June PMI data, therefore, suggest that risks have increasingly tilted towards the economy slipping into a downturn at the same time that inflationary pressures moderate but remain elevated.” Elsewhere, the FTSE 100 (-1.0%) lags largely due to losses across several heavyweight stocks – including miners and oil names as commodities continue to react to recession woes. Sectors are now mostly lower with a clear and firm defensive bias – Food & Beverages, Healthcare, Utilities, and Telecoms are among the top gainers whilst the laggards include Basic Resources, Autos, Insurance, Energy, and Banks. In terms of individual movers, Uniper (+5.4%) is the current Stoxx 600 winner as the Co. is said to be in talks with the German government for a bailout of up to EUR 9bln, according to Bloomberg sources. Rolls-Royce (-2.3%) declines after warning that UK PM Johnson must approve plans for a mini nuclear reactor in the next six months or risk seeing a delay to the project. Sainsbury's (+0.6%) is choppy after a trading update, but from a macro-perspective, the grocery name said pressure on household budgets is to intensify for the rest of the year. Finally, in M&A, Valora Holding (+50%) spiked at the open as it is to be acquired by FEMSA for CHF 260/shr (vs Monday's CHF 171 close), in a deal valued at CHF 1.1bln.

05 Jul 2022 - 10:04- EquitiesData- Source: Newsquawk