EUROPEAN EQUITY UPDATE: Stocks mixed as PMIs flash increase recession risks; Spain lags amid its political stalemate

Analysis details (09:50)

• Stocks in Europe kicked off the final full trading week of July on the back foot but have since trimmed losses with the region now seeing a mixed picture following a mostly negative APAC performance. The broader mood this morning seems somewhat non-committal ahead of a risk-packed week – which sees the FOMC, ECB and BoJ monetary policy meetings, as well as several large-cap earnings results on both sides of the pond. Add to that, the Chinese Politburo meeting will also be eyed for hints of more stimulus measures in the world’s second-largest economy (Newsquawk Primer available here). Back in Europe, the morning saw the release of the Flash PMIs from July – which disappointed across the board – with the underlying themes being the increased risk of recession alongside the dichotomy between manufacturing and services inflation in the Eurozone. Ahead of the Thursday ECB confab, S&P Global writes "The latest PMI reading is not going to please ECB officials as prices in the private sector are still creeping up, led solely by the substantial services sector. Thus, ECB president Christine Lagarde will certainly stick to her guns and hike interest rates by 25bp at the next monetary meeting at the end of July." All in all, analysts at ING summarise the release as confirming their “view of a materially lower inflation rate towards the end of the year but keeps hawkish concerns about the effect of wages on inflation alive.”


• US equity futures have tilted higher following a side-ways APAC session (ES +0.1%, NQ +0.2%, RTY +0.1%, and YM +0.1%). Participants this week will be busy juggling a slew of earnings as well as the FOMC meeting – the Fed is expected to lift rates by 25bps to 5.25-5.50% at its July confab, with traders looking for clues as to whether this is the central bank’s last rate rise of the cycle, or whether it is likely to fire an additional hike at a future meeting, in line with its projections. Meanwhile, markets are entering the busiest week of Q2 earnings, 48% of the S&P500 market cap is scheduled to report this week, with another 15% reporting next week. Traders will be looking ahead to mega-cap names such as Microsoft (Tuesday), Alphabet (Tuesday), and Meta (Wednesday), while large-cap earnings this week include McDonald’s (Thursday), ExxonMobil (Friday), and Chevron (Friday). Analysts at JPM highlight that consensus projections have been cut significantly over the past months and suggest “the stock price reactions, in general, could be more muted this time, or at least any positive momentum might not have legs. Ahead of Q1, sentiment and positioning were cautious, but the equity market was strong coming into Q2 reporting season, suggesting buy-side expectations are more elevated, even as analyst projections are subdued. Also, the question is whether guidances will be raised on the back of quarterly beats, as there was some loss of momentum as we moved through the quarter, and China dataflow continues to disappoint.”


• Over in Europe, stocks are mixed (Euro Stoxx 50 -0.3%, Stoxx 600 -0.1%) but the region has trimmed losses, potentially as the warnings flagged by the EZ PMIs could mean a less aggressive ECB going forward, although a 25bps July hike is as good as a done deal. In terms of regional performance, Spain’s IBEX 35 (-0.6%) is the clear laggard following the inclusive Spanish elections over the weekend (Newsquawk Analysis available here) which plunges the country into political uncertainty – the IBEX saw opening losses of around 1.5%, with the Spanish banking index underwater by 2.7% at the cash open. Equity sectors are mixed but with a slight tilt to the downside. Banks find themselves at the bottom of the pile, alongside Retail and Travel & Leisure. The latter is feeling some pressure after Ryanair’s (-3.1%) earnings which cautioned that the Co. will experience softer traffic growth due to Boeing delivery delays. On a more sectoral front, airline names such as easyJet (-4.1%) and IAG (-3.1%) are lower in sympathy, and possible amid the travel disruptions caused by the heatwaves in Europe. On the flip side, Telecommunications is leading the sectors, being propped up by Vodafone (+4.8%), which reported better revenue growth after it affirmed its FY24 guidance. As for individual movers, Ocado (+9.3%) is the best-performing company in the Stoxx 600, after the news that it will be paid GBP 200mln after winning a legal battle against a Norwegian rival that accused the Co. of infringing its automation patents. Julius Baer (+8.2%) is also extending gains after beating H1 earnings and after money inflows beat expectations. Philips (-6.5%) is heading for its worst day in nine months, despite reporting strong earnings and lifting its FY23 outlook, though analysts at Jefferies are noting that the Co’s order intake fell 8% YY, which may subdue sales growth in the next 12-18 months.

24 Jul 2023 - 09:53- Fixed IncomeEconomic Commentary- Source: Newsquawk