EUROPEAN EQUITY UPDATE: Stocks mixed but remain at the whim of yields

Analysis details (09:40)

• European equities (Eurostoxx 50 -0.2%) trade broadly softer once again, albeit off worst levels as the downside in futures seen ahead of the cash open abated. Futures were initially pressured alongside yet another pick-up in yields which saw the German 10yr hit 3% for the first time since 2011, however, equities were able to claw back some lost ground as moves in the fixed income space began to stabilise. From a macro perspective in the region, today has seen the final release of services and composite PMIs whereby the EZ-wide metrics saw the services print revised higher to 48.7 from 48.4, leaving the composite at 47.2 vs. the flash print of 47.1. The accompanying release noted, “the Eurozone economy ended the third quarter with another contraction in business activity…as output volumes across both the manufacturing and service sectors were constrained by deteriorating demand conditions”.


• Asia-Pac stocks declined following the losses on Wall Street where stocks and bonds resumed their slide as strong JOLTS data stoked tightening labour market concerns alongside the backdrop of suspected Yen intervention. ASX 200 (-0.8%) was dragged lower by underperformance in tech, real estate and the top-weighted financial sector with headwinds amid the continued upside in yields. Nikkei 225 (-2.1%) extended on losses beneath the 31,000 level amid wide speculation of currency intervention and with Japanese officials out in force refusing to confirm or deny whether they intervened. KOSPI (-2.4%) underperformed on return from the extended holiday despite encouraging Industrial Production data which showed a surprise expansion of 5.5%. Hang Seng (-0.5%) conformed to the downbeat mood amid the continued absence of mainland participants and with pressure on tech, energy and casino stocks.


• US equity futures (ES -0.4%, NQ -0.5%, RTY -0.5%) continue yesterday’s sell-off, which was spurred on by JOLTS data, sparking more fears that rates will “stay higher for longer”. Back to today, markets will await more employment data, coming by way of ADP National Employment, which will help guide expectations for Friday’s NFP report. Additionally, Services & Composite PMIs (Final), and ISM Services data will be closely watched. There are also several Fed speakers due to speak today, including Schmid, Bowman (Hawk) and Goolsbee (Dove). Commentary from these speakers will be closely watched, following speak from Fed’s Mester yesterday who cemented the “higher for longer” narrative, by saying the Fed will likely need to hike rates one more time. Events in Washington remain in focus too, with Kevin McCarthy ousted from the role of House Speaker, which he only took on in January, and just days after pushing through continuing resolution legislation that relied on Democrat support to avoid a government shutdown. Patrick McHenry has been appointed the interim Speaker and has put the House in recess for a week; Steve Scalise and Tom Emmer are the names being touted as replacements for McCarthy.


• Analysts at Barclays note that “absent a circuit breaker to the bond market, equities may continue to struggle” as increasing cross-asset volatility prompts more de-risking and “cash is the only place to hide”. That said, given oversold conditions, it might not “take much for equities to deliver typical positive Q4 seasonality, as fundamentals still hold”. Looking ahead, the desk suggests that in the absence of help from valuations, equity performance will likely be determined by the evolution of earnings. Amid a “tricky” growth-policy trade-off and markets starting to pay attention to fiscal risks, after having already neutralised its beta exposure in Q3, Barclays sticks to “a barbell approach, broadly neutral Cyclicals/Defensives”. The desk remains “OW Value, as valuations vs. Growth have not fully adjusted to the higher-for-longer rates regime, but a Quality tilt seems wise given rising credit risk”. Finally, the desk notes that although “Europe fundamentals look poorer, earnings are holding up and valuations are much more reasonable than for US”.


• Equity sectors in Europe have a negative bias with Autos & Parts bottom of the pile, followed by Travel & Leisure and Retail with the latter in part weighed on by Zalando (-2.1%) after the Co. was downgraded at UBS. Utilities are top of the leaderboard, potentially as a by-product of reporting by the FT that Germany is seeking a "grand bargain" with France to break through the current stalemate regarding nuclear power and help pave the way for a sweeping reform of the bloc's electricity market. Media names are also on a firmer footing with Relx (accounts for around 30% of the Stoxx 600 Media index) up around 1% after being upgraded to buy at Goldman Sachs. Novartis (+2.6%) shares are higher after executing the spin-off of its Sandoz unit which has commenced trading today under the ticker SDZ SW. Tesco (+2.2%) shares are higher post-H1 results which saw the Co. report better-than-expected profits and raise its profit guidance. Finally, Fresenius Medical (-4.8%) sits at the foot of the Stoxx 600 after reports suggesting the Co.’s Vascular Care unit has received a complaint by the NY AG over unnecessary surgeries. 

04 Oct 2023 - 09:40- Fixed IncomeEU Research- Source: Newsquawk