EUROPEAN EQUITY UPDATE: Stocks off worst levels but still struggling to catch a break

Analysis details (09:32)

• European equities (Eurostoxx 50 -0.5%) are once again on the backfoot with the exception of the FTSE 100 (+0.2%) which is supported by a softer GBP and gains in Barclays (+2.5%) which has benefited after being upgraded to overweight from equal weight at Morgan Stanley. FTSE-aside, the broad weakness seen across the equity complex appears to be a case of “more of the same” with the recent surge in bond yields (which admittedly has been tempered to some extent today) acting as a headwind for the complex. For Europe in particular, the nature of the rise in bond yields is one of the key issues at hand given that the increase in yields has stemmed in part from a higher-for-longer narrative out of the Fed and the recent surge in oil prices with the latter particularly notable given that the Eurozone is a net importer of oil and could add further pain to an already tricky growth outlook. This combined with Chinese property concerns at the start of the week and an absence of positive catalysts for Europe remains the main driving force for the region.


• Asia-Pac stocks were mostly lower following the choppy performance stateside and with headwinds from the rising yield environment. ASX 200 (-0.5%) was subdued by underperformance in real estate and tech as domestic yields tracked the upside in global peers with Australia’s 10yr yield up by around 10bps. Nikkei 225 (-1.1%) was pressured following the acceleration in Services PPI data and as recent currency moves keep participants on their toes regarding FX intervention. Hang Seng (-1.4%) and Shanghai Comp. (-0.4%) declined with sentiment not helped by trade frictions after the US imposed restrictions on additional Chinese and Russian companies related to supplying Russia with components to make drones, although losses in the mainland were stemmed by another substantial liquidity operation and hopes that the approaching Mid-Autumn Festival and National Day Golden Week holidays would provide a boost to consumption and economic activity.


• US equity futures (ES -0.5%, NQ -0.6%, RTY -0.4%) are pressured amid a generally negative risk tone across the market and a lack of any fresh catalysts. Yesterday the traders looked out for commentary from Fed’s Goolsbee (Dove), who ultimately reiterated much of the rhetoric from the Fed announcement. He as well as Fed’s Kashkari (Hawk), who spoke overnight, very much pushed the “higher-for-longer” narrative that has led to market jitters in the past week. Back to today, the docket is scarce by way of data releases, with US Housing Data, Richmond, and Dallas Fed data the only ones of note. The former may be eyed for signs of real estate stress given recent higher interest rates, whilst the latter may induce some short-term volatility if the figures beat expectations. Away from speakers, Fed’s Bowman is due to give remarks at 18:00 BST / 13:00 ET and Costco is to release its earnings after the market close.


• And as market sentiment continues to slump, Morgan Stanley notes that hedge funds have cut their stock net leverage at the fastest pace since the Covid-19 market crash. The figure is commonly used to gauge risk appetite between long vs. short positions, with the number dropping by 4.2%, overall indicating that investors are less bullish on equities.


• Looking towards sectoral performances, JP Morgan strategist Kolanovic warned that automakers, airlines and retailers are among the industries which will suffer from cooling inflation, overall highlighting the “growth-policy tradeoff” dynamics that have been hampering the market in the past week. The strategist maintains his defensive stance on equities, though upgrades his view on global energy stocks to Overweight, mentioning upside risks to oil for the near and long term. Kolanovic adds that energy stocks have struggled to keep up with the recent surge in oil prices and believes investors will begin to draw more investors into energy stocks. The recommended stock picks for the sector are Exxon Mobil (XOM), Marathon Oil Corp. (MRO) and Baker Hughes Co. (BKR). In summary, Kolanovic’s verdict on Energy concurs with views held by analysts over at Goldman Sachs (a write-up can be found in yesterday's equity update).


• Equity sectors in Europe are mostly lower with the exception of Health Care which is just about being propped up by Novartis (+1%) after Sandoz received European Commission approval for Tyruko. To the downside, Energy names are lagging peers amid downside in underlying crude prices with other laggards comprising of Autos and Tech. The latter has been weighed on by a combination of broader tech softness and losses in ASM International (-0.6%), which although has pared the bulk of its open losses of circa 5%, has been in focus after soft margin guidance overshadowed an increase in 2025 revenue guidance. In terms of individual movers, Drax (-5.4%) sits at the foot of the Stoxx 600 with Bloomberg noting that the Co. is under pressure after “several investors disclosed they were betting against the UK energy company”. Finally, luxury names remain out of favour with Richemont (-2%) a notable laggard in the space after being downgraded to Equal Weight from Overweight at Morgan Stanley.

26 Sep 2023 - 09:32- Research Sheet- Source: Newsquawk