EUROPEAN EQUITY UPDATE: Stocks shrug off Monday blues as ECB looms

Analysis details (09:19)

• European equities (Eurostoxx 50 +0.6%) have kicked the week off on the front foot with opening gains extended throughout the session. In terms of the macro narrative, not a great deal has changed for the region over the weekend and therefore it may be more of a case of buyers attempting to reverse some of last week’s softness. That being said, it will be worth noting the sustainability of any such moves given the slew of risk events due on this week’s docket, the most pertinent of which for the region is the ECB policy announcement with surveyed analysts marginally in favour of a pause. Given the ECB is now in its blackout period, it is plausible that source reporting throughout the week could give markets a steer of what to expect ahead of Thursday.


• JPM notes that if, as it suspects, the USD keeps getting stronger, this is not a good backdrop for EM. In its global equity regional allocation, it remains “cautious on EM vs DM”, noting that “The EM basket has underperformed European indices YTD, and we stay away from it”. From a sector standpoint, the desk states “while we are cautious on Miners, we note that they have already performed quite poorly, and, together with Energy which we are OW, can offer better relative value”. Conversely, H1 saw good performance for Luxury, Capital Goods, Autos and Semis but this performance is beginning to stall and further weakness could be ahead.


• Asia-Pac stocks traded mixed as yields climbed following comments from BoJ Governor Ueda who said that they cannot rule out that they might have sufficient data by year-end to determine whether they can end negative rates and that his focus is on a quiet exit. ASX 200 (+0.5%) was range bound with gains in the top-weighted financial industry making up for the underperformance in the tech and healthcare sectors. Nikkei 225 (-0.4%) was subdued after the comments from BoJ Governor Ueda which lifted the 10yr JGB yield to above 0.70% for the first time since 2014 although further downside in the index was stemmed as banks were lifted on the exit-related talk and with Japan aiming to take drastic economic stimulus measures. Hang Seng (-0.6%) and Shanghai Comp. (+0.8%) were varied with the Hong Kong benchmark pressured as last Friday’s losses caught up to the index following the black rainstorm closure and with declines led by weakness in the property sector, while Alibaba shares also suffered after its former CEO Daniel Zhang stepped down from the cloud business. Conversely, the mainland was kept afloat following somewhat mixed inflation data from China which showed headline CPI Y/Y was softer-than-expected but no longer in deflationary territory and after China’s National Administration of Financial Regulation eased rules for insurers to buy stocks.


• US equity futures (ES +0.4%, NQ +0.5%, RTY +0.5%) are trading on the front foot, as optimism returns following the Chinese data on Saturday. The day ahead is lacklustre with the only release of note coming by way of NY Fed’s SCE, which will give an insight into inflation expectations in the future. The docket for the week picks up, with US CPI to be released on Wednesday, PPI and IJC on Thursday followed by a quiet Friday, in which markets will await Industrial Production. The markets are currently optimistic that the US economy will achieve a soft landing and if this is conveyed by the CPI and IJC this week, it may spur some further bullish action across US equities. Analysts at Goldman Sachs said “progress towards a soft landing will support SPX earnings and lift the index to our 12m target of 4700 (+6%). While we believe the balance of risks to our year-end target of 4500 (+1%) is tilted to the upside, the economic growth and inflation data flow could create a choppy path for equities in the next few months.” Though to the contrary, Morgan Stanley equity strategist Michael Wilson reiterated his view that markets are in a late-cycle backdrop. "More importantly, equity markets are starting to agree based on relative performance under the surface," the bank notes, adding that it recommends sticking with a barbell of defensive growth and Industrials/Energy. In terms of stock specifics, Tesla (TSLA) shares are seen higher by 4.2% in pre-market trade following a broker upgrade at Morgan Stanley. They upgraded the auto-name to Overweight, raising its PT to USD 400 (prev. USD 250), making it the top pick stock at MS.


• Equity sectors in Europe are higher across the board with Basic Resource names top of the leaderboard by some distance thanks to upside in underlying metals prices. As such, some of the top performers in the Stoxx 600 include the likes of Anglo American (+3.6%), Rio Tinto (+3.5%) and Glencore (+2.9%) with reporting in the FT suggesting that the latter plans to expand its Democratic Republic of Congo exposure as it pushes into the lithium market. Elsewhere to the upside, Vistry Group (+12.8%) is the best performing stock in the Stoxx 600 post-H1 results and is helping to lift other homebuilders such as Persimmon (+4.3%), Barratt Developments (+2.6%) and Taylor Wimpey (+2.6%). Covestro (+3.8%) is another strong performer in Europe after the FT reported the company is considering an acquisition by Abu Dhabi's ADNOC after it increased its offer to around EUR 14bln. On a less positive footing, broker downgrades have acted as a drag on Alfa Laval (-2.7%), Legrand (-1.8%) and Melrose (-1.8%), whilst developments at AstraZeneca will be worth keeping an eye on amid reporting that CEO Sir Pascal Soriot, has discussed leaving the firm with a number of people, according to The Mail; though has not spoken to the board yet.

11 Sep 2023 - 09:19- Research Sheet- Source: Newswires