EUROPEAN EQUITY UPDATE: Stocks slip amid Snap losses, hawkish Lagarde, and not-so Flash PMIs

Analysis details (10:14)

Bourses in Europe have maintained the downside bias seen overnight after sentiment was sullied by US tech stocks after-hours following a profit warning from Snap (-27.5% pre-market) which saw its shares drop by more than 30% and subsequently weighed on social media peers Meta (-6.1% pre-market) and Pinterest (-11.5% pre-market), whilst mega-caps also remain subdued ahead of the Wall Street open. As a reminder, early month-end flows could occur this week on account of US Memorial Day next Monday; the desk as The Market Ear suggests "If you take the mid of JPM's high-end estimate (USD 56bln) and Morgan Stanley`s (USD 35bln) and assume that the month-end rebalancing started [on Monday] and will go for equal size until actual month-end, you have >USD 6bln of equity buying per day. That is on top of estimated USD 3-4bln of active daily buybacks happening". Meanwhile, analysts at Goldman Sachs say despite the unfavourable macro backdrop and weakening in investor sentiment, “our Risk Appetite Indicator is not at extreme bearish levels and remains well above the trough at the start of the Russia/Ukraine war. We remain cautious in expecting a broad and sustained rebound in risky assets and risk appetite near-term until we gain clarity on how fast inflation decelerates from here, how monetary policy reacts and the implications for growth.” GS also believes the bottom in stocks will come once the Fed signals the end of tightening, which may not occur until a recession is apparent. US equity futures are lower across the board with the Snap-induced tech downside pressuring the NQ (-1.9%) to a slightly greater magnitude vs the ES (-1.4%), RTY (-1.2%) and YM (-1.3%). Euro-majors see broad-based losses (Euro Stoxx 50 -1.2%; Stoxx 600 -1.0%), with some softness arising from commentary from ECB President Lagarde who highlights that when the central bank is out of negative rates, rates can be at or slightly above zero, whilst EZ flash PMIs missed forecasts and highlighting high price pressures and resilient GDP growth. On the other hand, the FTSE 100 (-0.5%) sees its losses cushioned amid favourable currency dynamics for exporters, with the Sterling sliding following dire UK Flash PMI metrics, which “indicate[s] a heightened risk of the economy falling into recession as the Bank of England fights to control inflation." Meanwhile, the Swiss SMI (-0.1%) is supported by its high exposure to healthcare – as the defensive sector currently resides towards the top of the table, albeit with mild losses. Delving deeper into sectors, overall there is a defensive tilt with Healthcare, Telecoms, Food & Beverages among the lesser hit, although Utilities resides as the clear laggard amid reports UK Chancellor Sunak orders a plan for a windfall tax on electricity generators – with Drax (-16.9%), Centrica (-10.8%), and SSE (-10.0%) all posting double-digit % losses. Meanwhile, inflation-prone Retail and Consumer Products and Services reside among the losers. Analysts at Morgan Stanley believe it is too soon to buy European cyclicals and Investors should stick to overweight on defensive/value stocks in Europe amid rising interest rates - “There is growing appetite from investors to build positions in ‘good companies at a better price’”, MS says.

24 May 2022 - 10:13- EquitiesData- Source: Newsquawk