EUROPEAN EQUITY UPDATE: Stocks slip as the soured sentiment seeps from Wall Street

Analysis details (10:05)

Equities in Europe are under pressure as the risk-off sentiment initiated during Wall Street hours yesterday seeped into APAC and later reverberated to Europe. US equity futures are also subdued in early European trade with the NQ (-1.2%) failing to benefit from the pullback in yields and lagging relative to the ES (-0.7%), YM (-0.6%) and RTY (-0.7%) – with tech valuation in question against the backdrop of central bank normalisation. On the inflation theme, US PPI will likely take focus as firms attempt to navigate elevated factory gate prices, whilst participants will also be on the lookout for impromptu central bank speakers. On the geopolitical front, markets are still awaiting the EU to agree on the sixth Russian sanctions package as the conditions of an EU oil embargo remain the key sticking point, whilst recent reports from the West suggest Belarus is amassing special forces to its southern border with Ukraine. Analysts at Citi in their Global Equity Strategy, favour “Value over Growth, EM/UK over US/Continental Europe and Financial/commodity stocks over Tech”, adding that “The MSCI AC World 12m fwd PE has derated from a peak 20x to 15x, tracking the rise in US 10Y TIPS yields to 0.3%. A further increase to +1.0% would imply the global benchmark trading at 14x and the MSCI AC World Growth index derating from 22x to 17x.” Back in Europe, broad-based losses are seen across the majors (Euro Stoxx 50 -2.2%; Stoxx 600 -2.0%), whilst the European periphery is slightly more cushioned amid some earnings-driven price action. The IBEX 35 (-1.0%) sees index heavyweight Telefonica (+2.3%) at the top post-earnings – in turn supporting the Telecoms sector in conjunction with UK-listed BT (+2.1%) following relatively in-line earnings, but BT Group and Warner Bros. Discovery agreed to form new premium sports JV. Overall, the sectors are in the red but have turned to a more defensive configuration vs the cash open – with Telecom, Personal Care Drugs and Grocery, and Utilities towards the top of the bunch. Basic Resources stands as the clear laggard as base metals tumble, followed by Consumer Discretionary, Autos, and Travel & Leisure. Analysts at Bernstein highlight a “double whammy” for European companies due to China’s Zero-COVID policy fuelling inflation alongside supply chain pressures, with the desk considering a “possible fractured supply chains resulting in delayed shipment and higher inflation, while weak China domestic demand would slow EU exports”. Looking at some corporate results, Siemens (-6.3%) reported underwhelming earnings and warned it will take a Q2 charge of some EUR 600mln from its Russian exit - the co. holds a 7.6% weighting in the DAX 40. Allianz (-2.2%) saw its Q1 net profits falling sharply after provisions over funds, while it kept its FY outlook unchanged and said it was on track to meet FY targets - Co. holds a 6.9% weighting in the DAX 40. Commerzbank (-2.5%) reported higher net profits despite Ukraine, while it reduced exposure to Russia, and confirmed its FY outlook. Rolls-Royce (+0.1%) said YTD financial performance had been in-line with expectations, with FY22 guidance unchanged.

12 May 2022 - 10:05- Fixed IncomeResearch Sheet- Source: Newsquawk