EUROPEAN EQUITY UPDATE: Stocks slip at the start of the week as China’s COVID cases hit another record peak

Analysis details (10:08)

Cash bourses in Europe hold the downside bias seen across APAC stocks overnight which emanated from China reporting a record increase in COVID cases, whilst social unrest in the country made the headlines over the weekend. On this, some desks have speculated that the protests could result in China taking a more lenient approach sooner with regards to its Zero-COVID policy, with Goldman Sachs suggesting China could end its current COVID policy before April and earlier than widely expected with some chance of a “disorderly” exit, although it still sees a Q2 exit from zero-COVID as most likely with around a 60% chance. Meanwhile, a couple of ECB Governing Council members hit the wires this morning, with hawk Knot warning of a risk the ECB is not doing enough, with risks to the inflation forecast entirely tilted to the upside, while he also suggested that “it is a bit of a joke” to talk about over-tightening now. US equity futures are also softer across the board with a bulk of the downside seen during APAC hours. In early European hours, the ES (-0.9%) gave up its 4,000 levels and a slight underperformance is present in the tech-laden NQ (-1.0%), as participants look for month-end flows ahead of the US jobs report at the end of the week. In terms of commentary, analysts at Deutsche Bank flag the possibility of a bear-market rally likely continuing into Q1 2023, spurred by low equity positioning. Further out, the German bank expects stocks flat-to-slightly down in Q2 on growing recession concerns, whilst Q3 2023 is expected to show a significant decline in stocks as a recession begins. Deutsche bank expects the SPX to bounce to 4,500 in H1 2023 before slumping to 3,250 in Q3 2023. Meanwhile, Goldman Sachs suggests the stock markets are in for a period of high volatility next year as markets do not yet reflect the risk of recession in the US. GS’ model implies a 39% chance of recession whilst risk assets are only pricing in an 11% probability. GS also noted that fears over financial stability as well as market stress indicators (such as liquidity risk and solvency risk) have increased across asset classes - GS remains “relatively defensive” over a three-month horizon. From a regional perspective, DB strategists favour Europe on low valuations despite its proximity to the Russia-Ukraine conflict alongside several consecutive months of equity outflows. DB expects the Stoxx 600 to end 2023 at around a 12% premium to Friday’s close around the 495 mark. Back to the session, the major European indices are lower across the board (Euro Stoxx 50 -0.8%; Stoxx 600 -0.9%) with sectors in a sea of red and portraying no overarching bias, although some of the defensive sectors are slightly more cushioned than most peers. Real Estate resides as the current laggard with UK homebuilders all hit - weekend reports suggested the UK housing market stalled in October with house price growth slowing to its lowest quarterly level since February 2020 amid a disastrous mini-budget and the cost-of-living crisis, according to Reuters citing data from Zoopla. The energy sector kicked off the session as the underperformer and remains low in the ranks following the overnight rout in crude oil prices as China printed a record number of new COVID cases, whilst Chevron (-1.6% pre-market) is to be granted a licence to import Venezuelan oil. It’s also worth keeping an eye on losses in the Tech sector with Apple (-1.9% pre-market) reportedly poised to lose 6mln iPhone Pros from the unrest at its Chinese plant, according to Bloomberg. In terms of individual movers, Brenntag (-8.7%) slumps amid reports that it is in talks to acquire US rival Univar (+12% pre-market), whilst the top of the Stoxx 600 sees Adler Group (+51%) after the Co. noted of an agreement with bondholder group on amendment of note terms and provision of secured debt financing.

28 Nov 2022 - 10:14- Research Sheet- Source: Newsquawk