EUROPEAN EQUITY UPDATE: Stocks slump as risk takes a hit

Analysis details (09:25)

• Equities in Europe (Eurostoxx 50 -0.9%) trade in a sea of red in the wake of soft leads from Wall Street and the APAC region. Higher yields, weak data, and the US rating downgrade at Fitch have been cited as factors for today's caution, ahead of jobs data out of the US which will help guide expectations for the more-widely followed BLS release, due Friday. For Europe specifically, not a great deal has changed on the macro front and therefore impetus will likely be gleaned from elsewhere and the busy corporate earnings slate.


• Asia-Pac stocks traded lower following the mostly negative lead from Wall St, while participants also digested Fitch's credit rating downgrade for the US from AAA to AA+. ASX 200 (-1.3%) declined with utilities, real estate and financials leading the broad-based retreat and with weaker AIG Manufacturing and Construction data adding to the glum mood. Nikkei 225 (-2.3%) underperformed and dipped below the 33,000 level as the focus shifted to corporate earnings and despite comments from BoJ’s Deputy Governor Uchida who stuck to a dovish tone. Hang Seng (-2.3%) and Shanghai Comp. (-0.9%) conformed to the risk aversion albeit with the downside in the mainland initially cushioned by further policy support and jawboning by agencies including the PBoC which pledged to support the stable and healthy development of the real estate market, maintain reasonable and sufficient liquidity, and promote a steady and moderate decline of financing cost for enterprises and interest rates for residents.


• US equity futures (ES -0.8%, NQ -1.2%, RTY -1.5%) are trading lower as risk-off trade continues and following a Fitch downgrade for the US to AA+ from AAA. Fitch cited that tax cuts and new spending initiatives coinciding with multiple economic shocks have led to rapid growth in government debt. Additionally, its downgrade reflects “the expected fiscal deterioration over the next three years”. It is important to note that analysts at Goldman Sachs said the downgrade mainly reflects governance and medium-term fiscal challenges but does not reflect new fiscal information. They add that the move should have little direct impact on financial markets as it is unlikely there are major holders of Treasury securities who would be forced to sell based on the ratings change.


• Yesterday’s data prints did not change the soft-landing narrative for the US economy, though JOLTs job openings of 9.582mln (prev. 9.824mln) did show a slight drop from the prior, but is further evidence that the labour market remains tight. The ISM Manufacturing print of 46.4 (prev. 46.0) showed that the economy marginally rebounded, yet remains in contractionary territory. Further adding to the dovish narrative, Bostic (non-voter, Dove) said he does not expect a hike in September, adding that inflation has peaked, though will take longer than expected for it to cool.  Looking ahead, the calendar is scarce on the data front, with attention on Mortgage Applications and ADP National Employment prints ahead of the important NFP report on Friday. There are also several earning calls today, including the likes of Occidental Petroleum Corp, CVS & Qualcomm. Markets will also keep a keen eye on the Treasury, which will publish its quarterly refunding estimates at 13:30 BST/ 08:30 ET.


• Analysts at Barclays suggest that stocks could take a breather from the recent strong rally as a soft landing becomes more consensus. That said, in the absence of a negative catalyst to change the goldilocks narrative, the desk is of the view that the grind higher can continue. Barclays adds that it has taken profits on its overweight tech position and rotated into Banks which have “significantly lagged their strong fundamentals on cycle worries”.


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  Equity sectors in Europe are lower across the board with marginal underperformance seen in Travel & Leisure, Basic Resources and Financial Services names, whilst Energy names are the relative outperformers (but ultimately still lower) following recent upside in crude prices amid tailwinds from the private sector inventory data which pointed to a record weekly drawdown of crude inventories. In terms of stock specifics, BAE Systems (+5.6%) is top of the Stoxx 600 following strong earnings and raising guidance, whilst Taylor Wimpey (+3.1%) is another UK post-results gainer despite the impact of rising rates. To the downside, earnings have acted as a drag on Siemens Healthineers (-7%) after the Co. reported a miss on adj. EBIT, whilst Hugo Boss (-2.6%) has been unable to benefit from strong earnings with some desks noting profit-taking and a broader theme of some companies failing to benefit from earnings beats.

02 Aug 2023 - 09:25- EquitiesEU Research- Source: Newsquawk