EUROPEAN EQUITY UPDATE: Stocks soft ahead of central bank frenzy

Analysis details (09:24)

• European equities (Eurostoxx 50 -0.3%) have kicked the week off on a broadly softer footing in what is a week set to be dominated by central bank activity. After the ECB’s decision to pull the trigger on another 25bps hike last week and commentary over the weekend hinting that last week’s move could be the last for the cycle, attention turns to the likes of the Fed, BoE, Riksbank, Norges Bank and SNB (previews of which can be found in our Week Ahead, available here). In terms of incremental updates over the weekend, things have been on the light side and today’s calendar is void of highlights and therefore the session may be more of a tame one compared to what is expected later in the week.


• Analysts at JP Morgan are of the view that Eurozone equities are looking quite cheap at present after notably lagging vs the US since May, adding “one could argue that the relative growth disappointments are likely closing in on their worst point, vs the US”. That said, the desk is of the view that “the absolute Growth-Policy trade-off is still challenging for Eurozone" and therefore reiterates its “downgrade to UW, made in May, staying cautious on the region, expecting it to have another leg of underperformance in the global context." From a sector standpoint, JPM has tactical positive calls on commodity equities and energy (Overweight) as well as mining (Neutral), whilst it holds a “relatively more cautious on consumer and corporate plays, that have done well in 1H, such as Autos, Semis, Capital Goods and Luxury” (see here for more details).


• Asia-Pac stocks were lower following last Friday’s declines on Wall St and with the region cautious in a holiday-thinned start to a busy week of central bank policy announcements. ASX 200 (-0.7%) was pressured with underperformance in tech and telecoms and with the handover of leadership at the RBA met with little fanfare. Japanese markets remained closed for a holiday, while Hang Seng (-1.7%) and Shanghai Comp. (+0.3%) both retreated at the open with the declines in Hong Kong led by tech and property stocks including Evergrande shares which slumped by more than 20% in early trade after some of its wealth management employees were detained by Chinese authorities. Conversely, the losses in the mainland were later reversed in the aftermath of the PBoC’s firm liquidity efforts and the previously unannounced meeting between Chinese Foreign Minister Wang Yi and US National Security Adviser Sullivan.


• US equity futures (ES +0.2%, NQ +0.2%, RTY +0.1%) are starting the week on a slightly firmer footing, ahead of a catalyst-thin day, with the only release of note being the NAHB Housing Market Index. US data releases this week also remain quiet, with notable prints including US MBAs, weekly IJCs and finally PMIs on Friday. Overall, much of the focus this week will be on the Fed, which is all but confirmed to announce another pause. In terms of noteworthy equity stories over the weekend, UAW and automakers have resumed talks on reaching a new contract, with Ford (F) saying it is committed to reaching an agreement with UAW that will reward workers. As for Stellantis (STLA), the Co. offered union employees a cumulative raise of nearly 21%, though UAW stated that Stellantis is playing games with the future of the assembly plant. As such, the UAW President said that they will do whatever they have to, regarding additional strikes.


• Morgan Stanley equity strategist Michael Wilson notes that uncertainty about the current economic cycle is high, with investors in Europe and the US grappling with uncertainty about where the economy is heading, which is typical of late-cycle environments. Wilson says the question is whether the rest of the year will see the continuation of mega-cap growth stocks leading the market, or if there will be a shift to areas that have underperformed so far, such as value and small/mid-cap stocks. In the absence of clear data on the remaining duration of the business cycle, the market is expected to trade in a "late cycle" manner, where holding a combination of defensive growth stocks -- including select growth stories and traditional defensive sectors like Healthcare and Consumer Staples -- along with late-cycle cyclicals like Industrials and Energy, is the recommended play, according to Wilson. Energy, in particular, is recommended within the cyclicals category; historically, the sector tends to outperform late in the economic cycle, supported by commodity strength, while the recent strong oil demand, significant production cuts, and stable crude prices contribute to its attractiveness.


• Equity sectors in Europe have a negative tilt with Health Care names bottom of the pile alongside losses in Lonza (-9.8%) after news that the Co.’s CEO is to step down; effective end of month. Elsewhere, Consumer Products & Services are also on the backfoot with LVMH (-1.6%) also on the backfoot with a piece in Bloomberg noting that demand for LVMH's Champagne brands is slowing down after a surge during COVID-19 lockdowns. In terms of individual updates, SocGen (-6.5%) is enduring a session of losses after its latest strategic plan underwhelmed by indicating little in the way of sales growth in the coming years. Nordic Semiconductor (-14.2%) sits at the foot of the Stoxx 600 after cutting Q3 revenue guidance and noted it has not yet seen the signs of improvement that it had expected to see in H2'23; other semiconductor names are lower in sympathy. S4 Capital (-24.6%) shares are showing heavy losses after poorly-received H1 results and is weighing on competitors WPP (-1.6%) and Publicis (-1.4%). On a more positive footing, IDS (+5%) and Unibail-Rodamco (+1.9%) have been supported by broker upgrades at JP Morgan and Barclays respectively.

18 Sep 2023 - 09:24- Fixed IncomeEconomic Commentary- Source: Newsquawk