EUROPEAN EQUITY UPDATE: Stocks soft as data acts as a drag

Analysis details (09:40)

• European equities trade on a softer footing, Euro Stoxx 50 -0.8%, with sentiment heading into the open partially a by-product of soft Chinese PMI data overnight (see below section for more details). Since then, the final release of Eurozone PMIs for August have done little to lift the mood with the EZ-wide services print revised deeper into negative territory (47.9 vs. flash 48.3), leaving the composite at 46.7 vs. flash reading of 47.0. The accompanying release noted “The disappointing numbers contributed to a downward revision of our GDP nowcast which stands now at -0.1% for the third quarter”. Additionally, “among the big eurozone countries, the main drag is coming from Germany and France, where activity in the service sector weakened at the fastest rate this year”. Elsewhere, and in contrast to the soft growth outlook, the ECB’s Consumer Inflation Expectations survey (July) saw the 12-month ahead expectation hold steady at 3.4%, whilst the 3yr projection rose to 2.4% from 2.3%. Looking ahead, comments from Germany’s Schnabel and Spain’s de Guindos will be eyed, however, it is hard to see how much they will focus on the current course of monetary policy given their respective subject matters.


• Asia-Pac stocks were mostly subdued after the holiday lull stateside and as the region digested disappointing data releases including the weaker-than-expected Chinese Caixin Services PMI. ASX 200 (-0.1%) was lower amid underperformance in the commodity-related sectors and as participants braced for the conclusion of RBA Governor Lowe’s final monetary policy meeting in which the central bank kept rates unchanged as widely expected. Nikkei 225 (+0.3%) stalled on its approach to the 33,000 level and with headwinds from disappointing household spending data which suffered its worst drop since February 2021, while KOSPI (-0.1%) traded in the red after firmer-than-expected CPI data reignited the hawkish pressure for the BoK. Hang Seng (-2.3%) and Shanghai Comp. (-0.7%) were pressured after Chinese Caixin Services PMI data missed forecasts and with the property sector dampened by default fears with about a third of 50 major private builders said to face around USD 1.5bln dollar of payments this month, while Country Garden narrowly averted a default and paid USD-denominated coupons hours before the end of the grace period.


• US equity futures (ES -0.4%, NQ -0.5%, RTY -0.3%) are trading on the back foot, as the market returns to trade following yesterday's market closure for Labour Day. The docket for today is thin, with markets looking towards Durable Goods and Factory Orders to give more indications into the current strength of the US economy, whilst the IBD/TIPP Economic Optimism Index will help to gauge the sentiment of the economy.


• AI has been driving the markets throughout the year, with the likes of NVDA surging almost 200% YTD. And many companies are looking to get a head start in the AI space, with the term “AI” or “Artificial Intelligence” being mentioned over 800 times on 76 out of 221 earning calls. Analysts over the course of the year have suggested that the AI sector has helped propped up the market and is significantly overvalued. Although, Goldman Sachs remains bullish on the sector, suggesting that it is not in a bubble. They argue that companies that have benefitted from recent valuation surges have strong balance sheets and return on investments, which has not been the case in previous bubbles. The analysts add “We believe we are in the relatively early stages of a new technology cycle that is likely to lead to further outperformance.”


• Equity sectors in Europe are lower across the board with the Personal Care, Drug & Grocery index the laggard with Ahold Delhaize (-6.3%) and Tesco (-2.9%) dragged lower by broker downgrades at JP Morgan. Elsewhere, the Consumer Products & Services index is also on the backfoot amid weakness in Luxury names (Kering -2.6%, LVMH -2.1%, Richemont -1.8% and Hermes -1.9%) following yet more soft data overnight from China. Of note for the banking sector, a slew of broker moves have acted as a drag on various names with Credit Agricole (-2.7%) weighed on by a downgrade at Goldman Sachs, BBVA (-1.7%) cut at MS and Commerzbank (-1.7%) and SocGen (-1.5%) both lowered by Barclays. Finally, Renault’s CEO said the company’s new EV division could fetch an IPO price of up to EUR 10bln when it floats next year, according to the FT.

05 Sep 2023 - 09:40- Research Sheet- Source: Newsquawk