EUROPEAN EQUITY UPDATE: Stocks soft as dust settles on FOMC “hawkish hold"

Analysis details (09:35)

• European equities (Eurostoxx 50 -0.8%) are lower across the board as the dust settles on last night’s “hawkish hold” by the FOMC (detailed below) which is guiding price action on this side of the Atlantic. On a day packed full of central bank activity, today has already seen the SNB defy market consensus by keeping rates unchanged, whilst the Riksbank and Norges Bank hiked rates by 25bps as expected and hinted that additional tightening may be forthcoming. The main event on the docket today comes via the 12:00BST rate decision from the Bank of England, whereby pricing is now near-enough 50/50 between a 25bps hike and unchanged after yesterday’s softer-than-expected UK inflation metrics. An unchanged rate from the BoE will likely bring forward expectations of 2024 policy loosening with a 25bps rate cut not priced in until November (vs September for the ECB and Fed).


• JP Morgan notes that if it is “right about increasing consensus EPS downgrades, then... this backdrop suggests equities are at high risk of losing some of their lofty year on year gains”. JPM highlights that the latest sell-side analysts’ global earnings expectations have slipped over recent weeks, with Global Emerging Markets (GEM), Asia Pac ex Japan, and now Europe showing the largest EPS downgrades. On a more positive note, JPM highlights Japan and the US (driven by tech) as “bright spots”.


• Asia-Pac stock markets were pressured in the aftermath of the FOMC’s hawkish pause in which the Fed dot plots pointed to one more rate hike by year-end and projected a smaller amount of cuts next year. ASX 200 (-1.4%) was lower with the top-weighted financial industry leading the broad declines across sectors. Nikkei 225 (-1.2%) retreated below the 33,000 level as Japanese yields climbed to decade highs and with the BoJ kickstarting its 2-day policy meeting. Hang Seng (-1.5%) and Shanghai Comp. (-0.8%) declined alongside the downbeat mood across regional peers, although the losses in the mainland were initially cushioned following the Chinese Cabinet’s pledge to speed up the development of the advanced manufacturing sector and amid resilience in developers after Guangzhou adjusted purchase rules for several districts.


• US equity futures (ES -0.3%, NQ -0.5%, RTY -0.1%) are trading on the backfoot as sentiment continues to remain sour following the slightly hawkish Fed meeting yesterday.  The Fed voted to keep rates unchanged at 5.25-5.50% and in-line with expectations. Much of the attention was on the updated dot plots, which were hawkishly revised, with the Central Bank still seeing a further hike this year. In Powell’s post-announcement press conference, the Chair did not call current rates “sufficiently restrictive”, though did mention the term “carefully” throughout the conference, highlighting the Fed is not in any hurry to hike rates. In conclusion, the Fed's message is one of cautious optimism, with an eye on inflation and a willingness to adjust policy as needed. Back to today, the docket remains fairly thin with a focus on Philly Fed Business Index, US Initial Jobless Claims and Existing Home Sales. The weekly IJC is expected to tick up slightly to 225k (prev. 220k), giving the market an insight into the labour market, which was noted as tight in yesterday's Fed meeting. From a macro perspective, the BoE is set to give its policy announcement alongside the CBRT. In terms of stock specifics, according to The Information, Google (GOOG) reportedly wants to ditch Broadcom (AVGO) as its TPU server chip supplier to reduce AI costs, which has led to a 1.9% drop in Broadcom shares, in pre-market trade.


• Equity sectors in Europe are mostly lower with the exception of retail which has been bolstered by post-earnings gains in JD Sports (+7.8%) and Next (+2.5%) which are the two best performing stocks in the Stoxx 600; the latter also boosted FY guidance and noted that “looking ahead to 2024/25 it is likely that inflationary pressures on selling prices and operating costs will continue to ease”. To the downside, Travel & Leisure and Basic Resource names lag peers with the latter hampered by softer underlying commodity prices and a slew of price target cuts at Morgan Stanley. Elsewhere, Ocado (-9.2%) sits at the foot of the Stoxx 600 following yesterday’s trading update which has been followed up by a broker downgrade by BNP Paribas, whilst Remy Cointreau (-2.0%) is lower on the session after being reiterated underweight by JP Morgan.

21 Sep 2023 - 09:35- Research Sheet- Source: Newsquawk