EUROPEAN EQUITY UPDATE: Stocks soft as geopolitical tensions loom large

Analysis details (09:35)

• European equities (Eurostoxx 50 -0.2%) have kicked the week off on the backfoot with the macro narrative currently focused on geopolitical risks surrounding Israel-Palestine. As a quick recap, over the weekend, an Israeli military spokesperson said their goal is to completely destroy the governing and military capabilities of Hamas. Subsequently, the Iranian Foreign Minister said ‘If the Zionist aggressions do not stop, the hands of all parties in the region are on the trigger’. In early European trade, sentiment was briefly supported by reports of a loose ceasefire in southern Gaza, however, an Israeli official poured cold water over this saying, there was currently no truce and humanitarian aid in Gaza in exchange for getting foreigners out. Closer to home in Europe, the constant drip-feed of ECB commentary continues to point towards an unchanged rate later this month. Elsewhere, the FTSE MIB may come into focus later in the session with traders on the lookout on Monday for details regarding the Italian budget. On which, GS notes that the index has been remarkably resilient for much of this year, in part because “of sector exposure — financials have seen strong earnings with expanding net interest margins and low loan losses this year — and because the index has low or no exposure to sectors such as chemicals, mining and real estate, all of which have underperformed”.


• APAC stocks were mostly lower amid ongoing geopolitical concerns with the Israel-Hamas conflict threatening to spill over to neighbours in the region. ASX 200 (-0.4%) was subdued amid underperformance in tech, telecoms and industrials but with losses stemmed by resilience in commodity-related industries. Nikkei 225 (-2%) underperformed and gapped below the 32,000 level despite the lack of fresh pertinent catalysts. Hang Seng (-0.8%) and Shanghai Comp. (-0.5%) saw somewhat varied price action with the Hong Kong benchmark choppy and the mainland ultimately pressured as participants digested several recent developments including the PBoC’s decision to maintain the 1-year MLF rate, as expected, with the operation the largest MLF net injection since December 2020. Furthermore, it was confirmed that the US is to take steps to prevent American chipmakers from selling AI chips to China that circumvent government restrictions and that China’s securities regulator will restrict securities lending which local press suggested could help support markets as it would tighten rules for short selling.


• US equity futures are seeing modest gains at the start of the week, although the focus seems to be on fixed income and energy markets amid the geopolitical ongoing described above. While the geopolitical situation might not necessarily lead to any further rate hikes, it could strengthen the higher-for-longer narrative, which may partly explain why global bond yields have been drifting higher in early trade. Note, recent commentary from Citi has suggested that the correlation between the S&P 500 P/E ratio is not as correlated with rates as is commonly perceived over the long run with valuations instead driven by other macro and micro forces. Equity futures, meanwhile will have more earnings to contend with this week; the corporate earnings slate picks up this week, and includes global bellwethers (TSM, TSLA, NFLX), as well as other key financials (GS, MS, AXP), and consumer names (PM, PG). In terms of US data, key highlights this week include retail sales.


• Equity sectors in Europe are now tilting mostly lower despite a constructive start. Laggards include Construction & Materials, Utilities and Autos & Parts, whilst Basic Resources and Energy outperform to the upside. In terms of stock specifics, Telecom Italia (-3.1%) shares are lower on the session despite news that KKR has submitted a bid for the Co.’s landline unit with some noting a lack of a figure for the offer within the reporting. Elsewhere, geopolitical tensions have proved to be supportive for the likes of Rheinmetall (+1.8%) and Leonardo (+1.7%). BioNTech (-7.1%) shares are lower after Pfizer (-2.8%) on Friday cut its FY23 revenue and adj. EPS guidance, citing declining sales of COVID products. Atos (-3%) shares are now lower on the session despite opening higher by some 20% following news that the Co.’s Chair Bertrand Meunier is to step down with immediate effect. Ocado (-3.8%) is the worst performing Co. in the FTSE 100 after being downgraded to underweight at Barclays. SoftwareOne (+4.8%) is higher on the session following reporting by Reuters that the Co. is subject to a bidding war.

16 Oct 2023 - 09:35- Research Sheet- Source: Newsquawk