EUROPEAN EQUITY UPDATE: Stocks soft as PMIs underscore bleak Eurozone growth prospects

Analysis details (09:21)

• European equities (Stoxx 600 -0.6%) are lower across the board (ex-FTSE 100) with the Stoxx 600 on track to close the week out with losses of around 1.7%. The main macro story for the region thus far has been the flash PMI prints for September, which kicked off with a disappointing report from France as both manufacturing and services unexpectedly delved further into contractionary territory, leaving the composite at 43.5 vs. prev. 46.0. Next up was Germany, which saw better-than-expected outturns for manufacturing and services which saw the composite print at 46.2 v. exp. 44.8. For the Eurozone-wide metrics, manufacturing came in on the soft side, whilst services exceeded expectations, leaving the composite at 47.1 vs. exp. 46.5 (prev. 46.7). The accompanying release noted “we expect the eurozone to enter a contraction in the third quarter. Our nowcast, which incorporates the PMI indices, points to a drop of 0.4% compared to the second quarter”.


• Asia-Pac stocks traded mixed amid a higher yield environment and after this week’s central bank frenzy culminated with a lack of surprises from the BoJ. ASX 200 (Unch.) was initially dragged lower with real estate and tech among the worst performers after the Australian 10yr yield touched its highest level since 2014, while the flash PMI data was mixed and showed a deeper contraction in manufacturing. Although optimism throughout the APAC region was able to keep the index afloat. Nikkei 225 (-0.7%) was pressured following the mostly firmer-than-expected Japanese CPI data but then pared some of the losses following the lack of hawkish surprises from the BoJ. Hang Seng (+2.6%) and Shanghai Comp. (+1.6%) shrugged off early jitters amid supportive measures including Beijing’s Municipal Commerce Bureau issuing draft rules to promote a high level of opening up and encourage foreign investments, while China's market regulator issued measures to promote the private economy.


• US equity futures (ES +0.1%, NQ +0.4%, RTY Unch.) are trading slightly firmer following the biggest US stock drop since March, in yesterday's session. Looking at the important data release, IJCs fell to 201k (prev. 221k, exp. 225k), highlighting the labour market continues to remain tight which was spotlighted by Fed’s Powell in his most recent appearance. Back to today, flash PMI data release will be closely watched to understand the growth outlook for the US. Do note that the Fed highlighted that economic activity has been expanding at a “solid” pace. Away from data, as we come out of the blackout period, markets will await commentary from Fed’s Cook (Neutral), Daly (Neutral) and Kashkari (Hawk).


• Morgan Stanley notes that two forces that have driven the market this year could begin to weaken. Firstly, MS warns that trend-following traders will look to unwind their positions as well as options dealers as they attempt to hedge their equity exposure. The bank largely attributes the recent selloff to the Fed’s hawkish rhetoric on Wednesday, which alluded to interest rates remaining higher for longer. “Even at flat prices, trend signals in the market will start to turn negative” said Christopher Metli of MS, suggesting that “a hawkish Fed has shaken the market”. The latest BofA Flow show noted that global equity funds in the week to Wednesday saw outflows of USD 16.9bln, which was the largest since December 2022. The regional breakdown noted that US outflows resumed at USD 17.9bln, Japan saw inflows of USD 0.3bln (2nd consecutive week), Europe saw USD 3.1bln of outflows (28th consecutive week), EM inflows resumed at 2.6bln.


• Equity sectors in Europe are mostly lower with the exception of Basic Resources which is in marginal positive territory thanks to underlying metals prices. To the downside, laggards comprise of Construction & Materials, Autos & Parts and Industrial Goods & Services. In terms of stock specifics, things are on the light side amid quiet newsflow, however, AstraZeneca (+1.1%) has been supported on the session after its Daiichi drugs showed benefits in a breast cancer trial. Ubisoft (+3.9%) shares are marching higher after the UK’s CMA regulator said the sale of Activision's cloud gaming rights to Ubisoft has made significant progress in resolving previous concerns. Elsewhere, Sanofi (-1%) shares are lower on the session after stating a prelim estimate of a currency impact of between -8.5% and -9.5% (prev. -7.5 to -8.5%) on Q3'23 business EPS.

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