EUROPEAN EQUITY UPDATE: Stocks trade horizontally despite action in the bond market; heavyweight LVMH drags down peers while Novo Nordisk boosts parts of the healthcare sector

Analysis details (09:39)

• Equities in Europe have held onto the mixed theme seen at the cash open, with the region failing to fully benefit from the tailwinds stateside which reverberated into APAC, with an added boost overnight after Bloomberg sources yesterday touted further Chinese stimulus. To recap ASX 200 was led by outperformance in tech and mining-related industries, while the index was unfazed by comments from RBA's Kent who reiterated some further policy tightening may be required. Nikkei 225 advanced and briefly breached the 32,000 level to the upside. KOSPI was the biggest gainer as shares in index heavyweight Samsung Electronics were boosted after its preliminary Q3 results which showed operating profit topped forecasts despite declining by 78% Y/Y. Hang Seng and Shanghai Comp. conformed to the broad constructive mood amid stimulus hopes with China to boost financial assistance to expand consumption and is weighing new stimulus, as well as a higher budget deficit this year to meet its growth target.


• US equity futures are flat with a mild upward tilt (ES +0.1%, NQ +0.2%, YM +0.1%, RTY +0.1%) and confined to tight ranges after the ES receded under 4,400 in the afternoon Wall Street session, with participants keeping powder dry in the run-up to US PPI today followed by the FOMC minutes (full preview available in the Newsquawk Research Suite). However, since the September FOMC, markets have experienced a large move higher in government bond yields amid surging oil prices and broader supply/demand imbalance concerns for the Treasury market, which a few Fed speakers have alluded to lately as having the potential to substitute the need for additional rate hikes. Thus, the debate around additional hikes in the minutes is unlikely to factor in the latest tightening of financial conditions. It’s also worth noting markets get the September US CPI report the day after the release of the minutes, which will no doubt shape the policy outlook.


• Back in Europe, cash markets are mixed (Euro Stoxx 50 -0.6%; Stoxx 600 Unch) with underperformance seen in the CAC 40 (-0.7%) and Euro Stoxx 50 on the back of disappointing earnings from heavyweight LVMH (-6.8%). The metrics from the luxury giant confirmed the growth slowdown feared earlier in the year when the broader luxury sector saw turmoil. LVMH CFO attempted to cushion some of the disappointment by suggesting the company’s performance was likely to normalise this year, but nonetheless, the bearish sentiment has reverberated across the sector with Kering (-2.6%), Hugo Boss (-26%), Burberry (-4.1%), Swatch (-1.8%), Richemont (-4.3%) all trading lower in sympathy. Thus, the Consumer Products and Services sector in Europe resides as the clear laggard. On the flip side, Health Care benefits from sector heavyweight Novo Nordisk (+3.1%) after announcing early signs of success in Ozempic kidney trial, albeit the update is subsequently pressuring kidney dialysis provider Fresenius Medical Care (-19%) amid less of a need for their products, with parent Fresenius (-10.6%) also plumbing the depths. Sticking with healthcare GSK (+0.7%) rose at the open as it settled a California lawsuit on Zantac. Shifting the focus to the construction sector, Travis Perkins (-8.9%) shares slipped after the Co. cut its outlook as “challenging market conditions persist with significant commodity products deflation impacting on margins.” UK homebuilders are softer in tandem – Barratt Development (-1.3%), Taylor Wimpey (-1.7%), and Redrow (-0.5%).


• In terms of commentary from banks, analysts at Goldman Sachs say they would avoid the Italian FTSE MIB and prefer the UK’s FTSE 100 for high dividend yield and FCF but lower sovereign risk. The desk suggests each 10bps in bond spreads shaves around 2% off Italia banks, 1.5% off the Italian index, and 80bps off European equities – citing betas since 2014 (ex-crisis). Meanwhile, as Europe gears up for Q3 earnings season with 10% of European firms poised to report by the end of next week, analysts at BofA say “Consensus expectations for Stoxx 600 year-on-year EPS growth in Q3 stand at -15%, down from -11% in Q2, which would mark the weakest quarterly growth rate since Q3 2020, with growth expected to remain negative in Q4, at -8%. Energy (-13ppts) is projected to be the major negative contributor to Q3 growth, while financials (+6ppts) provide the largest boost. Deeply negative Euro area macro surprises in Q3 imply sub-50% EPS beats, well below the long-term average of 54% and down from 51% in Q2.”

11 Oct 2023 - 09:44- EquitiesEU Research- Source: Newsquawk