EUROPEAN EQUITY UPDATE: Stocks tread water after the post-Powell sell-off awaiting the next catalyst

Analysis details (10:25)

• Stocks in Europe kicked off the mid-week session with modest losses across the board before painting a slightly more mixed picture, albeit regional bourses are confined to very tight intraday parameters. Market sentiment is somewhat tentative after the equity selloff experienced yesterday in the aftermath of Fed Chair Powell's hawkish testimony in which he put a 50bps hike for March in play and flagged higher terminal rate projections. “After Tuesday, the chance that the median prediction for the end of this year will move upward again looks very high. It also might make sense for the committee’s predictions in 2024 and 2025, which could scarcely be more scattered at present, to begin to converge toward the high end of current predictions. And what might be most interesting would be a shift in the longer-run dots to accept that the fed funds rate will not drop all the way back to 2%.”, according to Bloomberg's John Authers. Meanwhile, SGH Macro’s Tim Duy said “We see the possibility of a 75bp increase in the SEP-implied terminal rate to 5.75-6%. That would imply a policy path of 50-50-25 over the next three meetings, and while we can see the possibility of that outcome, it feels like it will be too much of a leap to signal that in the next SEP. The return to 50bp hikes is already a bitter pill for Fed doves to swallow; a full 75bp increase in the terminal rate would be adding insult to injury”. Powell is poised to testify before the House Financial Services Committee in which he is likely to repeat the same message as yesterday. US equity futures remain flat around yesterday’s lows, in caged ranges (ES +0.1%, NQ +0.1%, YM +0.1%, RTY +0.2%).


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  Overnight, sentiment was downbeat as the tone on Wall Street resonated in APAC, but the Japanese Nikkei 225 (+0.5%) bucked the as the JPY weakened on the post-Powell Fed-BoJ differential. Over in Europe, the mood remains mostly subdued (Euro Stoxx 50 -0.1%; Stoxx 600 -0.3%) as participants await the next catalyst. Sectors are mostly in the red with the marked laggards including Chemical and Real Estate, while Basic Resources and Tech reside in very modest positive territory following yesterday’s decimation. In terms of individual movers, European perfume makers are pressured amid a report the European Commission carried out unannounced inspections at the premises of companies and an association active in the fragrance industry in various Member States, whilst the UK competition agency also opened an investigation into the same sector. Givaudan (-3.7%) said that it was being investigated by EU and Swiss antitrust authorities, and it is cooperating. The probe comes amid "concerns that companies and an association in the fragrance industry worldwide may have violated EU antitrust rules that prohibit cartels and restrictive business practices". Perfume-maker Symrise (-4.0%) is also lower with the Co’s earnings largely overlooked, although the name forecasted its 2023 core profit margin slightly below market expectations and in line with last year's number. Co. said they do not see themselves as being affected by the probe. Elsewhere, Adidas (-2.0%) trades lower after missing on revenue, operating profit and dividend expectations, while suggesting "elevated recession risks in Europe and North America as well as uncertainty around the recovery in Greater China continue to exist." Other earnings-related movers include Continental (+4.5%), Brenntag (+0.5%), Admiral (-4.2%), Darktrace (+1.6%), Fuchs Petrolub (-4.9%), Fincantieri (-5.7%).


• In terms of analyst commentary, Bernstein strategists suggest European stocks are attractive relative to bonds, but this is not the case for the US. The desk says “taking an average of implied measures, the ERP (earning risk premium) in Europe is now ~5% — above the long- run average of 4%, while a US ERP of 2% is below the long-run average of 2.6%...Rising bond yields have been reflected in the falling ERP, resulting in a flat cost of equity…. This implies that the cost of equity used in discounting models does not need to be adjusted in our view.”

08 Mar 2023 - 09:55- Fixed IncomeResearch Sheet- Source: Newsquawk