EUROPEAN EQUITY UPDATE: Upside momentum wanes as Lagarde takes the shine off cash-open gains

Analysis details (10:06)

Bourses in Europe have pared back some of the gains seen at the open, whereby sentiment was originally supported by the late-trade rebound on Wall Street on Friday, with the momentum initially reverberating to APAC before waning - the region closed mixed with China pressured by COVID woes. In the run-up to the European cash open, sentiment saw another bout of upside after US President Biden suggested that the US is mulling reducing Trump-era tariffs on China, but thereafter the mood turned somewhat cautious as the US President warned that Washington will be willing to use force to defend Taiwan, whilst China said it will take firm actions to safeguard sovereignty and interests. The Euro Stoxx 50 opened with gains in excess of 1.0% but upside momentum faded, with the improved and above-forecast German Ifo metrics doing little to negate hawkish commentary from ECB President Lagarde who seemingly for the first time gave the green light for a September hike as she suggested that based on the current outlook, the ECB is likely to be in a position to exit negative interest rates by the end of Q3. Europe remains mostly in the green (Euro Stoxx 50 +0.4%; Stoxx 600 +0.7%) but the Italian FTSE MIB (-0.9%) stands out amid a myriad of large-cap ex-divs; including the likes of Intesa Sanpaolo (-2.6%) and Eni (-1.6%). Sectors in Europe now see inflation-prone Consumer Products, Autos, and Optimised Personal Care and Grocery sectors in the red, whilst Energy and Basic Resources reside at the top of the pack amid upside in the underlying commodities. Overall, the sectors do not portray a particular bias at the time of writing. In terms of individual movers, Siemens Gamesa (+6.4%) holds onto the gains fuelled by pre-market reports that Siemens Energy (+0.1%) has filed a tender offer to buy Siemens Gamesa for EUR 18.05/shr. Siemens Energy CEO said the offer is attractive and the priority is to stabilise Gamesa. Sticking with M&A, sources suggested that THG (Unch) CEO would back an offer of GBP 3bln for THG, according to ThisIsMoney, and a bid of GBP 2.50/shr would be enough, the sources added. US equity futures are also dented post-Lagarde, with the rise in fixed-income yields causing the NQ (+0.3%) to narrowly lag vs the ES (+0.4%), YM (+0.5%) RTY (+0.6%). Analysts at Morgan Stanley believe that it is too early to turn bullish on stocks after the S&P 500 narrowly avoided closing in bear market territory on Friday. MS says 3,400 in the SPX more accurately reflects the risks to earnings growth and the bank expects to see this level by the end of the Q2 earnings season. “Until then, vicious bear market rallies should be used to lighten up on the areas most vulnerable to the oncoming earnings reset.” MS is underweighted in cyclical tech and consumer discretionary, whilst being neutral on internet and software names.

23 May 2022 - 10:06- EnergyResearch Sheet- Source: Newsquawk