Live Markets: "Don't trust this equity rally"
25/05/2023 12:53
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STOXX Europe 600 up 0.1%
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Chip stocks rally on Nvidia boost
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German economy enters recession in Q1
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Nasdaq futures up 1.8%
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"DON'T TRUST THIS EQUITY RALLY" (1144 GMT)
That is the advice of Societe Generale global strategist
Albert Edwards, who, in a recent note, said it is "solely driven
by (unfounded) analyst optimism."
He highlights a divergence between analyst optimism and the
official economic leading indicator - which he says has "NEVER
been so weak without signalling an imminent recession."
Maybe analysts already discounted a recession?
"I think not," he says, pointing out the mere blip in
analysts' 12m forward EPS forecasts versus a 9% crash in their
long-term estimates over the next three to five years for EPS.
It is a worrying disconnect when considering Germany's DAX
.GDAXI is near all-time highs, while Japan's Nikkei .N225 is
passing the 30,000 level for the first time for 33 years.
Also under his microscope is the tricky topic of long-term
‘neutral’ interest rates - a rate that neither slows nor
quickens economic growth or inflation. Pundits dub this concept
"R*"
"Academic and (even) Fed economists have at last realised
that the R* for the economy may have diverged significantly from
the R* for the financial markets," Edwards says.
Bringing interest rates to their correct economic level – R*
- is now impossible to do without imploding the financial system
and thus collapsing the economy, he adds.
What's to blame?
"...years of excessively easy monetary policy in a mistaken
attempt to prop up economies," is his answer to that.
(Lucy Raitano)
*****
GLOBAL FUNDS' CHINA EXPOSURE DROPS TO PRE-REOPENING LEVELS
(1050 GMT)
Global fund managers have cut their weighting to mainland
China back to late 2022 levels when the country was still
pursuing its zero covid policy, while increasing exposure to
Japan to five year highs, HSBC said in a Thursday note.
A widening U.S.-China trade and technology dispute have
added to already weak sentiment around U.S debt ceiling
negotiations, dragging on Chinese stocks in recent months.
Onshore Chinese blue chips .CSI300 are down about 4.5% in
May so far, and flat on the year, having given back all their
gains associated with China's reopening at the start of 2022.
.SS
Global funds are significantly underweight mainland China
and their exposure to mainland Chinese stocks is at its lowest
since October 2022, HSBC Global Research said, referencing their
analysis of EPFR and FTSE Russell data.
Asia-focused funds are also now underweight China, they
said, while, in contrast, Japan portfolio weights for global
investors are now at five-year highs.
Japan's Nikkei share average .N225 reached its highest
since August 1990 earlier this week, as foreign investors have
been drawn by the Tokyo Stock Exchange's (TSE) push for better
corporate governance and Warren Buffett's increased investment
in some Japanese trading companies. .T
(Alun John)
*****
UNDER THE MICROSCOPE: BOFA'S EUROPEAN SEMICAP TOP PICKS
(0959 GMT)
Bank of America equity analysts have waded in with their top
picks for beneficiaries of the anticipated booming adoption of
AI-related semiconductor tech.
One top pick is ASM International ASMI.AS , which they see
along with ASML Holding ASML.AS as a beneficiary of higher
orders - and therefore factory utilisation.
Another top pick is Dutch BE Semiconductor Industries
BESI.AS , shares of which are up 8% today.
It is BE Semiconductor Industries' exposure to both Nvidia
through its "Chip-on-Wafer-on-Substrate" packaging (CoWoS
packaging) and its exposure to the American company Advanced
Micro Devices AMD.O through its "hybrid bonding" that stand
out. Hybrid bonding is a "chip-to-chip interconnect technology"
according to Besi's website.
Others they think will benefit include:
- Italy's Technoprobe TPRO.MI , which has a 20-25% revenue
exposure to datacenter/AI market
- Switzerland's Comet COTNE.S , whose sub-systems are used
by major semicap vendors
- Germany's Siltronic WAFGn.DE , a wafer manufacturer used
by both logic and memory chipmakers
- Germany's Infineon IFXGn.DE and the Netherlands'
STMicroelectronics STMPA.PA , which provide power management
for servers
(Lucy Raitano)
*****
UK TRADED GOODS INFLATION: DEFYING GRAVITY BUT FOR HOW LONG?
(0902 GMT)
All eyes are on anything related to semiconductors this
morning, which are enjoying a glittering AI-related boost and
tempering any steeper falls as the STOXX 600 .STOXX steadies.
But the market is still digesting Wednesday's UK inflation
surprise, and for strategists at Morgan Stanley, the big story
was the "extreme resilience" in UK core goods inflation.
The print showed food prices still rising sharply despite a
drop back to single digits for the headline inflation rate in
April, leaving Bank of England Governor Andrew Bailey concerned.
"We adjust our forecasts to reflect more resilient near term
traded goods inflation, with a sharper collapse in 2024," write
the MS strategists.
Crunching the numbers, it is the strength in traded goods
inflation that makes the UK an outlier when compared to the US
and the euro area, they say.
"This month, used cars and recreational items were the main
culprits for the surprise tick up in traded goods inflation."
This resilience comes amid a sharp correction in global
manufacturing and shipping costs, with an ongoing inflection in
US core goods inflation, and more recently in the euro area as
well.
Some of it has to do with retail sector margin expansion,
while some can also be attributed to a result of "faster and
sharper FX pass-through than in previous cycles"
"But gravity can only be defied for so long," the Morgan
Stanley strategists say.
For that reason, though they up their near-term traded goods
inflation forecast, they also foresee a bigger drop in the
sector over the final quarter of this year and throughout next.
Still, they remain convinced that the BoE will hike in June
for the final time.
(Lucy Raitano)
*****
TECH SUPPORT HELPS STOXX STEADY (0847 GMT)
The strong Nvidia NVDA.O beat is doing its thing, helping
stem a two day selloff across European equity markets, with a
rally in chip stocks helping benchmarks steady in early trades,
even as data showed the German economy entered into a recession.
The STOXX Europe 600 .STOXX was last just down 0.1% and
the EuroSTOXX50 .STOXX50E added 0.1% following two days of
heavy losses. A 2% bounce in tech .SX8P gave support.
Other sectors were mostly lower though led by retailers
.SXRP and real estate .SX86P .
Amsterdam's AEX .AEX index, where top chip stocks listed,
stood out with a 0.4% gain.
Here's your snapshot with top country indices.
(Danilo Masoni)
*****
NVIDIA TO THE RESCUE (0630 GMT)
A two-day European selloff looked set to pause on Thursday as
stellar numbers from semiconductor heavyweight Nvidia NVDA.O
brought relief to markets concerned over the lack of progress in
U.S. debt ceiling talks and new signs of sticky inflation in
Europe.
After a jump in UK core inflation contributed to push the
region wide STOXX Europe 600 benchmark into its worst day in two
months, index futures pointed to slight gains in the day ahead.
Derivative contracts on the EuroSTOXX50 and FTSE were up
0.1-0.2%.
Nasdaq futures rallied 1.4% while Frankfurt-listed Nvidia
shares advanced 23%. The world's most valuable listed
semiconductor company forecast Q2 revenue over 50% above Wall
Street estimates. It said it is boosting supply of
artificial-intelligence chips to meet surging demand.
The Nvidia beat was expected to boost European chip stocks
such as ASM ASMI.AS , ASML ASML.AS , Be Semi BESI.AS ,
Infineon IFXGn.DE and Siltronic WAFGn.DE . Traders also
pointed to positive reaction in insurer Generali GASI.MI and
ingredients maker Tate & Lyle TATE.L following results.
Placements in audio solutions firm GN Store GN.CO and
health and nutrition group DSM-Firmenich DSFIR.AS were set to
hit their shares at the open.
(Danilo Masoni)
*****
FITCH PUTS US ON WATCH; WILL IT MATTER IN WASHINGTON? (0554
GMT)
The U.S. debt ceiling saga continues to hang over global
markets, with the White House and Republicans both citing
progress in the latest round of talks but no breakthrough yet.
Ratings agency Fitch opted not to wait, placing the
country's "AAA" rating on watch for a possible downgrade - the
first major agency to do so. That could raise the stakes in
protracted negotiations as the June 1 "X-date" looms - or
policymakers in Washington might simply choose to ignore it.
The ratings watch has given a further boost to U.S Treasury
yields and the greenback, with the dollar index =USD notching
new trend highs while Japan's yen hit its lowest since Nov. 30
and the euro and sterling are sitting on major chart support.
Two-year Treasury yields have also extended to highs not
seen since mid-March, while the yield on Treasury bills maturing
in early June climbed further above 7%.
Stock markets across Asia are in the red, apart from Japan's
effervescent Nikkei, although S&P E-mini and Nasdaq futures have
bounced after a strong revenue forecast from Nvidia Corp
NVDA.O .
Europe's data calendar is fairly light, with German final Q2
GDP the main release. However, there are plenty of central bank
speakers, with comments from Bundesbank head Joachim Nagel and
ECB chief economist Philip Lane likely to draw the most
interest.
Bank of England monetary policy committee member Jonathan
Haskell's speech in Washington will also be watched after UK
price data again surpassed expectations on Wednesday. That left
Governor Andrew Bailey fretting about "sticky and stubborn"
inflation while markets priced in further policy tightening.
Expectations of a Federal Reserve rate hike in June also
continued to creep up, even after the May 2-3 meeting minutes
showed little consensus on the need for further increases.
Key developments that could influence markets on Thursday:
German final Q1 GDP and June GfK consumer sentiment
Bundesbank chief Nagel, ECB's Lane and de Guindos, and BoE's
Haskell speak
U.S. weekly jobless claims and second estimate of Q1 GDP
Earnings: Dollar Tree, Ralph Lauren and Gap
(Sonali Desai)
*****
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