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Basic Materials
Large Cap
Market Cap £6.59bn
Enterprise Value £6.98bn
Revenue £1.69bn
Position in Universe 117th / 1831

LIVE MARKETS-Basic materials stocks' stretched valuations

Wed 24th March, 2021 12:49pm
* STOXX 600 down 0.2% * Surprise PMI jump * Tech outperforms, banks in positive territory March 24 - Welcome to the home for real-time coverage of markets brought to you by Reuters reporters. You can share your thoughts with us at BASIC MATERIALS STOCKS' STRETCHED VALUATIONS (1248 GMT) We know the reflation trade narrative is no longer that hot. But talking about one the reflation trade winners, namely Europe's basic materials stocks, it makes sense wondering where we are in terms of valuations after a 10% fall from their recent highs. “A strong re-rating leaves some valuations stretched amid a diminishing commodity risk-reward appeal,” Morgan Stanley analysts say, while they suggest favouring “beneficiaries of China’s green agenda.” Euro Stoxx Basic Resources price-to-book value ratio relative to the market is “now 6% above its historical average, underpinned by strong early cycle returns of copper and iron equities,” Morgan Stanley analysts say. “China's shift towards carbon neutrality is likely to underpin structural changes in polluting industries such as steel and aluminium, where the country has a dominant global position,” they add. As a result of the above, Morgan Stanley sees in Europe a secular shift “in returns and strong spot earnings upgrades for steel and aluminium producers.” It suggests rotating out of some early outperformers such as BHP BHPB.L , Lundin LUN.TO , while favouring ArcelorMittal MT.AS and Hydro H.TO . In the chart below, the Stoxx basic materials stock index .SXPP year to date, compared with the Stoxx Europe optimized cyclicals .SCYC and the Stoxx 600 .STOXX . (Stefano Rebaudo) ***** PANDEMIC WORRIES? HERE'S A PINCH OF SALT! (1119 GMT) The third wave of the coronavirus outbreak on the continent is a big worry for financial markets as it is expected to undermine the economic recovery and investor sentiment. But there are contrarian views out there which argue these concerns are may be somewhat overblown. For one, European lockdowns are not as harsh as they seem. Mobility metrics show that the euro zone is about as open as the U.S., and it remains markedly more open than the UK, Deutsche Bank analysts say. “European workplaces in particular are busier than even in the US. In spite of the political rhetoric still emphasizing caution, Europe has seen some stealthy reopening,” they add. Second, the vaccine campaign is not at a standstill. Supply has been a big constraint but it will ease in the coming weeks, according to DB. Pfizer alone is expected to supply the EU with 200 million doses in the second quarter, and overall supply should amount to more than 300 million doses. This will not be enough to match the U.S., but the gap will be much closer than in the first quarter. (Stefano Rebaudo) ***** TIME TO DITCH BANK STOCKS? (0959 GMT) Banks stocks started slipping last week as bond yields eased and made the reflation trade narrative look less attractive than it was a few weeks ago. Now the big unknown is whether this is just a temporary setback or if it’s time to reduce exposure to the sector. “Post global financial crisis, these valuations would have been roughly the point at which reducing exposure made sense,” UBS analysts say in a research note. But “we think better-than-expected trading conditions and early stage of the macro, trading and payout recovery mitigate in favour of remaining overweight into a crucial 2H21 / 1H22 period,” they add. Here are some factors which go in favour of remaining exposed to banks, according to UBS. 1) Inflation euphoria is expected to peak in Q2 on rising vaccinations and reduced restrictions. 2) QE bond purchases peak in China, U.S. and UK would “prompt investors to consider whether portfolios are sufficiently exposed to stocks that like higher rates.” 3) In July the European Central Bank and the UK Prudential Regulation Authority are expected to update guidance on resumption of 'normal' dividends. UBS favours Nordea NDASE.ST , ING INGA.AS and Barclays BARC.L . In the chart below the Stoxx bank .SX7P index outperforming the Stoxx 600 .STOXX year to date. (Stefano Rebaudo) ***** TECH HAMMERS REFLATION STOCKS AT THE OPEN (0827 GMT) Not only is tech the only sector rising in Europe, it's also handsomely outperforming with a 1.8% jump while the broader market is well into the red. The pan-European STOXX 600 is falling 0.4% as banks adjust to a big drop in yields of euro zone and U.S. government bonds. The reflation trade isn't looking that hot at the moment and that's perhaps exactly what the Nasdaq and growth stocks needed to catch back with the rest of the equity pack. Apart from banks, retail is another big loser, as Europe double downs on lockdowns. Switzerland's Dufry is the top looser on the STOXX 600, down 9.5% after completing an offering of convertible bonds. The UK's WH Smith is also in a bad spot, losing 3.3%. One of the other highlight of the open is Italian defence and aerospace group Leonardo falling 7% after postponing the IPO of its U.S. electronics unit, blaming adverse market conditions. (Julien Ponthus) ***** A SETBACK FOR REFLATION TRADERS (0803 GMT) Rising COVID-19 caseloads, lockdowns and travel restrictions -- to many people it might feel like little has changed in the past 12 months despite the vaccine rollout. In financial markets though, we've come a long way, with the S&P 500 a whisker from record highs -- its 75% increase from March 23 2020 troughs represents the biggest rolling 12-month increase in the index since 1936, Deutsche Bank notes. And the narrative appears to have subtly switched from being focused on how massive and swift fiscal and monetary stimulus would be, to worries about the anticipated cost of U.S. President Joe Biden's infrastructure spending plans. Wall Street's overnight tumble is dragging markets lower today, hit by the possibility of tax hikes as well as fears of setbacks to the economic rebound. The prospect of a cancelled European summer is weighing on so-called reflation stocks such as airlines, banks, energy. U.S. Treasury 10-year yields US10YT=RR have sunk below 1.6%, continuing their slide from recent one-year highs of 1.75%, as Federal Reserve Chair Jerome Powell again downplayed inflation risks. European stocks futures are trading lower with the derivative for the DAX, Germany's blue chip benchmark, down 0.7% as western diplomatic tensions with China are brewing fears of a possible trade war. Investors wary of the economic health of Europe Inc will be closely watching the publication of euro zone PMIs this morning and later on U.S. manufacturing data. On currency markets, the dollar index =USD is closing in its four-month top of 92.506 while the euro has retreated to where it stood in November, trading below $1.185. Key developments that should provide more direction to markets on Wednesday: -Japan's factory activity gathered pace in March, Jibun Bank's flash PMI showed. -British consumer price inflation unexpectedly fell to 0.4% in February from 0.7% --Flash PMIs for France, Germany, UK and the euro zone --Fed speakers: Chair Jerome Powell, New York President John Williams; San Francisco Fed President Mary Daly, Chicago Fed President Charles Evans --Central bank meeting in Czech Republic, Iceland meeting --German Bund auction --US auctions 5-yr notes (Julien Ponthus) ****** IT'S RISK-OFF AHEAD OF THE EUROPEAN OPEN (0632 GMT) The third wave of infections in Europe is clearly starting to spread doubts across the continent on how swift and robust the 2021 recovery will be. Futures for European indexes are currently trading down about 0.6% and tracking Asian shares lower following a negative session on Wall Street. With U.S. Treasury yields sharply lower and the safe-haven dollar close to four-month highs, the mood for the open is clearly titled towards risk-off for European bourses. (Julien Ponthus) ***** <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ U.S. Treasury yields and inflation expectations banks lockdown vaccine ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
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