Live Markets: Cheap euro running out of juice for European stocks
22/07/2022 13:05
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CHEAP EURO RUNNING OUT OF JUICE FOR EUROPEAN STOCKS (1157
GMT)
A weakening euro has helped cushion value-for-money European
equities from bigger drops, but how much upside is left to
squeeze out of the struggling single currency?
Not much, according to Bofa equity strategists.
Slowing growth and rising interest rates have contributed to
a 19% fall in Europe's STOXX 600 .STOXX index from its peak in
January. This was somewhat tempered by the 6% peak-to-trough
decline in the euro trade-weighted index, the BofA analysts say
in a note.
"Without the support from EUR depreciation, the market would
likely have been down by close to 25%," they say.
The flagging euro has also helped European shares outperform
on a relative basis to their global peers, with the more than
10% fall in the EUR/USD spread accounting for most of the 5%
outperformance for European equities seen since January
according to the BofA strategists.
But with no further downside expected for the euro, they
think much of the benefit of FX weakness has already played out
for European stocks, leaving them more vulnerable to weaker
growth going forward.
Relative to global equities, their base-case macro
assumptions are consistent with around 5% underperformance for
European equities but this rises to 7% in a recession scenario.
The BofA strategists remain neutral on European equities,
overweight on staples and utilities, and underweight on banks
and autos.
(Lucy Raitano)
*****
THE SIGNAL AND THE NOISE (0957 GMT)
In the 2008 global financial crisis, investors lost about $9
trillion of wealth. This time around, losses are about $23
trillion and counting. And while investing in global markets may
seem the equivalent of whack-a-mole on most days, Gavekal
strategists point to three important trends that distinguish
this bear market episode from previous ones.
The single most important one is the disappearing negative
correlation between stocks and bonds. Hallmark of an
inflationary environment, bonds can no longer be relied as an
asset to hedge equity market risk. That perhaps explains the
amplified skittishness among investors at the first signs of
equity market wobbles.
The second big change is the spectacular meltdown of
cryptocurrencies. Trillions of dollars wiped off the valuations
of these coins, once hailed as inflation and equity market
hedges, has driven home the point that they are nothing more but
a leveraged play on central bank policy making.
And the final major change is how well emerging market
assets have held up so far this year in the face of rapid
Federal Reserve rate hikes, growing recession risks and a
deepening bear market. Emerging market bonds and currencies have
also held up well.
(Saikat Chatterjee)
*****
RUSSIA GAS FUELS EUROPEAN SHARES, SET FOR WEEKLY GAINS (0733
GMT)
The pan European index is flat but set for best week in two
months as Russia resuming pumping gas via its biggest pipeline
to Europe brought some relief to stocks grappling with higher
cost of borrowing and a political crisis in Italy.
Russia resumed pumping Nord Stream gas to Europe on Thursday
after a 10-day outage, allaying some of Europe's immediate
supply fears. urn:newsml:reuters.com:*:nL1N2Z2080
In the meantime, a first batch of earnings results have
started to come in showing mixed results. TOP/EQE
On Friday, shares in Beazley BEZG.L jump 11% to the top of
the STOXX 600 .STOXX after the Lloyd's of London insurer
reports profit plunge, but raises full year profitability
outlook. urn:newsml:reuters.com:*:nL8N2Z3194
The STOXX 600 index is flat, set for its best week since end
of May. EZ blue chips are down 0.2% .STOXX50E but are also set
for their best week since May. London-listed shares .FTSE , up
0.2% on the day, are on track for best weekly gains in one
months. .EU .L
(Joice Alves)
*****
DRAWING THE BATTLE LINES (0655 GMT)
For all the excitement about the European Central Bank's
first rate hike since 2011 and the launch of a new tool to
contain a blowout in borrowing costs, the euro and core bond
yields are back to levels where they were before Thursday's
meeting.
As pleased as bond vigilantes may be that the ECB has not
wasted any time in hiking by a more aggressive 50 bps and still
thinks it should be able to repeat that feat in September, for
markets the TPI (Transmission Protection Instrument) appeared to
be strong on promises but weak on detail. urn:newsml:reuters.com:*:nL8N2Z2681
The ECB may be able to finesse that and clear some of the
market confusion in time, but the question remains what happens
if markets have reason to test it sooner?
Throw into the mix an expectation that soft U.S. economic
data this week will not deter the Federal Reserve from raising
interest rates by another whopping 75 bps next week even as the
economy slows under the weight of soaring inflation.
So, it's not surprising that investors are singing a gloomy
tune on Friday.
World stocks are set to snap a three-day rising streak, the
U.S. dollar index has rebounded smartly from Thursday's lows and
the Treasury yield curve, a gauge of recession risks, is pushing
deeper into negative territory.
U.S. stock futures are in the red thanks to grim earnings
from social media darling stock Snap Inc SNAP.N sending its
shares down by 25%. That's a reminder that stock punters are
quick to dump richly valued mega cap stocks at the first signs
of trouble. urn:newsml:reuters.com:*:nL1N2Z22MN
Key developments that should provide more direction to markets
on Friday:
Italy's national election will be held on Sept. 25,
government source told Reuters on Thursday. urn:newsml:reuters.com:*:nS8N2Y4023
PMI: France, Germany, EU Composite, UK
UK retail sales fall by 0.1% in June urn:newsml:reuters.com:*:nL8N2Z26SG
Schindler cuts 2022 revenue guidance on China slowdown
urn:newsml:reuters.com:*:nL8N2Z30GL
(Saikat Chatterjee)
*****
ECB HANGOVER, ITALIAN POLITICAL TURMOIL IN FOCUS (0640 GMT)
Euro zone futures are trading lower the day after the
European Central Bank raised interest rates by more than
expected in its first hike in 11 years, bolstering economic
growth slowdown fears.
In the meantime, Italian futures are underperforming, down
0.7% as the political crisis widened in Italy sending tremors
through financial markets. Italy will hold a snap national
election on Sept. 25 after Prime Minister Mario Draghi resigned
following the collapse of his national unity government.
urn:newsml:reuters.com:*:nS8N2Y4023
ECB concerns about runaway inflation trumped worries about
growth. But that added to pressures on EZ stocks as the euro
zone economy is suffering from the impact of Russia's war in
Ukraine.
EZ futures are between flat and 0.7% lower, while London
FTSE futures are up 0.2%.
The ECB raised its benchmark deposit rate by 50 basis points
to zero percent. urn:newsml:reuters.com:*:nL1N2Z20BK
Next, the U.S. Federal Reserve meets next week and
expectations of a 100 bp hike have faded in favour of pricing
for a 75 bp move. FEDWATCH
(Joice Alves)
*****
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