Live Markets: Cyclicals' belief in U.S. acceleration seems unfounded - UBS

WestRock Co

07/09/2023 11:58

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      STOXX 600 flat
    

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      U.S. futures down 0.3%
    

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      Utilities lift, basic resources drag
    

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      Fed rate outlook in focus
    

  
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    CYCLICALS' BELIEF IN US ACCELERATION SEEMS UNFOUNDED - UBS (1040 GMT)
    Equity markets have strongly preferred cyclical stocks over the last three months, which
according to UBS global strategists signals "a strong belief in an extension, perhaps
acceleration, of the US expansion." 
    But, they argue, such a belief is unfounded and they are looking to sell U.S. and EU
cyclicals into the slowdown they expect in the fourth quarter. 
    "Economic data shows an economy moving quickly from red hot to just right. But the impact of
the tightening over the last 18 (months) is still in train, savings rates have dipped, surplus
labour has disappeared, real incomes have stopped growing, and oil prices have risen," they say.
    Though U.S. consumer spending has surprised to the upside, over two thirds of that growth
has come from tech, and they expect a derating in U.S. consumer spending from the fourth
quarter. 
    "Tech spending in the US picked up strongly through Covid and has seen a renewed jump in 
2023. We do not see this sustaining."
    They are most cautious on industrials, materials and consumer discretionary sectors. 
    
    (Lucy Raitano)
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    INVESTORS UNFAIRLY PENALISING EUROPEAN VALUE STOCKS - BARCLAYS (0906 GMT)
    Investors are unfairly penalising European value stocks because of their cyclicality,
according to Barclays equity strategists, who are sticking with their overweight rating on this
part of the market.
    "We think it remains far too cheap, particularly for the earnings/profitability it continues
to deliver," they write in a note. 
    Value stocks should also, in theory, benefit from the prospect of yield staying higher for
longer, a soft landing, and potentially even higher commodity prices that those seen in recent
months. 
    On the other hand, growth stocks remain very expensive despite cheapening last month,
Barclays say. 
    Higher real rates should continue to pile pressure on the lofty valuations of growth stocks,
which will be important for future returns, they say. 
    But they are not convinced enough to budge on their "midweight" rating of growth stocks,    
since they don't want to be explicitly "underweight" on something so closely related to tech.  
    "Having been UW Growth most of last year, and closed it/taken profits in November 2022, we
have been loathe to take it back to UW without a strong reason, and especially since it has
significant overlap with Tech, which by and large is still delivering," they say.

    (Lucy Raitano)
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    STOXX HEADING FOR WORST LOSING STREAK SINCE 2018 (0820 GMT)    
    The STOXX 600  .STOXX  is down again, off 0.2% and on track for its seventh straight day of
losses, which would be the longest such streak since early 2018. 
    Most industry sectors are in the red, but Basic Resources is leading the move, down 1.6% set
for its biggest daily fall in about a month. 
    The day's big winner so far is British insurer Direct Line  DLGD.L , up 14% at the top of
the STOXX 600 a day after Canadian insurer Intact Financial  IFC.TO  said it would buy Direct
Line's brokered commercial lines operations for an initial payment of 520 million pounds ($650
million). 
    The gains came despite Direct Line reporting a loss for the first half of this year and
reiterating that annual profit would continue to be adversely affected due to higher motor
insurance claims.
    The latest European macro news was from Germany where industrial production fell by slightly
more than expected in July. 
    
    (Alun John) 
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    DOWN (YET) AGAIN (0653 GMT) 
    European stocks are set for another down day, with STOXX 50 futures down around 0.3%. The
STOXX 600  .STOXX  closed down for a sixth straight day yesterday. Another drop today would set
it on track for its longest stretch of losses since early 2018.
    Stronger-than-expected services data on the U.S. from Wednesday is bearing the brunt of the
blame for the softness, as it is seen as fuelling concerns about sticky inflation leading to
higher-for-longer interest rates.
    China's trade data for August also came in weak - if better than July's terrible numbers -
Brent is still above $90 a barrel, and British mortgage lender Halifax said house prices were
4.6%lower last month than in August 2022, the sharpest paced fall since 2009. 
    There are a few pieces of deal news for traders to watch. 
    Nestle  NESN.S  is buying a majority stake in Brazilian premium chocolate maker Grupo CRM,
the Swiss food group said on Thursday, and paper and packaging major Smurfit Kappa said late on
Wednesday that it is in discussions to merge with U.S. paper company Westrock  WRK.N . 
    British electricals retailer Currys CURY.L   reported falling sales in most markets for the
four months to the end of August, but said UK trends were improving and stuck to its annual
guidance. 
    Also worth a read, Reuters reported, citing sources that Shell considered shutting its
flagship Prelude liquefied natural gas facility off Australia for a year to fix issues that have
plagued its operations, but instead opted for shorter maintenance period to allow it to capture
strong gas demand. 
    
    (Alun John) 
    
    *****
    
    
    
    MORNING BID EUROPE-FED STEALS FOCUS, STOCKS SELL OFF (0440 GMT) 
        
  
    The dominating theme in global financial markets is once again central bank policy, and
equity investors in particular are worried.
    U.S. data is showing a flare-up in inflationary pressures, just as markets had become
comfortable with the idea of a Goldilocks scenario replete with soft landings and less hot
labour markets.
    Even ultra-resilient Japanese stocks seem to have finally succumbed, with the Nikkei
threatening to snap an eight-day winning streak. Markets in China and Australia took another
steep step down.
    Investors weren't in the mood for any glass-half-full interpretations of Chinese trade data
either, which were dreary but not as dire as economists had predicted.
    Steadfast efforts by China's central bank to prop up a drooping yuan by setting
stronger-than-consensus official midpoints haven't prevented the currency from hovering on the
weaker side of the closely watched 7.3 per dollar line  CNH=D3 .
    The dollar continues to overpower all its rivals, popping to a new 10-month peak versus the
yen, despite Japanese finance ministry warnings.
    It's staying close to Wednesday's three-month top to the euro as well. Traders have
preferred to trust the data over protestations from ECB officials that the tightening cycle may
not be over ahead of next week's policy meeting.
    German industrial production figures are due today, with the euro bloc's giant threatening
to slip back into recession.
    Federal Reserve officials will be speaking en masse at a fintech conference hosted by the
Philly Fed, before they soon enter the blackout period on public comments heading toward their
own policy meeting.
    And let us not forget the G-20 meetings kicking off in India that will offer more chances to
read the economic tea leaves.
    Not China's though, with President Xi Jinping choosing to sit this one out. It's a worrying
sign to some, not just because the Chinese economy is one of the biggest risks for the global
outlook, but it continues a trend of decoupling from the West.
    Vladimir Putin, of course, is also not attending.

    Key developments that could influence markets on Thursday: 
    Germany industrial output
    UK house prices
    Euro area revised GDP
    US jobless claims
    Philadelphia Fed hosts fintech conference
    India hosts G-20 meetings
    
    (Kevin Buckland)