EUROPEAN EQUITY UPDATE: Stocks slip with cyclical lagging as growth concerns hit sentiment

Analysis details (08:55)

• Stocks in Europe kicked off the session with losses as the losses on Wall Street translated to risk aversion in APAC markets, which then reverberated to Europe. To recap, the real economy-levered Russell 2000 as participants digested weak global macro data in the form of soft China and European PMIs, while sentiment was also dampened amid the upside in yields and after the FOMC Minutes provided very little to deviate from the current view of further rate increases. Overnight, Hang Seng and Shanghai Comp declined with acute selling in Hong Kong-listed Chinese banks after China’s largest lenders cut rates for corporate US dollar deposits amid efforts to support the yuan and with banks said to have stopped buying bonds issued in the Shanghai free trade zone after heightened regulatory scrutiny, while losses in the mainland were stemmed ahead of US Treasury Secretary Yellen’s arrival in Beijing for meetings with senior officials.


• US equity futures are softer across the board this morning, albeit losses are shallower than European counterparts, although the RTY (-0.8%) underperforms vs the ES (-0.4%), NQ (-0.6%) and YM (-0.5%). Ahead, traders are braced for key US labour market releases in the next couple of days (ADP, weekly claims, JOLTs, Challenger today, ahead of NFP on Friday). Additionally, Sino-West tensions are in focus as Treasury Secretary Yellen begins a three-day trip to China, which comes amid the world's second-largest economy announcing restrictions on exports of key metals used in semiconductor manufacturing. Given the recent and deep losses in the Russel 2000, analysts at JPM suggest June brought about four significant changes that indicate a potential downturn from July to September. JPM anticipates that the slowing economy will become more apparent, pushing SMid returns into the red during these traditionally weak months. In terms of investment style, JPM maintains a preference for high-quality assets at fair prices due to our cautious outlook and the persisting high valuation disparity. On the sectoral front, even though Tech made strong gains in June and may continue to do so, JPM prioritises sectors that best align with our five established themes – 1) prioritizing companies with robust balance sheets to withstand higher rates; 2) preferring labour-light operations to mitigate rising wages; 3) targeting high-margin businesses to combat increasing costs; 4) considering rebound candidates given market value drops, and 5) maintaining realistic expectations in response to downwardly revised future earnings projections.


• In Europe, extended losses shortly after the cash open but have somewhat stabilised at the time of writing (Euro Stoxx 50 -1.1%, Stoxx 600 -0.9%), with the Euro Stoxx 50 dipping under the 4,300 mark from a USD 4,317 current intraday peak. Sectors are in a sea of red with defensives performing better than cyclicals – in fitting with the growth slowdown narrative. Utilities, Personal Care & Drugs, Telecoms, and Food & beverages reside at the top of the bunch with shallow losses, whilst the other end of the spectrum sees Basic Resources, Travel & Leisure, and Real Estate posting the deepest downside. This morning, data out of Germany showed industrial orders rising 6.4% M/M in May, topping expectations of a 1.2% rise; the upside was a function of large-scale orders of ships, spacecraft, and military vehicles, Reuters said. Elsewhere, Bank of England chief Bailey has been doing the media rounds this morning; the Governor said that moves by regulators on retail prices, specifically in the fuel market, will contribute to lowering inflation and will address overcharging by some retailers, potentially benefiting consumers. He anticipates a significant decline in inflation ahead, however, he acknowledged that the decline may create challenges for borrowers.

06 Jul 2023 - 08:55- Research Sheet- Source: Newsquawk