EUROPEAN EQUITY UPDATE: Stocks edge lower as EZ PMIs paint a bleak picture ahead of the US' return from Independence Day

Analysis details (09:23)

• Stocks in Europe kicked off the mid-week session on the back foot in what is the first full global trading session of the month, after the US Independence Day celebrations yesterday. APAC stocks traded in the red following the China services activity data released overnight, which fell short of expectations, while the trade frictions between China and the West have been exacerbated after the world’s second-largest economy slapped export restrictions on some metals used in the manufacture of semiconductors. Traders will note the FOMC meeting minutes due later today, alongside keeping an ear on OPEC’s energy summit, which will feature commentary from the Saudi and UAE ministers.


• US equity futures have succumbed to the global risk aversion, and trade with mild losses across the board (ES -0.2%, NQ -0.4%, YM -0.2%, and RTY -0.5%) as participants look ahead to the FOMC minutes ahead of the US jobs report on Friday. Bloomberg Opinion’s John Authers ponders what comes next for stocks in the second half of the year. Authers suggests that, in essence, the crux of stock performance lies in corporate earnings. Economic downturns are typically characterised by a decrease in these profits. For the past six quarters, the majority of survey respondents have anticipated a decline in profits over the following year. However, a significant number of these respondents are surprised that the decrease in earnings isn't more substantial, leading to a decrease in pessimism about profits, according to Authers. Both the economy and the corporate sector have demonstrated greater resilience than anticipated. “There is still no great optimism about the economy, but many are surprised that we do not already have a downturn, and certainty is falling. That helps risk assets.”, Authers says.


• Equities in Europe remain heavy (Euro Stoxx 50 -0.6%; Stoxx 600 -0.5%), with added bearish sentiment from a slew of downbeat PMIs from Europe, which entailed mostly negative revision. The EZ-wide Final PMIs warned that “there is much to suggest that the slowdown in growth will continue in the coming months”, and added that, “input costs are still rising strongly by historical standards and services firms are also still in a position to pass on at least some of these cost increases, some of which are due to higher wages, to end customers. This is reflected in stubbornly high core inflation, which is why the ECB is likely to continue to hike policy rates.” In terms of a quick recap of the regional releases, Italy warned of recession fears spreading, France flagged Q2 contractions in the manufacturing and services sectors and Germany seemingly escaped a Q2 recession but sees an increased chance of an H2 recession.


• Sectors in Europe are mostly lower and largely hold the defensive bias seen at the open, although Auto has made it to the top of the bunch after Volvo Cars reported impressive growth numbers. Sectoral laggards include Tech, Chemical, Insurance, and Basic Resources – the latter on the decline in base metal prices.

05 Jul 2023 - 09:23- Research Sheet- Source: Newsquawk