EUROPEAN EQUITY UPDATE: European stocks trade horizontally with some impetus from Friday’s Wall Street rally as markets get ready for US Independence Day followed by several risk events

Analysis details (09:25)

• Stocks in Europe kicked off the session with modest gains across the board at the cash open following the tailwinds from Wall Street on Friday which reverberated to APAC overnight, given the cooler-than-expected core US PCE data from Friday continued to provide a tailwind. Asia-Pac stocks began the new trading month on the front foot with momentum from last Friday's US rally and as participants digested key data releases including an improved Tankan survey and better-than-expected Chinese Caixin Manufacturing PMI, though shy of the prior. Meanwhile, the US confirmed that Treasury Secretary Yellen will visit China on July 6th-9th for meetings with senior Chinese officials although a Treasury official already tempered expectations and noted that no significant breakthrough was anticipated.


• US equity futures are flat and directionless, with the ES in a tight range around 4490. Ahead, the US ISM manufacturing data is due in the afternoon, and we are cautious about thinner market conditions given that many US traders will be away ahead of Tuesday's Independence Day holidays (US markets are open today in reduced trading hours).


• Stocks in Europe somewhat waned off best levels since the cash open (Euro Stoxx 50 +0.3%, Stoxx 600 +0.2%) with little reaction seen to the mixed Manufacturing PMIs from Europe, whilst the French CAC and UK’s FTSE 100 are flirting with the unchanged mark at the time of writing amid losses in index heavyweights – the former weighed on by heavyweight LVMH (-0.9%) amid China woes. The latter is dragged lower by AstraZeneca (-4.4%), who despite reporting positive lung cancer trial data, disappointed investors who expected a clearer statement on the trial’s success in terms of progression-free survival alongside how much longer patients lived overall, according to desks. Nevertheless, these stocks are dragging down the Healthcare and Consumer Products and Services sectors which currently reside as the laggards. 


• Sectors are overall mostly positive with Basic Resources, Energy, Insurance, and Banks the outperformers. Automakers are in focus today after Tesla (TSLA) posted record deliveries in Q2 as the effect of the slew of price cuts are being seen, while China's big three EV companies also saw records for the month. Volkswagen (+1.2%), Renault (+1.5%), Stellantis (+1.5%), and Mercedes-Benz Group (+0.9%) are all seeing gains.


• JPMorgan strategists predict a downturn in the equity market resilience experienced so far this year. They anticipate that the economic data will worsen in the second half of the year and corporate earnings will likely face pressure. They see a disconnect in markets where there's an expectation for a soft landing without deterioration in profits, labour, or credit, alongside a belief that inflation will decrease, and central banks will stop tightening. The strategists question how the Federal Reserve will pivot without any economic pain. They point out that labour markets considered lagging indicators, could weaken suddenly, and China's economy may continue to stall without significant government support. JPM notes that the yield curve remains strongly inverted, which they consider an "ominous sign" that has historically proven accurate. Also, predict corporate pricing power will likely weaken as inventories increase, operating leverage turns negative, and financing costs rise. Their strategy advises remaining underweight on euro-area and US stocks, overweight on the UK via the FTSE 100, neutral on emerging markets, and overweight on Japan. They favour a defensive allocation to markets like Switzerland.

03 Jul 2023 - 09:25- Research Sheet- Source: Newsquawk