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STOXX 600 DOWN 1.3%
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U.S. futures edge lower
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UK dodges techical recession
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Ueda is likely next BOJ governor
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CYCLICALS OUTPERFORMANCE BODES WELL, BUT WITH CAVEATS - MS (1119 GMT) Cyclical stocks have massively outperformed defensives in Europe over the last six months, boding well for the broader macro environment, but investors shouldn't get too excited just yet, according to a team of Morgan Stanley equity strategists led by Graham Secker. "European cyclicals have outperformed defensives by 18% over the last six months, a relative rate of return only exceeded 3% of the time since 1990," the MS strategists wrote.
Despite the optimism that the outperformance will be followed by more of the same, they offer three caveats that warrant caution.
"First, prior episodes of strong cyclical outperformance usually occur after a significant drop in ROE (return on equity) which paves the way for a commensurately strong rebound in profitability", they say - flagging the lack of such a drop in cyclicals' ROE over the last year. This factor "would limit the potential for any EPS recovery", they say.
An inverted yield curve also doesn't usually work well for cyclical stocks. An inversion is typically followed by cyclical underperformance, and the recent divergence from this trend looks "unusually striking" to the MS strategists.
Some negative economic indicators from Morgan Stanley's cross-asset strategy team around economic growth are another reason for their caution, as they suggest "investors' safety cushion is deflating and hence that the market's risk-reward profile has deteriorated".
Luxury, capital goods and semis are showing the most elevated cyclical valuations at present, based on MS's analysis of European sectors based on their relative valuation to the market.
They add that autos stands out as the cheapest cyclical sector, "by some distance".
(Lucy Raitano)
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EUROPE IN THE RED, BUT OIL STOCKS FLY (0921 GMT)
The STOXX 600 is down 0.6%, wiping out its weekly gain and now on track for a
five-day loss of 0.2%.
Oil is pretty much the only sector trading higher, and by quite a high margin, with the oil and gas stocks index up 1.4%.
BP is providing a big boost, as shares rise 2.8% to their highest since April 2019.
But it is Swedish defence equipment maker Saab that tops the index, with shares soaring 8.8% after reporting a rise in fourth-quarter operating profit.
Retail names meanwhile are struggling, down 2.1%, and weighed down by Zalando - down 3.1% - and Zara owner Inditex - down 2.9%.
Here is your opening snapshot:
(Lucy Raitano)
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EUROPEAN FUTURES SIGNAL DECLINES (0740 GMT)
European futures are flashing red this morning, with the STOXX 600 looking poised to lose around 0.5% at the open and just about wipe out the 0.3% gain so far this week.
It's not even 8am, and there's already talk that the Bank of Japan is set to appoint its next governor, while the UK has managed to dodge a recession. FTSE futures seem to be enjoying the latter, outperforming the rest of Europe so far, though still down 0.3%.
Elsewhere, the oil bonanza continues, with Norwegian independent oil firm Aker BP saying it will boost its dividend by 10% after posting $2.2 billion operating profit for the
final quarter of 2022.
Swedish defence equipment maker Saab also reported a fourth-quarter operating
profit, while Zara owner Inditex has reached an agreement to raise salaries in its Spanish
stores by an average 20%.
(Lucy Raitano)
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