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STOXX 600 cuts losses
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Euro zone business growth at 9-month high
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Takeover talk lifts Electrolux
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U.S. stock futures inch lower
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U.S. STOCKS IN THE EQUIVALENT OF EVEREST'S "DEATH ZONE": MS (1205 GMT) U.S. equities have reached "dizzying" heights, according to Morgan Stanley's chief U.S. equity strategist Mike Wilson.
Plentiful liquidity is allowing investors to live in the markets equivalent of Mount Everest's "death zone" - where oxygen is so thin it can cause climbers' minds to play tricks on them and make fatal mistakes, Wilson says. Conditions now, based on valuations and equity risk premia, are at their most stretched in 14 years, he says. "With the P/E now at 18.6x and the ERP at just 155 basis points, we are in the thinnest air of the entire liquidity-driven secular bull run that began in 2009," Wilson said in a note released late on Sunday. Late last year, U.S. stocks lifted off "safer" valuation levels, as investors banked on China's reopening to offset a slowing U.S. economy. By the start of 2023, investors pushed stocks to "dangerous" levels based on the view that the Federal Reserve would signal at its meeting on Feb. 1 that a peak in rates was imminent. The bottom line, Wilson says, is the bear market rally that began in October has morphed into a speculative frenzy based on a Fedpause/pivot that isn’t coming.
The economic situation is better than it appeared a few
months ago, but it won't stop an earnings recession, he says.
(Roshan Abraham)
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WHAT COUNTS MORE: ECB HAWKS OR FED AND DATA? (1101 GMT)
Most analysts agree that a combination of U.S. robust
economic data and hawkish central banks has triggered the recent
repricing in the euro area rate expectations.
It's harder to tell if markets have started tuning in more
to the ECB hawks or if the Fed is still in the driving seat.
"In sum, the renewed commitment to policy tightening by the
Fed against the backdrop of the resilient labour market and
sticky inflation in the euro area is reviving the hawks' power
to stir markets, for now," says Davide Oneglia, lead analyst on
the euro area and ECB at TS Lombard.
He also said that just a week before, "hawkish comments by
ECB officials struggled" to significantly impact the pricing of
the Bank's terminal rate due to cooling EA headline CPI and
relative Fed dovishness."
As analysts at Citi recently flagged, doves or more neutral
ECB officials are more under the investors' spotlight, as they
are the ones who might signal when rates might stop rising.
"In addition, judging from this week's speech by Fabio Panetta,
ECB doves appear to be less dovish than some investors might
have expected," he adds.
Their call for "smoothing… policy rate hikes - that is,
moving in small steps" falls short of advocating a pause and
remains consistent with current market pricing.
(Stefano Rebaudo)
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SO FAR, SO GOOD - EARNINGS SEASON AT HALF-WAY POINT (1051
GMT)
We have arrived at the mid-point of European earnings
season, and so far, so good.
Numbers are looking healthy, but outlooks are more cautious. Financials boast one of healthiest EPS trends, according to Morgan Stanley equity strategists.
More companies are beating than missing expectations for both sales and EPS in what is shaping up to be "another good quarter", they write in a note.
"Financials and energy are now enjoying the best of this earnings season when assessing both the breadth and size of EPS beats," the MS strategists say, adding that cyclical sectors such as industrials, consumer discretionary and materials are showing weak EPS trends despite their relative price outperformance. Net sales beats stand at 29% while a 22% net beat for consensus EPS numbers is in line with the previous two seasons.
Markets are more tolerant of a miss than in the previous two
quarters, according to Morgan Stanley data. The average one-day
price reaction to an EPS beat is +119bps versus -213bps for a
miss, which Morgan Stanley says is less than in the past two
quarters.
(Lucy Raitano)
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STOXX: FINANCIALS AND CONSUMERS DRAG (0950 GMT)
Shares in Europe kicked off the day on the back foot with
losses across financials, consumer discretionary and tech
dragging the STOXX 600 down as much as 1%, although
strength in defensives helped limit initial losses.
The pan-European equity benchmark index was last down just
0.2%, off initial lows receiving a helping hand from upbeat PMI
business activity surveys and thanks to gains in the utility
sector following strong update from French power company Engie.
A rally in Electrolux following Italian media
reports about a potential takeover interest from China also
helped offset sectoral losses elsewhere. Financials remained the
biggest drag to the STOXX, as a cautious forecast from HSBC
weighed and as Credit Suisse shares fell more than 5% to new
record lows.
A gauge of euro zone equity volatility hit its
highest in two months before paring some of those gains.
(Danilo Masoni)
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EUROPE SIGNALS LOWER (0731 GMT)
European shares were set to open a touch lower on Tuesday
amid lingering concerns over monetary policy. Ukraine is also
back in focus ahead of a speech by Russian President Vladimir
Putin to set out the aims for the second year of his invasion.
EuroSTOXX50 , DAX and FTSE futures
were last down around 0.3% following losses in Asia where the
prospect of the Federal Reserve staying hawkish for longer
weighed on sentiment. S&P contracts pointed to a weaker
start for Wall Street too, following a long weekend.
In corporate news, HSBC quarterly profit surged 92%
as rising rates swelled net interest income, although its Hong
Kong shares fell as a cautious outlook left investors pondering
whether the rates boost may already have peaked.
In France, energy company Engie reported a sharp
increase in 2022 profits thanks to higher natural gas and power
prices, while payment services company Worldline posted
a stronger-than-expected Q4 organic sales growth. Both shares
were seen rising at the open.
Also in focus are flash PMIs for the euro zone, UK and
Germany and France for more clues on the strength of a pickup in
economic activity across the region.
(Danilo Masoni)
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CAST AWAY (0652 GMT)
After a sputtering start to the week for the equities
market, flash PMI data from Eurozone, UK and Germany will likely
give some sort of direction for traders. Investors have put on
their risk-off hats so far, with the dollar ascendant on
Tuesday, having erased its year to date losses and as Asian
equities flirt with six-week lows.
With U.S. markets set to reopen after Monday's holiday,
investor focus will be squarely on minutes from the Feb. 1
Federal Reserve meeting, scheduled to be released on Wednesday.
At that meeting, the central bank raised interest rates by
25 basis points and said disinflation was underway. Resilient
economic data for the past month has brought back investor fears
that the Fed will have to hike more and stay higher for longer.
Minutes from the Reserve Bank of Australia's policy meeting
in February showed the board abandoned all thought of pausing
rate hikes in the face of sticky inflation and signalled more
hikes would be needed in the months ahead.
Meanwhile, Russian President Vladimir Putin was due to make
a speech on Tuesday setting out aims for the second year of his
invasion of Ukraine. It comes just a day after U.S. President
Joe Biden's surprise visit to Ukraine where he walked the
streets of Kyiv and promised to stand with Ukraine as long as it
takes.
In the corporate world, global miner BHP Group reported a dour first half earnings but pinned hopes on a
rebound in demand from China, its biggest customer.
Europe's largest bank HSBC Holdings unveiled plans
for a special dividend and share buybacks as rising interest
rates swelled net interest income.
Earnings from Walmart later in the day will shed
light on American consumers' buying habits in the face of rising
expenses.
Key developments that could influence markets on Tuesday:
Economic events: Flash PMIs for Germany, France, UK and
Eurozone
(Ankur Banerjee)
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