Brexit May Be Delayed. But Markets Have a Bigger Problem
(Bloomberg) -- Want the lowdown on European markets? In your inbox before the open, every day. Sign up here.
If there’s one thing that is relatively clear from last night, it’s that the risk of no-deal Brexit has dropped. While we await to see if the EU will agree to another delay and if there will be a general election, any negative reaction on European equities and U.K. domestic stocks in particular should be contained, judging by the limited retreat in futures this morning. But there might be a bigger problem for investors: the macro landscape is still deteriorating.
The market had a pop last week when odds of a no-deal Brexit significantly receded. It has been consolidating within a strong resistance area since then, and the number of Stoxx 600 stocks trading above their 50-day moving average, a bullish momentum signal, has now stalled.
At these levels, an improvement in PMIs -- due tomorrow -- are much needed especially after the IMF cut its global growth forecast to a decade low of 3% while Germany slashed its economic outlook for 2020. Yesterday, S&P Global Ratings also lowered its euro-area growth forecasts to 1.1% for 2020. Looking at economic surprises for Europe, they remain at a very low level, while the Euro Stoxx 50 has been rising toward 2018 highs.
Deutsche Bank strategists are among those keeping a cautious view on equities in the near term. They say the market has been rising despite dismal macro data and there are some risks given current valuation levels. They recommend defensive sectors over cyclicals.
In fact, just this year, cyclicals experienced four major episodes of outperformance against defensives. Every time, further deterioration of manufacturing data put an end to the trend. Numbers tomorrow could help determine what comes next for cyclical shares.
A bigger problem would be that the region’s manufacturing downturn spreads to the services sector, something that’s been avoided so far, with resilient services allowing composite PMIs to hold up.
In the end, investors may need to count on the ‘bad news is good news’ mantra, as further economic deterioration may put pressure on governments spending policies. It’s been wishful thinking so far, as budget plans did not let much room for fiscal stimulus, while Germany has managed to deflect the pressure to spend.
In the meantime, Euro Stoxx 50 futures are down 0.5%, FTSE 100 futures are flat, and S&P 500 contracts are down 0.1% ahead of the European open.
SECTORS IN FOCUS TODAY:
Watch software firms after U.S. cloud software firm ServiceNow’s billings forecast disappointed, sending shares in the firm tumbling lower. Watch Dassault Systemes, Nemetschek and Sage.Watch semiconductor firms as U.S. bellwether Texas Instruments slumped after it flagged customers cutting orders and gave a weaker-than-expected revenue and earnings forecast. Watch Infineon, STMicroelectronics, IQE, AMS, ASML and BE Semiconductor.Watch home-appliance makers following disappointing results from washing machine maker Whirlpool and Roomba vacuum-cleaner manufacturer iRobot. Watch Electrolux and SEB for any read-across, along with vacuum-parts makers like Atlas Copco, Pfeiffer Vacuum Technologyand VAT Group.Watch oil and gas stocks might be pressured as indications that U.S. crude inventories expanded for a sixth week put pressure on crude prices. Watch oil majors like Shell, Total and BP, oil-services firms Wood and TechnipFMC and smaller oil explorers like Tullow Oil and Lundin Petroleum.
COMMENT:
“Bottom line: For the first time in almost 3 1/2 years, the market is seeing light at the end of the tunnel. The precise date is not known yet, but general principles can be worked on,” Oddo strategist Sylvain Goyon writes in emailed comments. “I would expect a positive trend on U.K. domestic assets, higher yields on the gilt by anticipation of future budgetary largess and a stabilization in the pound.”
NOTES FROM THE SELL SIDE:
Casino’s new plan to strengthen liquidity will lead to a “very big” dividend cut, reducing the French retailer’s dividend yield from 7% to 2.5%, according to Bernstein (underperform).Weaker trading and higher costs resulted in Swedbank’s 3Q miss, Morgan Stanley (overweight) says in note after the report.Carrefour’s 3Q French hypermarket sales showed worst performance since 2Q 2012, which is “very concerning,” according to Bernstein (underperform).Nokian Renkaat’s guidance cut after market close on Tuesday implies a cut to consensus EPS estimates of about 5%-6%, Morgan Stanley (equal-weight) writes in note.
COMPANY NEWS AND M&A:
SATS Raises $150 Million in Oslo’s Second-Largest IPO This YearABB 3Q Operating Ebita Misses; Confirms ViewsHeineken Third-Quarter Org. Beer Volume Matches EstimatesBankia Shareholder Artisan Seeks Bank Merger With ING: ExpansionAkzo Nobel Confirms 2020 Views After 3Q Adj. Op. Income MissPSA 3Q Rev. Beats Estimate, Confirms 2019-2021 TargetsSwedbank CEO Sees Costs Related to Probes of SEK1b in 2019Handelsbanken Exits Some Markets; Sees SEK1.5b Lower CostsMonte Paschi Seeks Buyers for $2.2 Billion of Bad LoansCarrefour 3Q Group Sales EU20.2b; LFL Growth +2.3%Ingenico 3Q Rev. EU880M Vs Est. EU841M; Guidance ConfirmedSSAB Third-Quarter Adjusted Ebitda Misses EstimatesRio to Review New Zealand Smelter’s Future on Aluminum SlumpNorsk Hydro Third-Quarter Underlying Ebit Beats EstimatesNokian Renkaat Cuts FY Guidance on Weaker Car, Tire MarketsTelenor Third-Quarter Ebitda Meets EstimatesAeroports De Paris Nine Month Revenue EU3.53 BlnSyngenta Targets Chinese Acquisitions as It Prepares for IPOAker Solutions Third-Quarter Adjusted Ebitda Meets EstimatesSulzer Sees Full-Year Adjusted Ebita Margin About 10%
TECHNICAL OUTLOOK for Stoxx 600 index:
Resistance at 395.1 (July high); 397.9 (June 2018 high)Support at 383.8 (50-DMA); 379 (200-DMA); 365.5 (50% Fibo)RSI: 60.5
TECHNICAL OUTLOOK for Euro Stoxx 50 index:
Resistance at 3,636 (February 2018 high); 3,687 (January 2018 high)Support at 3,519 (76.4% Fibo); 3,476 (50-DMA); 3,403 (61.8% Fibo)RSI: 61.6
MAIN RESEARCH AND RATING CHANGES:UPGRADES:
3i Infra raised to hold at JefferiesAstraZeneca raised to buy at Handelsbanken; PT 955 kronorAtlas Copco raised to reduce at AlphaValueGerresheimer raised to neutral at JPMorgan; PT 61 euros
DOWNGRADES:
Arjo cut to hold at Handelsbanken; PT 43 kronorBodycote cut to hold at HSBC; PT 725 penceCargotec cut to sell at ABG; PT 25 eurosPrudential cut to hold at Deutsche Bank; PT 1,450 penceThales cut to underperform at Credit Suisse; PT 89 eurosWallenstam cut to sell at Handelsbanken; PT 105 kronor
INITIATIONS:
Axfood reinstated sell at ABG; PT 180 kronorColonial rated new buy at Oddo BHF; PT 12.60 eurosHunting rated new buy at Jefferies; PT 540 penceICA Gruppen reinstated sell at ABG; PT 390 kronorLiberbank rated new hold at Berenberg; PT 35 euro centsMerlin rated new buy at Oddo BHF; PT 14.55 eurosNordex rated new hold at SocGen; PT 12 eurosSiemens Gamesa rated new buy at SocGen; PT 15 eurosVST Building Technologies rated new buy at SRC ResearchVestas rated new hold at SocGen; PT 550 kroner
MARKETS:
MSCI Asia Pacific up 0.2%, Nikkei 225 up 0.4% S&P 500 down 0.4%, Dow down 0.1%, Nasdaq down 0.7%Euro down 0.02% at $1.1123Dollar Index up 0.04% at 97.56Yen up 0.11% at 108.37Brent down 0.5% at $59.4/bbl, WTI down 0.8% to $54.1/bblLME 3m Copper down 0.4% at $5797.5/MTGold spot up 0.1% at $1489.5/ozUS 10Yr yield down 1bpsat 1.75%
ECONOMIC DATA (All times CET):
8:45am: (FR) Oct. Business Survey Overall Demand, prior -38:45am: (FR) Oct. Business Confidence, est. 106, prior 1068:45am: (FR) Oct. Manufacturing Confidence, est. 102, prior 1028:45am: (FR) Oct. Production Outlook Indicator, est. 5, prior 48:45am: (FR) Oct. Own-Company Production Outlook, est. 5, prior 64pm: (EC) Oct. Consumer Confidence, est. -6.8, prior -6.5
To contact the reporter on this story: Michael Msika in London at mmsika4@bloomberg.net
To contact the editor responsible for this story: Blaise Robinson at brobinson58@bloomberg.net
For more articles like this, please visit us at bloomberg.com
©2019 Bloomberg L.P.
