- STOXX 600 down more than 2%
- Wall Street futures in the red
- Tech loses over 4%
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SIX REASONS TO BUY UK STOCKS (1315 GMT)
Morgan Stanley analysts reiterate a buy on London blue chips (.FTSE) listing six facts that make a compelling case for UK equities.
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Here they are:
1) UK stocks historically tend to outperform in risk-off periods because the London index has the biggest defensive exposure than any other major country, accounting for 37% of the UK market cap.
When global equities were falling over the past 20 years, the MSCI UK index has outperformed MSCI Europe 68% of the time.
2) UK stocks tend to benefit from higher real yields.
3) FTSE 100 companies are cheap. The blue chip index
is the cheapest major stock market versus its own 10-year history.
4) Higher dividends.
MSCI UK’s dividend yield of 3.6% is twice as high as that on offer from MSCI World.
5) UK EPS expectations at -3% for 2022 and 2023 are very low. By comparison, MSCI EMU EPS growth expectations sits around +8%.
6) Oil price surge is “very positive” for UK EPS as around a quarter of UK profits come from the energy sector.
THE FED AND THE DOLLAR DOWNSIDE RISKS (1221 GMT)
Conventional wisdom has it that a Federal Reserve monetary tightening boosts the dollar value.
But the situation might be a bit more complicated if the Fed were to shrink its balance sheet more aggressively than expected, after pouring generous monetary stimulus into the economy during the pandemic.
ING argues in a research note that the Fed announcement after this week’s policy meeting might “bear downside risks” on the greenback.
Its economists see no reason for the Fed to continue purchasing assets and expect the central bank “to announce an immediate conclusion to their QE asset purchase programme.”
“This may be interpreted by markets as an indication that the Fed’s balance sheet will do the heavy lifting in the policy normalisation process, which could pour some cold water on current expectations for four rate hikes by the end of the year,” they say in a research note.
“This should cause the dollar recovery to stall or marginally reverse, although an escalation in geopolitical tensions in Ukraine would have the exact opposite effect on the greenback,” they add.
The chart shows the dollar index rising as investors bid safe-haven currencies on heightened tensions between Russia and the West over Ukraine.
MANY SHADES OF MARKET STRESS (1018 GMT)
There was very little doubt early this morning that this session would start in the red but it’s probably fair to say the market stress is stretching beyond expectations.
The STOXX 600 has gradually increased its losses to -1.8% and is back to levels unseen in the past month:
Volatility is also back with a vengeance as you can see below:
A lot of the attention has been on the tech sector lately with rising yields denting the appeal of growth stocks and making investors reluctant to keep on paying hefty premiums for them.
As you the following chart shows, the European tech index has briefly touched July lows:
While a lot of blame for the tech sector’s problems has been put on rising yields, it’s pretty hard to do this morning with the yield of Germany’s Bund dropping to -0.1%:
It’s also always difficult to read what the fate of bitcoin tells us about the state of markets but the crypto king falling below $34,000 for the first time since July can’t be good:
One touch of optimism could be found in the morning note of UBS GWM which doesn’t sees the current volatility as a long-term threat.
“For longer-term investors, we don’t think it is a bad thing if market volatility takes some of the air out of the more speculative corners of the market”, wrote chief investment officer Mark Haefele.
“Nor is it a bad thing if current volatility means that some secular growth names are being offered at their best prices in months”, he also said adding that the macro environment remain supportive.
TELCO M&A FIGHTS THE GLOOM (0836 GMT)
There isn’t much to rejoice about this morning across European equity markets so let’s start with the good news.
The telecom sector is one of the only space enjoying a steady flow of buying orders with Vodafone up close to 4% after a Reuters report that it is talks with Iliad to combine their respective businesses in Italy.
The telecom index is up 0.8% with BT, Orange and Telecom Italia enjoying some read-across boost.
Another big winner is Unilever, rising about 5% following reports activist investor Nelson Peltz has built a stake in the consumer goods maker. This comes after Unilever seemed to have abandoned the pursuit of GlaxoSmithKline’s consumer healthcare business.
Another stock standing out this morning Renault with a 3.3% jump after Reuters reported the French carmaker and its partners Nissan and Mitsubishi plan to triple their electric vehicle investments.
That’s mainly it for the good news with most sectors and regional bourses in the red as the pan-European STOXX 600 loses 0.3% and seems set for a fourth straight week of losses.
As you can see below, there are few stocks making gains among the biggest movers this morning:
BEARS AT THE GATE (0759 GMT)
With a 14% fall from its November peak, not only is the Nasdaq deep in correction territory, it is also now within striking distance of the 20% fall bar which defines a bear market.
And while a U.S. Federal Reserve tightening cycle could be expected to weaken tech and other growth sectors, market stress is actually spread throughout Wall Street.
The S&P 500 has just suffered its biggest weekly loss since the COVID-19 market crash of March 2020 and is less than 2% away from a correction.
Friday’s selloff came against the backdrop of a sharp fall in U.S. Treasury yields, which seems to suggest expectations of higher interest rates may not be the only factor denting sentiment ahead of this week’s Fed meeting.
Until now, markets have been fairly happy to ignore the simmering tensions between Russia and the West over Ukraine but this might be changing as President Joe Biden weighs options for boosting America’s military assets in Eastern Europe.
In this context, stakes are building quickly for fourth-quarter earnings, especially after high-visibility stocks such as Netflix and Goldman Sachs disappointed investors.
Mega-caps due to update the market this week include IBM (IBM.N), Microsoft (MSFT.O) Tesla (TSLA.O) and Apple (AAPL.O).
As the week starts, stress is palpable across most markets — MSCI’s index of Asia-Pacific shares ex-Japan (.MIAPJ0000PUS) is down over 1% while South Korean shares posted their biggest drop in five weeks and European futures are in the red.
In the meantime the dollar index is ticking up and bitcoin down to $35,295, almost 50% down from its November peaks.
Key developments that should provide more direction to markets on Monday:
-US two year note auction ($54 bln)
-EU bond sale
-US earnings: Halliburton, IBM, Logitech
-European earnings: Dior, Swatch, Phillips
-Philips expects summer recovery from supply chain woes read more
-Germany’s Lufthansa in talks to buy 40% stake in Italy’s ITA Airways – sources
NEW WEEK, SAME TREND (0705 GMT)
European bourses are set for a rough start of the week with futures pointing to losses of about 0.5% after Friday’s sell-off on Wall Street.
Asian bourses retreated and worries about a possible Russian attack on Ukraine is denting sentiment while investors brace for the Fed’s meeting this week.
All eyes are now on IBM (IBM.N), Microsoft (MSFT.O) Tesla (TSLA.O) and Apple (AAPL.O) which are due to update the market this week.
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