Gambling on Casino Can Be Dangerous: European Equity Pre-Market

(Bloomberg) -- Euro Stoxx 50 futures are down 0.4%. We’re back in a risk-off mood once again, after President Trump was said to go ahead with tariffs on an additional $200 billion of Chinese goods even as the White House attempts to restart talks with Beijing. Asian equities are weaker, though a Japan bank holiday is giving investors some time to process.

Beneath the surface, we might get some sector rotation in Europe after U.S. 10-year bond yields rallied on Friday to hit 3%. The bond proxy sectors such as real estate and utilities might take a hit, while banks could rally. Watch the sectors most heavily hit by the trade tensions between the U.S. and China, including automakers, auto parts, miners, steelmakers, oil & gas firms and the semiconductor sub-sector. Emerging Markets have particularly suffered from the trade war rhetoric and the dollar strength, but Franklin Templeton believes the rout may be nearing a bottom.

As we approach the release of the Italian budget on September 27, it seems large asset managers are getting more confident that the government will stick to fiscal discipline. Janus Capital, Franklin Templeton and Fidelity have all increased or kept their exposure to the troubled country. There is some Brexit news, as always, with European leaders ready for talks on Wednesday. The pound is holding above 1.30 per dollar as Theresa May seems to be gaining support.

Looking at U.K. equities, GS strategists noticed they are again trading at a sharp P/E discount to both Euro Area (7%) and the US (26%), and that is mostly due to the mining sector underperfomance. The sector dipped into bear market territory before bouncing back last week. GS, MS and JPMorgan all agree the weakness is at odds with the constructive outlook for metals demand/supply, and like JPMorgan’s analyst highlighted last week, miners are among the cheapest stocks right now (P/E below 10x), most have a rock solid balance sheet and high dividend yield (~5%).

Vodafone will be one U.K. stock to watch today after the FT reported that its rising CEO Nick Read was considering a sale of mobile masts. There are 110,000 towers in Europe, half of which are directly controlled, and a bank has valued them at €12B. H&M will be in the spotlight, no doubt. The fashion retailer released a sales update. Ten days ago, SocGen cut its price target, the lowest of the street, forecasting more pain. The shares are down 27% so far this year, close to 13-year lows and the stock is one of the most heavily shorted in Europe - 24% of its free float, 49 days to cover.

Finally, what’s going on with Casino? Muddy Water’s latest attempt to pressure the shares was short lived. Less than a month after their devastating tweets, Casino has now bounced back. The supermarket chain CEO did his best to reassure shareholders during roadshows and analyst meetings, and it seems to have worked. The shares could have more juice as more than 38% of the free float was short as of last Thursday, with 18 days needed to fully cover.

COMMENT:

  • “Year to date, the valuation of European equities contracted 10%, bringing the 12m forward P/E closer to MSCI EM than S&P 500. We estimate that a quarter of SXXP revenue is derived from Asia-Pacific and other EM, with 5% directly from China. Indices such as the MDAX or the FTSE 100 generate more than 30% of their Sales from EM and Asia-Pacific. The DAX is the European index with the highest beta to world trade growth.” GS believes an increase in China infrastructure spending and a looser policy stance should help activity to pick-up.
Gambling on Casino Can Be Dangerous: European Equity Pre-Market

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