August Heat Leaves Stock Market at a Crossroads

(Bloomberg) -- Who said August would be a quiet month? Not us. Yesterday’s bounce pushed stocks a little bit higher on what has been a rocky road to recovery since the havoc wreaked in the first half of the month. And while stocks are still very sensitive to the trade noise, they seem to have found a floor.

The sell-off in August has now put cyclical stocks at their lowest relative level to defensive peers in three years. Up until recently, the shares had held well despite deteriorating European macro data. That’s no longer the case.

Miners and steelmakers have been particularly affected with an 11% drop this month, taking the basic resources sector into negative territory for the year. At the other end of the spectrum, the demand for food & drinks shares has shown no sign of abating.

The aggressive de-risking that occurred in August shows that investors are not complacent anymore, according to Barclays strategists, who see the cautious positioning providing some cushion to equities. Global equities outflows have now reached 3% of assets under management since December, about half the outflows sustained during the 2008-2009 downturn.

And even though talk of recession has been incessant since the inversion of the U.S. 10-year/2-year yield curve, Barclays strategists say current market levels indicate that little recession risk is priced in. Yet, the NY Fed currently has a probability of a U.S. recession in the next 12 months standing above 31%, a similar level to August 2007.

European equities seem to be at a crossroads. The Stoxx Europe 600 has done nothing but consolidate around its 200-day moving average since mid-August and technical indicators like the Relative Strength Index (RSI) are directionless.

The market’s sideways move this month has morphed into a “bearish flag” with a tight grip to the upside and the downside. Thursday’s little rally off the 200-day moving average is now testing the upper end, and multiple resistance points suggest a firm catalyst is needed to push the market higher.

September will likely be a crunch month with the potential for a second and maybe bigger rate cut from the Fed, the possibility of the ECB restarting its quantitative easing program, and further trade talks between the U.S. and China. And that’s not even mentioning Brexit turmoil.

In the meantime, Euro Stoxx 50 are up 0.3% ahead of the European open, while S&P 500 futures are up 0.1%.

SECTORS IN FOCUS TODAY:

• Watch for more reaction to the hawkish tone from some ECB officials sounding alarm bells over more stimulus, two weeks before the next meeting to discuss bolstering the euro-zone economy.
• Watch the pound and U.K. stocks as the U.K. and the EU will ramp up Brexit talks in the coming weeks with British officials set to meet their EU counterparts at least twice a week in September in search of a breakthrough.
• Watch stocks exposed to Argentina after S&P downgraded the country’s credit rating to selective default. Watch BBVA, Tenaris, Salini Impregilo, Prosegur, Telefonica, among others.

COMMENT:

• “Our flagship positioning model tumbles from 2.4 to 1.3 triggering a contrarian ‘buy signal’ for risk assets, the first buy signal since Jan 3rd, 2019,” Bank of America Merrill Lynch strategists write in a note.

NOTES FROM THE SELL SIDE:

• Jefferies cut Novo Nordisk to underperform from hold, saying the stock is becoming expensive, setting PT to DKK300.

COMPANY NEWS AND M&A:

• Vivendi’s Canal+ in Talks to Distribute Netflix in France: Figaro
• Pernod Ricard CEO Says No Further Contacts With Elliott: Echos
• CNH Industrial Is Said to Weigh Options for Iveco Truck Business
• BNP to Bid for Deutsche Bank’s Equity Derivatives Book: Rtrs
• Deutsche Bank Mulls Closing About 200 Branches: WiWo
• German Slump Threatens Bank Profits as Loan Default Risk Spreads
• Prudential ‘Blinded’ by Green-Eyed Monster in $1.8 Billion Suit
• Leopoldo Del Pino’s Siemprelara Sells 0.9% of Ferrovial
• Strabag Keeps Full Year Outlook, Starts New Strategic Program
• Ackermans Sees FY Profit From Business Activities Below Last Yr
• BW Offshore Second Quarter Ebitda Beats Highest Estimate
• OCI Mandates JPMorgan to Evaluate Strategic Options Methanol Ops
• Genmab Says Ofatumumab Was Superior to Teriflunomide in Studies

TECHNICAL OUTLOOK for Stoxx 600 index:

• Resistance at 381.3 (50-DMA); 395.1 (July high)
• Support at 371.3 (200-DMA); 365.5 (50% Fibo)
• RSI: 51.6

TECHNICAL OUTLOOK for Euro Stoxx 50 index:

• Resistance at 3,437 (50-DMA); 3,515 (May high)
• Support at 3,403 (61.8% Fibo); 3,307 (200-DMA); 3,239 (June/August low)
• RSI: 53.7

MAIN RESEARCH AND RATING CHANGES:
UPGRADES:

• ABN AMRO Bank GDRs upgraded to buy at HSBC; PT 22 Euros
• Daimler raised to buy at Kepler Cheuvreux; Price Target 49 Euros
• J. Martins upgraded to buy at Goldman; PT 16.50 Euros
• Mentice Upgraded to Buy at Pareto Securities; PT 80 Kronor

DOWNGRADES:

• Novo Nordisk cut to underperform at Jefferies; PT 300 Kroner
• Salmar downgraded to hold at Fearnley; PT 427 Kroner
• Takeaway cut to neutral at JPMorgan; Price Target 91 Euros

INITIATIONS:

• Air Partner rated new hold at ICBC Research; PT 80 Pence
• K2AB SS rated new reduce at Kepler Cheuvreux
• Uniphar rated new outperform at RBC; PT 1.70 Euros

MARKETS:

• MSCI Asia Pacific little changed, Nikkei 225 up 1.2%
• S&P 500 up 1.3%, Dow up 1.3%, Nasdaq up 1.5%
• Euro down 0.08% at $1.1048
• Dollar Index down 0.01% at 98.5
• Yen up 0.14% at 106.37
• Brent down 0.1% at $61/bbl, WTI down 0.3% to $56.5/bbl
• LME 3m Copper down 0.3% at $5706.5/MT
• Gold spot up 0.1% at $1529.1/oz
• US 10Yr yield up 2bps at 1.51%

ECONOMIC DATA (All times CET):

• 8:45am: (FR) July PPI MoM, prior -0.5%
• 8:45am: (FR) July PPI YoY, prior 0.2%
• 8:45am: (FR) Aug. CPI EU Harmonized MoM, est. 0.5%, prior -0.2%
• 8:45am: (FR) Aug. CPI EU Harmonized YoY, est. 1.2%, prior 1.3%
• 8:45am: (FR) Aug. CPI MoM, est. 0.4%, prior -0.2%
• 8:45am: (FR) July Budget Balance YTD, prior -77.3b
• 8:45am: (FR) Aug. CPI YoY, est. 1.0%, prior 1.1%
• 9am: (SP) June Total Mortgage Lending YoY, prior 18.8%
• 9am: (SP) July Retail Sales YoY, prior 0.3%
• 9am: (SP) July Retail Sales SA YoY, est. 2.5%, prior 2.4%
• 9am: (SP) June House Mortgage Approvals YoY, prior 11.2%
• 10am: (IT) July Unemployment Rate, est. 9.6%, prior 9.7%
• 10am: (SP) June Current Account Balance, prior 2.7b
• 10:30am: (UK) July Consumer Credit YoY, prior 5.5%
• 10:30am: (UK) July Net Consumer Credit, est. 1b, prior 1b
• 10:30am: (UK) July Net Lending Sec. on Dwellings, est. 3.7b, prior 3.7b
• 10:30am: (UK) July Mortgage Approvals, est. 66,100, prior 66,400
• 10:30am: (UK) July Money Supply M4 MoM, prior 0.1%
• 10:30am: (UK) July M4 Money Supply YoY, prior 2.3%
• 10:30am: (UK) July M4 Ex IOFCs 3M Annualised, prior 2.5%
• 11am: (EC) July Unemployment Rate, est. 7.5%, prior 7.5%
• 11am: (EC) Aug. CPI Estimate YoY, est. 1.0%, prior 1.1%
• 11am: (IT) Aug. CPI EU Harmonized MoM, est. 0.0%, prior -1.7%
• 11am: (IT) Aug. CPI NIC incl. tobacco MoM, est. 0.3%, prior 0.1%
• 11am: (IT) Aug. CPI NIC incl. tobacco YoY, est. 0.3%, prior 0.5%
• 11am: (IT) Aug. CPI EU Harmonized YoY, est. 0.5%, prior 0.3%
• 11am: (EC) Aug. CPI Core YoY, est. 1.0%, prior 0.9%
• 12pm: (IT) 2Q F GDP WDA YoY, est. 0.0%, prior 0.0%
• 12pm: (IT) 2Q F GDP WDA QoQ, est. 0.0%, prior 0.0%

--With assistance from Jan-Patrick Barnert.

To contact the reporter on this story: Michael Msika in London at mmsika4@bloomberg.net

To contact the editors responsible for this story: Blaise Robinson at brobinson58@bloomberg.net, Namitha Jagadeesh, Celeste Perri

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