Consolidation Doesn't Mean Nothing Is Happening: Taking Stock

(Bloomberg) --

The European stock benchmark has been trading in a tight range for weeks now, without the momentum to break out. You can point the finger at sluggish economic data, the lack of further support from the Fed, the need for progress in trade talks, or all three. One thing’s for sure, the market needs a new catalyst. But that doesn’t mean nothing’s happening, as there’s a deep churn among the most-favored sectors.

Looking at the Relative Rotation chart for the Stoxx 600, the past 12 weeks reveal some big shifts. Defensive sectors such as utilities, telecoms, health care and real estate are all feeling the pain, reflecting a preference for cyclical shares, which are more sensitive to economic growth.

Consolidation Doesn't Mean Nothing Is Happening: Taking Stock

With a push toward cyclicals underway, technology and construction industries are leading, while the attraction of autos and banks is improving fast. Miners seem to be the exception in the group, with a clear weakening trend. Recent broker downgrades after a strong rally, stalling economic growth and a soaring dollar seem to have taken their toll on the sector.

Consolidation Doesn't Mean Nothing Is Happening: Taking Stock

Cyclicals are likely to continue to outperform as the macro backdrop improves in Europe and emerging markets, Bank of America Merrill Lynch strategists write. They expect further pro-cyclical rotation in credit markets also, with high yield outperforming sharply in April.

Consolidation Doesn't Mean Nothing Is Happening: Taking Stock

Using tactical signals, BofAML is bullish on construction, industrials, technology, personal goods and autos. Banks are still in neutral territory although they are now preferred to insurance. Utilities, travel, health care and telecoms all show bearish signals.

Europe overall remains susceptible to a short squeeze, given it’s still the most underweight market in fund managers’ exposure. The latest investment flow figures show further outflows from the region. The earnings season hasn’t been too bad so far, though the emergence of a catalyst will likely be necessary to send the market in a clear direction. In the meantime, sector rotation brings a lot of trading opportunities.

Ahead of U.S. payrolls this afternoon, Euro Stoxx 50 futures are trading up 0.1%, signaling more range-bound trading.

  • Watch network equipment firms Nokia and Ericsson after U.S. peer Arista Networks missed estimates, sending its shares plunging in post-market trading.
  • Watch video game developers after U.S. group Activision Blizzard’s 2Q forecast missed analyst estimates, sending its shares down in extended trading. Watch Ubisoft, Frontier Developments, THQ Nordic, Starbreeze and Codemasters.

COMMENT:

  • “Global economic data has been below consensus expectations for 14 months in a row, the longest stretch since the financial crisis,” said Luca Paolini, chief strategist at Pictet Asset Management. “World trade, on volume terms, is now at its weakest level since 2009 while business confidence in developed economies is falling. At the same time, investors appear too optimistic about prospects for corporate earnings growth. We think equities may struggle to add to their recent rally. We therefore maintain our underweight stance on stocks and remain neutral on bonds.”

COMPANY NEWS AND M&A:

  • HSBC Profit Beats Estimates as CEO Flint Reins in Cost Increases
  • BASF Had Weakening Demand from Key Industries; 1Q Adj Ebit Beats
  • Adidas 1Q Operating Profit Rises 17%, Beating Highest Estimate
  • Adyen Shares Placed at EU680/Shr
  • Novo Nordisk 1Q Ebit Beats Highest Estimate; Outlook Maintained
  • Air France-KLM 1Q Op. Loss At EU303M V. EU118M Loss Last Year
  • SocGen 1Q Net Income Falls 26%; Trading Revenue Declines
  • Swiss Re 1Q ROE +5.9%; P&C Combined Ratio 110.3%
  • UBS Doesn’t Expect Wave of Lawsuits, Chairman Weber Tells NZZ
  • Proximus First Quarter Adjusted Ebitda 1.8% Above Estimates
  • Boliden First Quarter Operating Profit 3.0% Above Estimates
  • Tenaris First Quarter Net Sales Miss Lowest Estimate
  • OMV Says 2019 Production Target Depends on Libya Security
  • Siltronic 1Q Ebitda EU127.2m; Maintains Lower 2019 Forecasts (1)

NOTES FROM THE SELL SIDE:

  • Morgan Stanley says HSBC’s 1Q profit beat expectations on better revenue and lower costs and the only weak spot in the results should reverse later in the year. Adj. pretax profit a 12% beat against consensus, with adj. revenue 4% better than expected and costs 2-3% lower than estimates.
  • Jefferies cuts Kion to hold from buy, arguing valuation closing in on fair value; while order book has strengthened, broker also says it’s cautious on near-term order development. Sees more upside in buy-rated Jungheinrich.
  • Heineken’s entry into Ecuador isn’t material risk to bigger rival AB InBev although it shows increased beer competition, where once-protected markets are being challenged by new entrants, according to Jefferies.

TECHNICAL OUTLOOK for Stoxx 600 index:

  • Resistance at 392.7 (July high); 403.7 (100% Fibo)
  • Support at 385.7 (76.4% Fibo); 381.4 (50-DMA)
  • RSI: 57.9

TECHNICAL OUTLOOK for Euro Stoxx 50 index:

  • Resistance at 3,516 (76.4% Fibo); 3,596 (May high)
  • Support at 3,403 (61.8% Fibo); 3,382 (50-DMA)
  • RSI: 63.6

MAIN RESEARCH AND RATING CHANGES:
UPGRADES:

  • Catena upgraded to buy at Kempen & Co; PT 270 Kronor
  • Duerr upgraded to buy at Commerzbank; PT 49 Euros
  • Hugo Boss upgraded to neutral at Goldman; PT 64 Euros
  • Logitech upgraded to buy at Kepler Cheuvreux; PT 45.50 Francs
  • Wacker Chemie upgraded to neutral at JPMorgan; PT 78 Euros
  • Zalando Upgraded to Hold at SocGen; PT 43 Euros

DOWNGRADES:

  • Big Yellow Group cut to sell at Kempen & Co; PT 9.60 Pounds
  • Cramo downgraded to reduce at Inderes; PT 19 Euros
  • Fabege cut to neutral at Kempen & Co; Price Target 135 Kronor
  • Geberit downgraded to neutral at MainFirst; PT 470 Francs
  • Kion downgraded to hold at Jefferies; PT 63 Euros
  • Lancashire downgraded to hold at HSBC; PT 6.96 Pounds
  • Outokumpu downgraded to hold at SEB Equities; PT 3.10 Euros
  • Siemens Healthineers downgraded to neutral at Citi
  • VIB Vermoegen cut to hold at SRC Research; Price Target 26 Euros
  • Workspace cut to neutral at Kempen & Co; Price Target 10 Pounds

INITIATIONS:

  • Cyan rated new buy at Berenberg; PT 41 Euros
  • GB Group rated new hold at Panmure Gordon; PT 5.74 Pounds
  • IQE rated new buy at Panmure Gordon; PT 1.20 Pounds
  • Ideagen rated new buy at Panmure Gordon; PT 1.65 Pounds
  • John Laing Group rated new outperform at Macquarie
  • Kainos rated new hold at Panmure Gordon; PT 5.30 Pounds
  • Learning Tech rated new buy at Panmure Gordon; PT 1.10 Pounds
  • Network International Holdings rated new buy at Berenberg
  • Nordic Entertainment Group new equal-weight at Morgan Stanley

MARKETS:

  • MSCI Asia Pacific down 0.1%
  • S&P 500 down 0.2%, Dow down 0.5%, Nasdaq down 0.2%
  • Euro little changed at $1.1172
  • Dollar Index little changed at 97.83
  • Yen up 0.02% at 111.49
  • Brent down 0.5% at $70.4/bbl, WTI down 0.2% to $61.7/bbl
  • LME 3m Copper up 0.4% at $6190.5/MT
  • Gold spot up 0.1% at $1272.3/oz
  • US 10Yr yield up 4bps at 2.54%

MAIN MACRO DATA (all times CET):

  • 10:30am: (UK) April Markit/CIPS UK Services PMI, est. 50.3, prior 48.9
  • 10:30am: (UK) April Markit/CIPS UK Composite PMI, est. 50.6, prior 50
  • 10:30am: (UK) April Official Reserves Changes, prior $172.0m deficit
  • 11am: (EC) March PPI MoM, est. 0.1%, prior 0.1%
  • 11am: (EC) March PPI YoY, est. 3.0%, prior 3.0%
  • 11am: (EC) April CPI Core YoY, est. 1.0%, prior 0.8%
  • 11am: (EC) April CPI Estimate YoY, est. 1.6%, prior 1.4%
  • 11am: (CC) April CPI MoM, prior 0.83%
  • 11am: (CC) April CPI YoY, prior 1.36%

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