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Corrections Aren’t Always a Harbinger of Doom: Taking Stock

Corrections Aren’t Always a Harbinger of Doom: Taking Stock

(Bloomberg) -- After one of the worst weeks for European equity markets this year, there’s one question on everybody’s minds: was this a short-term correction or the start of a major sell-off? The sell-side seem to be relatively bullish, while the buy-side is cautious. Looking at the overall picture, it doesn’t look too bad.

Corrections Aren’t Always a Harbinger of Doom: Taking Stock

Volatility might have spiked, but there’s no sign of panic yet. The Euro Stoxx 50’s volatility index jumped to just above 20. Similar surges have often been followed by bounces. And as we mentioned last week, traders seemed better prepared for a drop this time, with the put-call ratio reaching a peak of 3.4 on Sept. 24, showing market operators have built protection against a pullback.

Corrections Aren’t Always a Harbinger of Doom: Taking Stock

“I don’t think this is the start of a more meaningful sell-off,” says Benjamin Jones, a senior multi-asset strategist at State Street bank in London. He sees the drop more as a knee-jerk reaction to the poor ISM figure in the U.S. than the start of a bear market.

Corrections Aren’t Always a Harbinger of Doom: Taking Stock

Still, the macro figures were pretty bad and such gloomy snapshots have been appearing with regularity, giving pessimists some support. Newton Investment Management’s real-return team has seen the absence of an economic recovery as a reason to have a low position in equities.

But for Bank of America Merrill Lynch, the market has already baked in a much bigger deterioration in growth momentum, and European equities have 10% upside by the end of the first quarter 2020, according to their macro projections.

And of course there’s always the positioning. Andrew Milligan, head strategist at Aberdeen Standard Life, explains that while markets may correct on bad news, forced selling is more limited when equity exposure is already quite low. Barclays strategists show Europe is a consensus underweight, even more so than the U.K.

Corrections Aren’t Always a Harbinger of Doom: Taking Stock

In the meantime, Euro Stoxx 50 futures are up 0.1% ahead of the European open, while S&P 500 contracts are down 0.4%.

  • Watch Portuguese stocks after Socialist Prime Minister Antonio Costa won a parliamentary election on Sunday and will remain in the government for a second term.
  • Watch the pound and U.K. stocks as prospects of a Brexit deal faded after talks between the two sides stalled and European leaders cast doubt on reaching an agreement in time for Oct. 31. Deal or no deal, here is how to trade the different outcomes.
  • Watch trade-sensitive stocks as Chinese officials narrow scope of talks, signaling they’re increasingly reluctant to agree to a broad trade deal.

COMMENT:

  • “To say that equities are unloved is an understatement,” Jefferies strategists write in a note. “Global equity funds extended their redemptions to a fourth straight quarter, the longest streak on record. Investor positioning is very bearish.”

NOTES FROM THE SELL SIDE:

  • Publicis faces the risk of a margin reset, with revenue growth slowing to zero and the company having just invested in the acquisition of Epsilon, Morgan Stanley says in note as it cuts rating to underweight from equal-weight.
  • Virbac has room for more upside, with the market underestimating U.S. recovery which should drive margin accretion well ahead of consensus, Jefferies says in note as moves to buy from hold.

COMPANY NEWS AND M&A:

  • HSBC to Cut Up to 10,000 Jobs to Slash Costs, FT Reports
  • Osram to Update Strategy as Ams Offer Doesn’t Achieve Threshold
    • AMS Fails to Get Minimum Threshold for Osram Takeover Offer
  • Airbus to Start Exchange for Airlines to Hedge: FN
  • ACS Seeks Buyer for Road Maintenance Unit ImesAPI: Confidencial
  • National Grid May Hold Talks on Managing Power Networks: FT
  • Kering Eyewear, Safilo Renew Supply Agreement for Gucci Products
  • Metro Bank Founder Hill Seeks Support to Go Private: Telegraph
  • Domino’s Woos Ex-Greene King CEO to Lead U.K. Board: Times
  • Sunrise CFO Says Is Convinced UPC Takeover Will Succeed: FuW
  • EDF Unions Call for Oct. 17 Strike Against Group Reorganization
  • Raiffeisen Waits for Courts to Set Precedent on Polish FX-Loans
  • Volvo to Double Market Share in China Construction Equipment: DI
  • Sobi Valuation Is too Low, Dagens Industri Says
  • Sirius Minerals Cuts 300 Jobs to Lower Costs: Times
  • Drax Application Approved to Develop Gas Turbine Technology

TECHNICAL OUTLOOK for Stoxx 600 index:

  • Resistance at 381 (50-DMA); 395.1 (July high); 397.9 (June 2018 high)
  • Support at 376.1 (200-DMA); 365.5 (50% Fibo)
  • RSI: 42.5

TECHNICAL OUTLOOK for Euro Stoxx 50 index:

  • Resistance at 3,573 (July high); 3,596 (May 2018 high)
  • Support at 3,437 (50-DMA); 3,403 (61.8% Fibo); 3,358 (200-DMA)
  • RSI: 44.4

MAIN RESEARCH AND RATING CHANGES:
UPGRADES:

  • Collector upgraded to hold at SEB Equities; PT 48 Kronor
  • Daimler upgraded to hold at HSBC; PT 45 Euros
  • Ericsson upgraded to hold at SEB Equities; PT 70 Kronor
  • Virbac upgraded to buy at Jefferies; PT 248 Euros
  • Yara Upgraded to Hold at Norne Securities; PT 400 Kroner

DOWNGRADES:

  • Carnival Plc downgraded to hold at HSBC; PT 35 Pounds
  • Dechra Pharma downgraded to hold at Jefferies; PT 30.90 Pounds
  • Kojamo downgraded to neutral at Goldman; PT 15.10 Euros
  • Publicis cut to underweight at Morgan Stanley; PT 38 Euros
  • TMK GDRs downgraded to hold at BCS; PT $4.20

INITIATIONS:

  • Duke Royalty rated new corporate at Edison; PT 54 Pence

MARKETS:

  • MSCI Asia Pacific up 0.1%, Nikkei 225 down 0.2%
  • S&P 500 up 1.4%, Dow up 1.4%, Nasdaq up 1.4%
  • Euro little changed at $1.0979
  • Dollar Index up 0.04% at 98.85
  • Yen up 0.06% at 106.88
  • Brent little changed at $58.4/bbl, WTI up 0.1% to $52.9/bbl
  • LME 3m Copper up 0.4% at $5666.5/MT
  • Gold spot little changed at $1505.1/oz
  • US 10Yr yield down 1bps at 1.52%

ECONOMIC DATA (All times CET):

  • 10:30am: (EC) Oct. Sentix Investor Confidence, est. -13, prior -11.1
  • 11am: (IT) Istat Releases the Monthly Economic Note

To contact the reporters on this story: Michael Msika in London at mmsika4@bloomberg.net;Ksenia Galouchko in London at kgalouchko1@bloomberg.net

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

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