Crude Oil Reality May Halt Europe's Equity Rally

(Bloomberg) --

Just when European stocks were getting back into rallying mood and heading for multi-month highs led by a revival in cyclicals and banks, something had to ruin it all. This time it’s coming from the geopolitical front, and it’s ugly. Except maybe for energy stocks.

The drone strikes on a Saudi Arabian oil facility has removed about 5% of global supplies, an attack the U.S. has blamed on Iran, with President Donald Trump saying the U.S. is “locked and loaded depending on verification” that Iran staged the attack. Oil posted its biggest ever intraday jump to more than $71 a barrel, and Euro Stoxx 50 futures are down 0.8% this morning.

There will probably be a knee-jerk reaction in the energy sector, especially since it has been in limbo this year. With a 3.4% gain in 2019, it’s one of the worst performing sectors of the Stoxx 600. The sector has been mostly considered as a value play, with a high dividend yield, and its defensive features have not been taken into consideration. Today’s move, if durable, may prompt investors to reevaluate the status of oil majors.

“Energy equities are materially undervalued at current levels,” says BMO Capital Market analysts. They expect stocks to respond positively, particularly the oil majors such as BP. Even if the oil supply disruption is short lived, the event is a reminder that events in the Middle East are unpredictable, they say, and further attacks would push crude prices even higher than current levels. As for Santander analysts, they see Equinor, ENI and Galp as most sensitive to short term oil upside on a trading basis. Bernstein says Equinor, BP and ENI have the highest beta to crude and are the best way to play the latest geopolitical oil market event.

At the other end of the scope, airlines may be in trouble in the short term. Although some are partially hedged against oil moves, fuel accounts for 25% of operating costs, according to the IATA, which means crude price swings have a major impact on airlines’ results.

SECTORS IN FOCUS TODAY:

• Watch European miners, steelmakers and luxury stocks following further signs of a slowdown in China’s economy, with industrial output missing expectations in August.
• Watch U.K. homebuilders following data showing asking prices for homes posted their first September decline for 9 years.

NOTES FROM THE SELL SIDE:

• Prosus is initiated with an underperform rating at Jefferies, which expects a normalizing discount after index buying, with the figure probably settling at the narrow end of the recent Naspers range of 30%-40%, from the current 17%.

COMPANY NEWS AND M&A:

• H&M Third Quarter Sales Meet Estimates
• Spire Healthcare 1H Adjusted Operating Profit GBP51.4 Mln
• Alfa Financial Sees Earnings Significantly Below Previous Views
• Avon Rubber Says Performance is in Line With Expectations
• Telefonica Mulls Partial Acquisition of OI: EL Confidencial
• AMS Lowers Acceptance Threshold for Osram Bid to 62.5% From 70%
• Wirecard, UnionPay, Sign MoU to Form Global Partnership
• Lundbeck to Buy Alder in $1.95B Deal to Gain Migraine Drug

TECHNICAL OUTLOOK for Stoxx 600 index:

• Resistance at 395.1 (July high); 397.9 (June 2018 high)
• Support at 381.1 (50-DMA); 372.9 (200-DMA); 365.5 (50% Fibo)
• RSI: 68.6

TECHNICAL OUTLOOK for Euro Stoxx 50 index:

• Resistance at 3,573 (July high); 3,596 (May 2018 high)
• Support at 3,435 (50-DMA); 3,403 (61.8% Fibo); 3,325 (200-DMA)
• RSI: 69.5

MAIN RESEARCH AND RATING CHANGES:
UPGRADES:

• ASR Nederland upgraded to overweight at JPMorgan; PT 36.30 Euros
• Deutsche Wohnen upgraded to buy at Goldman; PT 35.20 Euros
• Hammerson upgraded to buy at Goldman; PT 3.03 Pounds

DOWNGRADES:

• Coface downgraded to neutral at JPMorgan; PT 10.80 Euros
• Eni downgraded to hold at Berenberg
• Go-Ahead downgraded to hold at Jefferies; PT 21.60 Pounds
• Hannover Re downgraded to underweight at JPMorgan; PT 129 Euros
• ICADE downgraded to neutral at Goldman; PT 83.30 Euros
• Mapfre downgraded to neutral at JPMorgan; PT 2.70 Euros
• Orsted downgraded to hold at HSBC; Price Target 680 Kroner
• Swiss Life downgraded to underweight at JPMorgan; PT 370 Francs

INITIATIONS:

• Energean Oil & Gas re-initiated at peel Hunt With Buy
• Prosus rated new underperform at Jefferies; PT 61 Euros

MARKETS:

• MSCI Asia Pacific up 0.6%, Nikkei 225 up 1.1%
• S&P 500 down 0.1%, Dow up 0.1%, Nasdaq down 0.2%
• Euro down 0.02% at $1.1071
• Dollar Index down 0.07% at 98.19
• Yen up 0.2% at 107.87
• Brent up 10.5% at $66.6/bbl, WTI up 9.4% to $60/bbl
• LME 3m Copper down 0.9% at $5918/MT
• Gold spot up 1% at $1503.6/oz

ECONOMIC DATA (All times CET):

• 10am: (IT) Aug. CPI FOI Index Ex Tobacco, prior 102.7
• 10am: (IT) Aug. CPI EU Harmonized YoY, est. 0.5%, prior 0.5%
• 10:30am: (IT) July General Government Debt, prior 2.39t

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

To contact the editor responsible for this story: Blaise Robinson at brobinson58@bloomberg.net

©2019 Bloomberg L.P.