If You’re Seeking an Earnings Lift, Look Away Now
If You’re Seeking an Earnings Lift, Look Away Now
(Bloomberg) -- This time it’s different. That might be the motto of some investors recalling last October’s painful sell-off. As European equities struggle to reach new peaks, more than hope is needed for the market to go higher. Better earnings would help and thankfully, the reporting season is fast approaching. But real improvement is far from certain.
The trouble is, global revisions to profit estimates have been consistently negative for the past six months. And if you omit a tiny positive print in April, they’ve actually been downgraded for about 14 months now.
Strategists including Oddo BHF’s Sylvain Goyon are struggling to be optimistic about the market’s prospects without an improvement in earnings per share. Consensus EPS growth forecasts for the Stoxx 600 are still standing at 9.2% for 2020, so further downwards revisions are inevitable, he says. Goyon’s own forecast is for just 2% growth next year.
That’s why recent market bounces are unlikely to last, Goyon says. He’s doubtful of a swift resolution in the trade war and sees hopes for fiscal stimulus as “wishful thinking.”
Barclays’ strategist Emmanuel Cau is on the same page in seeing a need for EPS revisions to bottom out, skeptical of an immediate upside. He argues that more is needed to see a breakout from the current range, which is similar to the pre-jump market movement seen in late 2016. As for the one-year outperformance of bonds against equities, it’s unlikely to reverse unless the macro backdrop improves. That may be some way off. Citi’s data show economic surprises have soared to their highest level since April, 2018 in the U.S. this week, while they went back to the doldrums in Europe.
During the latest market bounce, equities finally recorded inflows, although very little for European stocks and some positioning trends don’t look bullish. Systematic trend-followers (CTAs) were forced to cover shorts on major European equity futures and flipped to the long side, according to Nomura Cross-Asset Quantitative Strategist Masanari Takada, who remains doubtful that the trend has legs. Takada says CTAs’ net exposure is strongly correlated to economic momentum like German Ifo and economic surprises, while hedge funds tend to add longs on European stocks when inflation expectations rise. None of this data is positive at the moment.
Technically, the Stoxx 600 has failed to break out of its cap of around 392.4 points and sold off on the five occasions it was tested. LCM technical analyst Andy Dodd says the index formed a bearish reversal pattern after the last breakout attempt.
In the meantime, Euro Stoxx 50 futures are up 0.1% ahead of the European open, while S&P 500 contracts are down 0.2%.
- Watch Henkel after U.S. adhesives maker HB Fuller tumbled in extended trading following a cut to its earnings guidance. Also watch for read-across into firms like Covestro and Sika, which are also involved in making sealants and adhesives.
- Watch trade-sensitive sectors as the U.S. is set to get World Trade Organization authorization to impose tariffs on about $8 billion worth of European goods in reaction to state aid given to airplane maker Airbus. That’s in opposition to the European Union imposing $4 billion worth of tariffs on U.S. exports in a clear tit-for-tat move more in line with the aggressive stance the Trump administration has taken.
- Watch the pound and U.K. stocks as Prime Minister Boris Johnson remains defiant in the face of calls to resign and will once again push for a new general election. Now attention turns back to how lawmakers can definitively prevent a no-deal Brexit.
COMMENT:
- “We see attractive value in the U.K. utilities, especially among networks and retail,” Citi analysts write in a note. “With the political and regulatory risks diminishing, we believe these value traps will turn into value trades.”
NOTES FROM THE SELL SIDE:
- Citi says it’s turning more bullish on U.K. utilities, noting polls suggest the likelihood of a majority Labour Government led by Jeremy Corbyn is reducing, which means the nationalization risk is easing; upgrades Centrica, United Utilities and Pennon to buy from neutral.
- Thomas Cook’s collapse gives On the Beach an opportunity to make a “step-change” in its market share and deliver as much of 5 years of growth in 12 months, Berenberg says in a note maintaining buy on the online travel firm.
- Engie is resumed with a buy-rating at Citi, which says co. should be relatively immune to a potential economic slowdown as about 90% of Ebitda is regulated or contracted.
COMPANY NEWS AND M&A:
- Ericsson Expects to Pay $1 Billion in U.S. Corruption Probes (2)
- ABN Amro Investigated by Dutch Prosecutor
- BHP Judges China’s Steel Growth Has Plateaued, Ord Minnett Says
- Metro Is Evaluating ‘Efficiency Measures,’ Sees One-Off Costs
- BBVA in Talks to Sell Charmartin Project to Merlin: Cinco Dias
- Fingerprint Cards CEO, Chairman Have Bought Shares in Company
- Imperial Brands Sees Earnings Below Expectations
- Rallye, Fonciere Euris, Finatis Seek 6-Month Safeguard Extension
- Altice Europe to Lower Share Capital by Canceling Treasury Shrs
- Colruyt Forecast for Slight Increase in Adj. Net Tops Estimates
- Hella 1Q Adj. Ebit 3.1% Above Estimates; Outlook Reiterated (1)
- Bakkafrost Offering Prices 7.33m Shares at NOK500/Share
- Bourbon Is Studying Offer for ‘New Money’ From Deutsche Bank
- Bakkafrost Buys 68.6% of Scottish Salmon Co. for NOK28.25/Share
- Thales to Pay Interim Div. of EU0.60 a Share
TECHNICAL OUTLOOK for Stoxx 600 index:
- Resistance at 395.1 (July high); 397.9 (June 2018 high)
- Support at 381.4 (50-DMA); 374.5 (200-DMA); 365.5 (50% Fibo)
- RSI: 54.7
TECHNICAL OUTLOOK for Euro Stoxx 50 index:
- Resistance at 3,573 (July high); 3,596 (May 2018 high)
- Support at 3,440 (50-DMA); 3,403 (61.8% Fibo); 3,342 (200-DMA)
- RSI: 55.6
MAIN RESEARCH AND RATING CHANGES:
UPGRADES:
- Centrica upgraded to buy at Citi
- Micro Focus upgraded to neutral at JPMorgan; PT 11.30 Pounds
- Pennon upgraded to buy at Citi
- Seeing Machines upgraded to buy at Panmure Gordon; PT 5 Pence
- United Utilities upgraded to buy at Citi
DOWNGRADES:
- Worldline downgraded to hold at SocGen; PT 68 Euros
INITIATIONS:
- Aberdeen Standard rated new buy at Investec
- Adyen rated new sell at SocGen; PT 600 Euros
- Burford Capital rated new buy at Peel Hunt; PT 11.64 Pounds
- Dassault Systemes resumed overweight at morgan Stanley
- Engie resumed at citi with Buy; PT 16.70 Euros
- GL Events rated new outperform at MainFirst; PT 30 Euros
- Groupe Tera SACA rated new outperform at MainFirst; PT 5 Euros
- Ingenico Group rated new buy at SocGen; PT 105 Euros
- Nexi rated new sell at SocGen; PT 8.80 Euros
- Prosus rated new overweight at JPMorgan
- Wirecard rated new buy at SocGen; PT 271 Euros
MARKETS:
- MSCI Asia Pacific down 0.7%, Nikkei 225 little changed
- S&P 500 up 0.6%, Dow up 0.6%, Nasdaq up 1%
- Euro up 0.12% at $1.0956
- Dollar Index down 0.11% at 98.93
- Yen up 0.1% at 107.66
- Brent down 0.1% at $62.3/bbl, WTI little changed at $56.5/bbl
- LME 3m Copper down 0.1% at $5780/MT
- Gold spot up 0.3% at $1509/oz
- US 10Yr yield down 4bps at 1.7%
ECONOMIC DATA (All times CET):
- 10am: (EC) Aug. M3 Money Supply YoY, est. 5.1%, prior 5.2%
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
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