ADVERTISEMENT

No Easy Bets on Halloween Event Spooking Markets

No Easy Bets on Halloween Event Spooking Markets

(Bloomberg) -- The Halloween deadline for Brexit has the qualities investors hate most in market events -- unpredictability and uncertainty.

In a month when jitters already abound on global growth and trade, there’s still no deal in sight for the U.K. With Prime Minister Boris Johnson insisting the country plans to exit on Oct. 31 even as EU officials remain unconvinced by proposals put forth so far, it could all come down to the wire. So far, an extension and early general elections have high odds in strategists’ scenarios, which leaves traders of U.K. assets in a wait-and-see mode.

Deal or no-deal, it appears U.K. stocks are not expected to come out as winners. Even if the two sides pull off the near-impossible feat of reaching an agreement before the deadline, the big winners would be euro-area stocks, JPMorgan strategists said earlier this week, partially because the exporter-heavy FTSE 100 would be penalized by the soaring pound.

No Easy Bets on Halloween Event Spooking Markets

Should the U.K. leave the EU without a deal by Oct. 31, sterling may fall “through 1.15 or even 1.10” versus the dollar, levels not seen since 1985, Jefferies wrote in a note yesterday.

Faced with extreme scenarios, Bank of America Merrill Lynch strategists recommend a volatility play. They forecast the pound will depreciate 15% against the dollar in case of a no-deal Brexit, while moving up 10% in case of a deal. In both situations, they expect European equities to move in the same direction as sterling, and the Euro Stoxx 50 to “realize more than the FX-dampened FTSE in the lead up to and following such Brexit scenarios.”

In fact, the risk premium associated with U.K. equities has been rising much faster than that of the euro area since the referendum, and remains in upward trend.

No Easy Bets on Halloween Event Spooking Markets

Credit Suisse economists shared their view on Monday that an extension of Article 50 is the most likely scenario, but the path to get there could require “increased stress” in the second half of October. They price the odds of a no-deal Brexit at 20% and see a 90% chance of a general election by the end of the year. This continuous political stress could weigh on sterling and U.K. assets, they say.

In the end, prolonged uncertainty seems to be the most painful scenario, as it drags on the economy and makes planning difficult, with consequences for the job market as well. Although the unemployment rate is hovering near its lowest since the 70s, U.K. staffing companies warned yesterday that a lack of clarity around Britain’s departure from the European Union has continued to hurt hiring trends. No surprise then that U.K. business confidence has been sinking.

That leaves U.K. stocks as a trade for the brave, or for the value hunter. Sustained worries about Brexit have already dragged the FTSE 100 to near its cheapest level relative to the Euro Stoxx 50 in 13 years, prompting strategists at Citi and Pictet to recommend the shares on valuation grounds.

No Easy Bets on Halloween Event Spooking Markets

In the meantime, Euro Stoxx 50 futures are little changed ahead of the European open, while S&P 500 contracts are up 0.2%.

SECTORS IN FOCUS TODAY:

  • Watch European exporters given the deteriorating relations between China and the U.S. over the past 48 hours, with the U.S. cracking down on China over human rights and the National Basketball Association running afoul of Chinese sensibilities.
  • Watch for luxury stocks as markets may position ahead of French luxury conglomerate LVMH reporting third-quarter sales after the close and may give a sense of how much the industry has been affected by the unrest in Hong Kong.

COMMENT:

  • “Markets have rallied in 3Q, but not on earnings prospects. Following the sharp cuts to EPS growth estimates, now at -4% y/y in Europe and -3% in the U.S., soft 3Q results may not come as a surprise to investors,” Barclays strategists write in a note. “However, the September market rebound to near ytd highs reduces the cushion, in our view, in particular for cyclicals.”

NOTES FROM THE SELL SIDE:

  • Following a sustained period of downgrades and de-rating for the U.K. pub and restaurant sector, there appears to be some confidence returning as reflected in an upturn in consolidation, which may continue to be a catalyst, Jefferies says, initiating on 6 stocks.
  • While DNB, SEB and Nordea remain buy rated, the banks are not estimated to show any “superior outperformance” in the upcoming 3Q results, Handelsbanken says in note.

COMPANY NEWS AND M&A:

  • GAM Said to Halt Sales Talks With Suitors Including Generali
  • Credit Suisse Weighs Return to U.S. Private Banking After Exit
  • Renault Chairman Wants to Start Search for New CEO: Figaro
  • Boostheat Paris IPO Priced at EU14/Share vs EU14-EU17 Range
  • DBV Technologies Prices $125M of Shares, Closing Seen Oct. 11
  • Takeaway Third Quarter Orders 41.6 Mln
  • Kappahl 4Q Operating Profit Rises to SEK108 Mln
  • CropEnergies 2Q Operating Profit EU28.6 Mln Vs. EU9.6 Mln Y/y
  • BKW Acquired Germany’s LTB Leitungsbau; No Financial Details
  • AMG Buys International Specialty Alloys Assets From Kennametal
  • Bourbon: Takeover Offer Made by A Co. Owned by French Banks
  • TECHNICAL OUTLOOK for Stoxx 600 index:

    • Resistance at 395.1 (July high); 397.9 (June 2018 high)
    • Support at 380.6 (50-DMA); 376.6 (200-DMA); 365.5 (50% Fibo)
    • RSI: 41.6

    TECHNICAL OUTLOOK for Euro Stoxx 50 index:

    • Resistance at 3,573 (July high); 3,596 (May 2018 high)
    • Support at 3,436 (50-DMA); 3,403 (61.8% Fibo); 3,363 (200-DMA)
    • RSI: 48.2

    MAIN RESEARCH AND RATING CHANGES:
    UPGRADES:

    • Cellnex upgraded to outperform at MainFirst; PT 48 Euros
    • DWS raised to overweight at JPMorgan; PT 34 euros
    • KBC Group raised to buy at Jefferies; PT 70 euros
    • Veolia raised to overweight at JPMorgan; PT 25.50 euros

    DOWNGRADES:

    • HSBC cut to underweight at Morgan Stanley; PT 540 pence
    • Inwido cut to hold at Handelsbanken; PT 56 kronor
    • Netcompany cut to hold at ABG; PT 280 kroner

    INITIATIONS:

    • 4imprint rated new hold at HSBC; PT 2,875 pence
    • Aj Bell rated new sell at Liberum; PT 295 pence
    • Ascential rated new buy at HSBC; PT 460 pence
    • Avast rated new buy at HSBC; PT 455 pence
    • Benchmark Holdings rated new buy at HSBC; PT 61 pence
    • Blue Cap rated new buy at GSC Research; PT 23 euros
    • Blue Prism rated new hold at HSBC; PT 1,100 pence
    • Dart Group rated new buy at HSBC; PT 1,050 pence
    • Domino’s Pizza Group rated new underperform at Jefferies
    • Equiniti rated new buy at HSBC; PT 295 pence
    • Greene King reinstated hold at Jefferies; PT 850 pence
    • Hargreaves Lansdown re-initiated buy at Liberum; PT 2,125 pence
    • IntegraFin rated new hold at Liberum; PT 390 pence
    • J D Wetherspoon reinstated hold at Jefferies; PT 1,590 pence
    • Keywords Studios rated new buy at HSBC; PT 1,700 pence
    • Marston’s reinstated underperform at Jefferies; PT 90 pence
    • Mitchells & Butlers reinstated buy at Jefferies; PT 530 pence
    • Nucleus Financial Group rated new hold at Liberum; PT 150 pence
    • Quilter rated new buy at Liberum; PT 159 pence
    • RWS Holdings rated new hold at HSBC; PT 600 pence
    • Restaurant Group reinstated buy at Jefferies; PT 170 pence
    • Ricardo rated new hold at HSBC; PT 630 pence
    • Robert Walters rated new buy at HSBC; PT 615 pence
    • SThree rated new buy at HSBC; PT 350 pence
    • Savills rated new hold at HSBC; PT 920 pence
    • Shareholder Value Beteiligungen rated new buy at GSC Research
    • Sophos rated new hold at HSBC; PT 435 pence

    MARKETS:

    • MSCI Asia Pacific down 0.6%, Nikkei 225 down 0.6%
    • S&P 500 down 1.6%, Dow down 1.2%, Nasdaq down 1.7%
    • Euro up 0.02% at $1.0959
    • Dollar Index down 0% at 99.13
    • Yen down 0.08% at 107.18
    • Brent down 0.4% at $58/bbl, WTI down 0.4% to $52.4/bbl
    • LME 3m Copper up 0.5% at $5703.5/MT
    • Gold spot up 0.1% at $1507.3/oz
    • US 10Yr yield up 1bp at 1.53%

    ECONOMIC DATA (All times CET):

  • 8am: (DE) Aug. Trade Balance ex Ships, prior 8.1b
  • 8am: (DE) Aug. Current Account (Seasonally Adjusted), prior 15.1b
  • 8:30am: (FR) Sept. Bank of France Ind. Sentiment, est. 99, prior 99
  • 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

    ©2019 Bloomberg L.P.