Top Growth Sector Faces Test of Great Expectations

(Bloomberg) -- Signs of stabilization for China’s economy provided just what the stock market needed to be steady as investors dive into the earnings season. Among tech companies, SAP, ASML and Ericsson are scheduled to report this week, which might signal what’s next for the shares of Europe’s best-performing industry this year.

The region’s technology sector is up 26% in 2019, keeping up with the Nasdaq 100, while the Philadelphia Semiconductor Index SOX has soared more than 30%. The SX8P has been bouncing near the 500-point level after recently hitting a one-year high following a truce in the U.S.-China trade dispute.

Top Growth Sector Faces Test of Great Expectations

The big question remains what impact the commerce wrangle will have on earnings. We’ve already seen numerous warnings from the semiconductor complex, with IQE, Siltronic and Broadcom setting alarm bells ringing at the end of June. Amid escalating tension between Japan and South Korea, Samsung saw its quarterly profit fall by more than half.

Uncertainty stemming from the trade war and the potential drag on the global economy has prompted analysts at Evercore and DA Davidson to warn that a recovery in demand for the chip sector might not materialize until 2020. Bloomberg Intelligence analysts also highlight that the sector’s valuation against its growth picture isn’t a perfect match. Indeed, it’s the most expensive industry group in Europe with an estimated price-to-earnings ratio near 23 times for 2019.

Top Growth Sector Faces Test of Great Expectations

All this means the second-quarter earnings season will be a key test as to whether we’re getting closer to the bottom of the cycle. To be sure, there have been some upbeat signs recently, such as the previously mentioned truce, and the U.S. saying that it will grant licenses to Huawei suppliers. Elsewhere, Asian bellwether TSMC, which supplies Apple, saw quarterly sales beat expectations, while Chinese car sales rose for the first time in a year in June, a potential positive for chip makers exposed to autos, such as Infineon and Melexis.

Analysts at Liberum highlight signs of improvement in areas such as servers, smartphones and cryptocurrency, as well as semiconductor companies reporting “green shoots” of recovery more broadly. They’re overweight on ASML and Ericsson.

Meanwhile, Deutsche Bank analysts expect a significant step-up in inquiries for both Ericsson and Nokia regarding 5G infrastructure, driven by the need for continuity of supply, as well as ongoing security concerns. That said, they don’t think this will improve financials for either company for two years, though sentiment is still positive around margins in the home region.

Top Growth Sector Faces Test of Great Expectations

Looking at Ericsson’s and Nokia’s share price, the initial U.S. ban on sales to Huawei has only had a small effect so far. Any update on the matter will be scrutinized, especially after Nokia’s earnings shocker in April.

In the meantime, Euro Stoxx 50 futures are trading 0.1% lower ahead of the open.

  • Watch miners and steelmakers sectors on Tuesday after iron ore prices jumped following the latest output data from Rio Tinto and on signs of healthy demand from steel mills.
  • Watch the pound and U.K. stocks a difficult meeting was held between the chief negotiators of Brexit. While the EU is reportedly weighing up concessions it could offer to the U.K. to prevent a no-deal Brexit, the pound is at the weakest level ever for this time of year and, if history is anything to go by, it’s going to get worse in August.
  • Watch trade-sensitive sectors after U.S. Treasury Secretary Steven Mnuchin U.S. trade chief Robert Lighthizer may travel to Beijing to hold trade negotiations. Meanwhile, the World Trade Organization is expected to give the U.S. the green light to slap new tariffs on Europe in the ongoing battle about illegal aircraft subsidies.
  • Watch banks, as JPMorgan and Goldman Sachs will report earnings, after Citigroup kicked off the season on Monday with a mixed set of results.


  • “Although the U.K. economy has surprised most commentators in its strength since the 2016 referendum and there is the promise of a fiscal dividend should Brexit be smoothly achieved, and while U.K. equities look cheap, a ‘radical overhaul’ will scare international investors into a rush for the exit,” Kames Capital CIO Stephen Jones writes in a note. “This is not the time to go strongly overweight U.K. assets – equities, Gilts or Sterling.”


  • CRH to Sell Europe Distribution for Ent. Value EU1.64B Cash
  • Bayer’s Monsanto Called Reprehensible as Roundup Verdict Cut
  • Rio’s Copper Flagship Faces $1.9 Billion Cost Blowout, Delay (1)
  • Aroundtown Offering Prices 84m Shares at EU7.15/Share
  • AMS Ends Talks to Buy Osram in Boost for Private Equity Suitors
  • Atlantia Board Looked Through Genoa Bridge Collapse Report: FT
  • Salini Impregilo Presents New Offer for Astaldi (1)
  • Telenor Second Quarter Ebitda Misses Lowest Estimate
  • Borregaard 2Q Op. Revenue Matches Ests., Adj. Ebita Beats (1)
  • Schibsted Second Quarter Ebitda NOK1.06 Bln
  • BillerudKorsnas Second Quarter Adjusted Ebitda Misses Estimates
  • Schmolz + Bickenbach Cuts FY Profit Views on Trade Conflicts (1)
  • Partners Group AuM EU79.8b; Reconfirms 2019 Gross Client Demand


  • The rising probability the U.K. could face a no-deal Brexit prompts JPMorgan to cut Lloyds Banking Group to neutral from overweight given the pressure this could put on the bank’s earnings and revenue.
  • Italian utilities have the highest returns and the lowest risk perception, however, unpriced risk is high now after regulatory risk is discounted in U.K. and Spain, Citi says, cutting Enel to neutral while raising A2A to neutral.
  • Baader Helvea cuts Bossard to hold, removing the only buy rating among analysts tracked by Bloomberg, with the broker now applying a more negative growth/margin scenario.
  • Liberum raised ITV to buy from hold with unchanged 145p price target, following drop in shares that leaves the stock 40% below the broker’s discounted cash flow valuation.

TECHNICAL OUTLOOK for Stoxx 600 index:

  • Resistance at 397.9 (May 2018 high); 403.7 (2018 high)
  • Support at 385.7 (76.4% Fibo); 380.8 (50-DMA)
  • RSI: 56.8

TECHNICAL OUTLOOK for Euro Stoxx 50 index:

  • Resistance at 3,520 (76.4% Fibo); 3,596 (May 2018 high)
  • Support at 3,413 (50-DMA); 3,403 (61.8% Fibo)
  • RSI: 60.1


  • A2A upgraded to neutral at Citi
  • Aston Martin upgraded to hold at Jefferies; PT 10 Pounds
  • Elekta upgraded to hold at Jefferies; PT 126 Kronor
  • ITV upgraded to buy at Liberum
  • Telenor upgraded to hold at DNB Markets; Price Target 183 Kroner


  • Coloplast cut to sell at DNB Markets; Price Target 700 Kroner
  • Enel downgraded to neutral at Citi
  • Getinge downgraded to sell at SEB Equities; PT 120 Kronor
  • Lloyds downgraded to neutral at JPMorgan; PT 70 Pence
  • Pandox downgraded to hold at DNB Markets; PT 200 Kronor


  • Glenveagh rated new buy at Berenberg; PT 1.15 Euros
  • Green REIT rated new buy at Berenberg; PT 2 Euros
  • Hibernia REIT rated new buy at Berenberg; PT 1.70 Euros
  • I-RES rated new buy at Berenberg; PT 2.10 Euros
  • Johnson Service rated new overweight at Barclays; PT 2.05 Pounds


  • MSCI Asia Pacific up 0.3%, Nikkei 225 down 0.6%
  • S&P 500 little changed, Dow up 0.1%, Nasdaq up 0.2%
  • Euro up 0.02% at $1.126
  • Dollar Index up 0.01% at 96.94
  • Yen down 0.08% at 108
  • Brent up 0.1% at $66.6/bbl, WTI little changed at $59.6/bbl
  • LME 3m Copper up 0.3% at $5999/MT
  • Gold spot up 0.1% at $1415.3/oz
  • US 10Yr yield little changed at 2.09%


  • 10am: (IT) May Trade Balance EU, prior 1b
  • 10am: (IT) May Trade Balance Total, prior 2.89b
  • 10:30am: (UK) June Claimant Count Rate, prior 3.1%
  • 10:30am: (UK) June Jobless Claims Change, prior 23,200
  • 10:30am: (UK) May Average Weekly Earnings 3M/YoY, est. 3.1%, prior 3.1%
  • 10:30am: (UK) May Weekly Earnings ex Bonus 3M/YoY, est. 3.5%, prior 3.4%
  • 10:30am: (UK) May ILO Unemployment Rate 3Mths, est. 3.8%, prior 3.8%
  • 10:30am: (UK) May Employment Change 3M/3M, est. 45,000, prior 32,000
  • 11am: (EC) May Trade Balance SA, est. 17.8b, prior 15.3b
  • 11am: (EC) May Trade Balance NSA, prior 15.7b
  • 11am: (GE) July ZEW Survey Current Situation, est. 5, prior 7.8
  • 11am: (GE) July ZEW Survey Expectations, est. -22, prior -21.1
  • 11am: (EC) July ZEW Survey Expectations, prior -20.2
  • 11am: (IT) June CPI FOI Index Ex Tobacco, prior 102.7
  • 11am: (IT) June CPI EU Harmonized YoY, est. 0.8%, prior 0.8%

* For a wrap on developments in Europe’s equity capital markets, click here.

©2019 Bloomberg L.P.

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