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The Case for Staying Bullish on European Markets: Taking Stock

The Case for Staying Bullish on European Markets: Taking Stock

(Bloomberg) -- After a strong quarter for European stocks, some parts of the market are starting to look stretched. While that may mean equities are due for a breather, most strategists are adamant that the bull trend isn’t over yet for a number of reasons.

First, there are the equity flows. The exodus from equity funds didn’t stop the market rally, and the decoupling between the two is now staggering, as Barclays strategists show in their latest note. It’s unclear what will happen if, or when, the tide turns back into equities -- so it’s worth keeping an eye on the data.

The Case for Staying Bullish on European Markets: Taking Stock

The past quarter favored growth and quality over value, taking the comparable pricing of growth stocks to extremes, according to Barclays. In fact, the relative performance of value stocks is tracking the 10-year bund yield, and a small bounce in the yield could trigger a rotation into value. That’s something an increasing number of strategists are betting on.

The Case for Staying Bullish on European Markets: Taking Stock

At a geographical level, JPMorgan strategists prefer U.S. and emerging-market equities to European stocks. That said, they see the latter region moving higher this year. But for Europe to outperform, corporate earnings, led by banks, would need to beat the U.S. That’s unlikely at the moment, given disappointing profit growth and a dovish ECB, the strategists say.

Banks are also linked to the euro and the bund yield, and while JPMorgan is unexcited by European lenders, the time to buy them might be near given a recovery in loan growth and reduced bad assets, they write. So it’s a sector to watch closely. On Monday, banks rallied, alongside miners and autos.

The Case for Staying Bullish on European Markets: Taking Stock

The view differs at Societe Generale, as they see European stocks lower by the end of the year with a target of 320 for the Stoxx Europe 600 Index, currently trading at 383.7. Still, it’s not all gloom as they forecast some growth acceleration and political risk receding by the summer, which would support valuations.

After the U.K. Parliament once again couldn’t find a common ground on Brexit, the pound is down 0.2% and FTSE 100 futures are gaining 0.1%, while Euro Stoxx 50 contracts are little changed ahead of the open.

SECTORS IN FOCUS TODAY:

  • Watch miners as iron ore prices jumped once more after BHP said its annual output will be cut by 6m to 8m tons in the year to the end of June due to the impact of a cyclone. Watch BHP, Rio Tinto, Anglo American and Ferrexpo and keep an eye on steel stocks including ArcelorMittal and Evraz with steel rebar prices also higher.
  • Watch European grocery names after Amazon said it would cut prices on hundreds of Whole Foods items. Watch Ahold Delhaize, which makes nearly 60% of its revenue from the U.S. market; also keep an eye on other retailers like Tesco, Sainsbury’s, Carrefour and Ocado given Amazon sells Whole Foods products in Europe.
  • Watch oil and oil companies after crude had its best quarter for a decade and has extended those gains into Tuesday as Saudi Arabia deepened cuts and the crisis engulfing Venezuela got worse, and as Iran said keeping the OPEC+ supply cuts going after June should be “easy.”
  • Watch the pound and U.K. stocks after lawmakers once again failed to find a clear majority for any of the alternatives proposed. It seems MPs are leaning towards softer options, which could give a short-lived boost to the pound. Goldman Sachs sees a “big finish” to Brexit creating a good opportunity.
  • Watch the lira and Turkish stocks amid disagreements over who won Istanbul key race. Until there’s clarity, the lira may continue to swing and Turkish assets will remain in limbo while markets wait to see if Erdogan will offer an olive branch to traders he so perturbed last year. But there has been one winner so far: beer stocks.

COMMENT:

  • “The key question investors have now is which market to believe - equities or rates,” Goldman Sachs strategists write in a note. “We do not think equities and bonds rallying together is actually that unusual compared with historical dovish Fed pivots. And while the yield curve inverting was recently associated with an increase in volatility, we do not think it is a signal of an imminent recession. We recently downgraded equities to neutral tactically given the strong rally, but have remained overweight over 12-months given few attractive alternatives and the search for yield.”

COMPANY NEWS AND M&A:

  • BHP Follows Rio in Flagging Cyclone Will Trim Iron Ore Output
  • Novartis Must Face U.S. Suit Claiming Prescription Kickbacks
    • Novartis Says Cosentyx Approved in China for Psoriasis Patients
  • Salzgitter to Study Any Thyssenkrupp, Tata Divestitures: Reuters
  • BP Hasn’t Spoken to Kosmos About Acquiring Tortue LNG Stake
  • Nordex Group Wins Order for 157.5 MW With N149 Turbines
  • Swedish FSA Says Swedbank Poses No Threat to Financial Stability
  • Medartis ’18 Ebitda in Line With Guidance; Sees Continued Growth
  • Russia’s Rustransсom Plans to Raise $300 Million in London IPO
  • Renault Is Said to Flag Ghosn Oman Payments to Prosecutor
  • Euronext Extends Oslo Bors Offer Acceptance Period Until May 6
  • BlackRock No Longer in Running for Italy’s Carige, Sole Says

NOTES FROM THE SELL SIDE:

  • Berenberg cut Atos to sell saying the recent reduction in Worldline stake is set to drive a de-rating, and additional downside risk appeared from the adoption of IFRS 16 which will add EU1.3b of new debt to balance sheet. Sets PT at Street-low EU60, a more than 33% cut.
  • Morgan Stanley has become more cautious on building construction, saying pockets of weakness are multiplying with increased risk that capital goods stocks that are highly exposed and rated could disappoint. Cuts Assa Abloy to underweight from equal-weight, and stays cautious on Legrand, Schindler.
  • Berenberg upgraded Easyjet to hold, with street-low 1,040p PT unchanged, as valuation now appropriately captures the FY19 earnings risks. Ryanair remains a sell on greater risks to unit revenue and labor costs.

TECHNICAL OUTLOOK for Stoxx 600 index:

  • Resistance at 384.6 (trend line); 385.7 (76.4% Fibo)
  • Support at 374.5 (61.8% Fibo); 369.7 (50-DMA)
  • RSI: 65.8

TECHNICAL OUTLOOK for Euro Stoxx 50 index:

  • Resistance at 3,403 (61.8% Fibo); 3,516 (76.4% Fibo)
  • Support at 3,309 (50% Fibo); 3,274 (200-DMA)
  • RSI: 64.4

MAIN RESEARCH AND RATING CHANGES:
UPGRADES:

  • Anglo American upgraded to buy at Deutsche Bank
  • EasyJet upgraded to hold at Berenberg
  • Vallourec upgraded to buy at SocGen; PT 2.82 Euros
  • X5 Retail GDRs upgraded to overweight at JPMorgan; PT $29

DOWNGRADES:

  • Assa Abloy cut to underweight at Morgan Stanley; PT 183 Kronor
  • Atos downgraded to sell at Berenberg; PT 60 Euros
  • Deutsche Post downgraded to neutral at Citi
  • Engie downgraded to sector perform at RBC
  • Fugro GDRs downgraded to neutral at NIBC Bank N.V.
  • Intesa downgraded to neutral at Oddo BHF; PT 2.45 Euros
  • RELX downgraded to add at AlphaValue

INITIATIONS:

  • A.G. Barr rated new underweight at Barclays
  • AB InBev rated new equal-weight at Barclays; PT 79 Euros
  • Britvic rated new equal-weight at Barclays
  • CRH rated new buy at Jefferies; PT 31 Euros
  • Campari rated new equal-weight at Barclays; PT 8.80 Euros
  • Carlsberg rated new overweight at Barclays; PT 975 Kroner
  • Coca-Cola HBC rated new overweight at Barclays
  • Countryside rated new buy at Jefferies
  • Diageo rated new overweight at Barclays
  • Ferguson rated new buy at Jefferies
  • Heineken rated new overweight at Barclays; PT 111 Euros
  • Ibstock rated new buy at Jefferies
  • Kier rated new hold at Jefferies
  • LSR Group GDRs rated new overweight at Gazprombank; PT $3.10
  • Pernod Ricard rated new overweight at Barclays; PT 199 Euros
  • Remy Cointreau rated new equal-weight at Barclays; PT 127 Euros
  • Sika rated new buy at Jefferies; PT 166 Francs
  • UniCredit reinstated outperform at MainFirst; PT 15.25 Euros

MARKETS:

  • MSCI Asia Pacific up 1%, Nikkei 225 up 0.2%
  • S&P 500 up 1.2%, Dow up 1.3%, Nasdaq up 1.3%
  • Euro down 0.04% at $1.1209
  • Dollar Index up 0.06% at 97.29
  • Yen up 0.02% at 111.33
  • Brent up 0.2% at $69.2/bbl, WTI up 0.4% to $61.8/bbl
  • LME 3m Copper little changed at $6468/MT
  • Gold spot up 0.1% at $1288.4/oz
  • US 10Yr yield down 3bps at 2.47%

MAIN MACRO DATA (all times CET):

  • 9am: (SP) March Unemployment MoM Net (’000s), est. -28, prior 3.3
  • 10:30am: (UK) March Markit/CIPS UK Construction PMI, est. 49.8, prior 49.5
  • 11am: (EC) Feb. PPI MoM, est. 0.2%, prior 0.4%
  • 11am: (EC) Feb. PPI YoY, est. 3.1%, prior 3.0%
  • 5pm: (DE) March Foreign Reserves, prior 455.6
  • 5pm: (DE) March Change in Currency Reserves, prior 0

--With assistance from Joe Easton.

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, Jon Menon

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