European Stocks Need a Miracle to Keep Beating U.S.

09 Sep 2019, 10:40 AM IST

(Bloomberg) -- Over the past few weeks, European stocks have staged an unusually strong comeback versus their U.S. peers. If the “Miracle at Medinah,” Europe’s victory against the U.S. in the Ryder Cup, is considered one of the best comebacks in sports history, something akin to it may be required for the European equity market’s outperformance to hold.

Bear in mind that the S&P 500 didn’t drop as much as the Stoxx 600 in early August, and has beaten the European benchmark every year since 2015. Superior earnings growth, massive share buybacks and fiscal incentives in the U.S. are partly responsible, while European stocks have been dragged by a string of political crises and sluggish economic growth.
Still, the risk-on mood suits European markets well, as they are leading the recovery from the August fallout -- even after last night’s rally on Wall Street -- with investors looking to get back into cyclical stocks.

European Stocks Need a Miracle to Keep Beating U.S.

Looking at charts, the picture gives Europe the edge right now. The positive performance since last week has helped the Stoxx 600 to break out of its August range and pierce above its 50-day moving average, a positive momentum signal.

There are also some improvements in Europe. For one, Italy seems to have overcome its political issues and is showing willingness to make peace with Europe. The FTSE MIB has now regained its leading place among main European markets with a 19% surge year-to-date, while the spread between Italian and German yields has plummeted to its lowest level since May 2018. In the U.K., the risk of a no-deal Brexit next month have been receding -- for now.

Still, short-term optimism might not be a big game changer. JPMorgan strategists said earlier this week that they remain neutral on Europe, despite being “tempted” to reverse their preference for U.S. over European stocks. Why? Because Europe first has to beat the U.S. in terms of earnings and European banks would need to perform better than their U.S. peers, according to the strategists. We’re far from that, with earnings expectations still trailing in Europe. But yesterday’s big bounce in bond yields is definitely a good sign for the battered sector.

But macro data haven’t improved yet, particularly in Germany, where poor factory orders are adding to an already challenging situation. “The eurozone is entering a quasi-recession,” writes BNP Paribas strategist Luigi Speranza, expecting a policy response from the ECB as well as from the German government through stimulus which could be worth 1% of GDP, he says. This could end up being the key to extend Europe’s recent edge.

In the meantime, Euro Stoxx 50 futures are down 0.2% ahead of the European open, while S&P 500 contracts are up 0.1%, and the all-important U.S. monthly jobs report is due later today.

SECTORS IN FOCUS TODAY:

Watch the pound and U.K. stocks as Britain’s main opposition political parties are drawing up plans to push for a general election on Oct. 29, just two days before the official Brexit date, as they seek to outmaneuver Prime Minister Boris Johnson over Brexit.

COMMENT:

“All in all, we do not think the idea of investing in equities simply for lack of alternatives is convincing,” DWS CIO Stefan Kreuzkamp writes in a note. “With central banks failing to make any positive surprises, we think that improving macroeconomic data across the board is needed first to increase the upside potential of equities.”

NOTES FROM THE SELL SIDE:

Glanbia is upgraded to buy from hold at Jefferies after a “sensibly reset” guidance as well as a share-price drop. Broker says Glanbia Performance Nutrition (GPN) fundamentals remain intact, implied FY19 guidance seems deliverable, but Europe online is the main challenge.
U.K. mid-cap food stocks are in a “tricky position” where investors need to decide whether to focus on the short-term challenges or the long-term opportunities the sector has, Berenberg writes in a note upgrading its rating on Bakkavor to hold from sell.
Barclays downgrades Sodexo to underweight, saying the food delivery space could be both a threat and opportunity for caterers but the negatives outweigh the positives currently. Compass Group (equal-weight) the best-placed caterer; Aramark, Elior kept at equal-weight.

COMPANY NEWS AND M&A:

Telefonica to Propose Buyback of 2% of Shares: EL Confidencial
- Telefonica Weighs Selling Ecuador Unit: El Economista
Ericsson CEO Rejects Report of His Imminent Exit, Reuters Says
Thyssenkrupp Elevators to Be ‘Perfect Match’, Kone CEO Tells RP
Deutsche Bank Cutting Dozens of Jobs in Fixed-Income Trading
Swedish Banks Say Government’s New Bank Tax May Breach EU Rules
EDP Draws Up Shortlist for Hydro Assets: Reuters
Var Energi Agrees to Buy Exxon Mobil’s Norwegian Assets: DN
SBM Offshore Signs Long-Term FPSO Supply Pact With ExxonMobil
Wendel 1H Net Income Falls to EU98.6m

TECHNICAL OUTLOOK for Stoxx 600 index:

Resistance at 395.1 (July high); 397.9 (June 2018 high)
Support at 381.2 (50-DMA); 372 (200-DMA); 365.5 (50% Fibo)
RSI: 62.7

TECHNICAL OUTLOOK for Euro Stoxx 50 index:

Resistance at 3,515 (May high); 3,596 (May 2018 high)
Support at 3,435 (50-DMA); 3,403 (61.8% Fibo); 3,315 (200-DMA)
RSI: 62

MAIN RESEARCH AND RATING CHANGES:
UPGRADES:

Bakkavor upgraded to hold at Berenberg
Boliden upgraded to overweight at Morgan Stanley; PT 232 Kronor
Clariant upgraded to overweight at Barclays; PT 24 Francs
Dunelm upgraded to hold at HSBC; Price Target 8 Pounds
Glanbia upgraded to buy at Jefferies; PT 13.50 Euros
Pennon upgraded to outperform at RBC; PT 8.75 Pounds
Pirelli upgraded to buy at Deutsche Bank; PT Set to 6.50 Euros
Safran upgraded to overweight at JPMorgan; PT 156 Euros
Vestas upgraded to buy at BofAML; PT Set to 630 Kroner

DOWNGRADES:

CRH downgraded to neutral at Goldman; PT 33 Euros
Kerlink SACA cut to hold at Midcap Partners; PT 1.60 Euros
Lloyds downgraded to hold at Deutsche Bank; PT Set to 55 Pence
Melia Hotels downgraded to neutral at MainFirst; PT 8 Euros
Norden downgraded to hold at SEB Equities; PT 90 Kroner
Prosegur Cash cut to market perform at BBVA; PT 1.56 Euros
RBS downgraded to hold at Deutsche Bank; PT Set to 2.15 Pounds
Sodexo downgraded to underweight at Barclays
United Utilities cut to sector perform at RBC; PT 8.50 Pounds

INITIATIONS:

Lonza rated new overweight at Morgan Stanley; PT 405 Francs
Nordex rated new underperform at BofAML; PT 7.50 Euros

MARKETS:

MSCI Asia Pacific up 1.1%, Nikkei 225 up 0.5%
S&P 500 up 1.3%, Dow up 1.4%, Nasdaq up 1.8%
Euro up 0.1% at $1.1046
Dollar Index down 0.06% at 98.36
Yen down 0.07% at 107.02
Brent little changed at $61/bbl, WTI little changed at $56.3/bbl
LME 3m Copper down 0.5% at $5817.5/MT
Gold little changed at $1518.6/oz
US 10Yr yield up 2bps at 1.58%

ECONOMIC DATA (All times CET):

8:45am: (FR) July Current Account Balance, prior -800m
8:45am: (FR) July Trade Balance, est. -4.45b, prior -5.19b
9am: (SP) 2Q INE House Price Index QoQ, prior 1.5%
9am: (SP) 2Q INE House Price Index YoY, prior 6.8%
10am: (IT) July Retail Sales MoM, prior 1.9%
10am: (IT) July Retail Sales YoY, prior 1.3%
10:30am: (UK) Aug. BoE/TNS Inflation Next 12 Mths, prior 3.1%
11am: (EC) 2Q F GDP SA QoQ, est. 0.2%, prior 0.2%
11am: (EC) 2Q F Employment QoQ, prior 0.2%
11am: (EC) 2Q F Employment YoY, prior 1.1%
11am: (EC) 2Q Gross Fix Cap QoQ, est. 0.2%, prior 1.1%
11am: (EC) 2Q Household Cons QoQ, est. 0.2%, prior 0.5%
11am: (EC) 2Q F GDP SA YoY, est. 1.1%, prior 1.1%
11am: (IT) Istat Releases the Monthly Economic Note
11am: (EC) 2Q Govt Expend QoQ, est. 0.3%, prior 0.1%

To contact the reporters on this story: Jan-Patrick Barnert in Frankfurt at jbarnert3@bloomberg.net;Michael Msika in London at mmsika4@bloomberg.net

To contact the editors responsible for this story: Blaise Robinson at brobinson58@bloomberg.net, Namitha Jagadeesh