Europe's outperformance "a reversal of fortune" with further to go - GS
STOXX 600 flat
Nasdaq futures drop after big-tech earnings
Focus on U.S. jobs report
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EUROPE'S OUTPERFORMANCE "A REVERSAL OF FORTUNE" WITH FURTHER TO GO - GS (1318 GMT)
The recent outperformance of European equities relative to U.S. stocks is a hot topic for market players, who are questioning how much longer the situation can persist.
Goldman Sachs strategists think this outperformance - true in both local and USD terms - has further to go.
Since a market trough in mid-October, the S&P 500 is up about 17%, while Europe's STOXX 600 .STOXX is up around 20%.
According to GS, there have been only three major periods of European equity outperformance in U.S. dollar terms since the 1980s.
Cheaper valuations, improved fundamentals and positive inflows are the drivers of the recent shift, they write, which marks a "reversal of fortune" given European shares have generally underperformed their U.S. counterparts since the GFC.
As for the latest cycle of outperformance, they address three main questions on investors' minds.
The first is what might happen in the event that the S&P 500 has a sharp correction. The strategists' answer is not pretty.
"In a US drawdown there is nowhere to hide," they write.
"...the median drawdown in Germany during US bear markets since the 1970s is close to the S&P 500 (28%), while the FTSE 100 is slightly lower (23%). But even when the US suffers smaller corrections, of between 10% and 20%, the falls in other markets are typically comparable."
The second concern bugging investors is what happens to European outperformance if the S&P 500 remains relatively flat - an outcome that Goldman Sachs forecasts. But it needn't worry investors.
"After years of outperformance a flat market in the US is unlikely to prevent the European equity market from outperforming so long as global growth remains intact and a soft landing is achieved."
"How much can Europe outperform in a benign environment?" is their third and final question.
"If things progress well for global growth and interest rates remain stable, we would expect Europe to continue to outperform the US," they say.
COULD PAYROLLS SURPRISE TO THE UPSIDE? (1205 GMT)
The first Friday of the month can only mean one thing: Nonfarm Payrolls.
This month, consensus looks for the U.S. to have added 185,000 jobs in January although uncertainty surrounds the forecast, with estimates ranging from 125,000 to 305,000.
One of the more bullish forecasts of 300,000 comes from Goldman Sachs senior economist Spencer Hill.
"While consensus appears to expect the spike in corporate layoff announcements to weigh on tomorrow's report, jobless claims have fallen further, and California WARN notices suggest the majority of these mass layoffs have not yet been implemented," Hill said in a research note published on Thursday.
The number of Americans filing new claims for unemployment benefits dropped to a 9-month low last week, data released on Thursday showed.
Hill also points to strength in "Big Data" employment indicators, a boost from favourable seasonal factors, still-elevated labour demand, and a 36,000 boost from the return of striking education workers for the expected upside surprise.
On the negative side, Hill notes that the ADP's employment report flagged possible disruptions from winter weather and California flooding.
Niels Christensen, chief analyst at Nordea, told Reuters earlier this week that the average earnings will be the most important part of the jobs report for the markets.
Average hourly earnings are forecast to rise 0.3% after a similar gain in December. That would lower the year-on-year increase in wages to 4.3% from 4.6% in December.
"What is on investors' minds is how much pressure is on wages at the moment," Nordea's Christensen said, as central banks look for signs of higher wages feeding into underlying inflation.
Goldman's Hill sees earnings increasing 0.4% on the month, which would bring the annual rate down to 4.4%.
"While we believe labor shortages are easing and wage pressures have peaked, we expect a one-time boost of roughly 0.05pp from start-of-year wage hikes," Hill said, "We assume neutral calendar effects."
HOW ABOUT A 4% TERMINAL RATE? (1118 GMT)
The data-dependent game is still on and market participants still flag that an ECB deposit rate at 3.25%, which many analyst see at the end of the tightening cycle, might not be enough to tame inflation.
Deutsche Bank analysts acknowledge that the yesterday's ECB comments on what comes after March opened all possibilities, including the potential for a pause in rate hikes.
"However, this was not borne out by the press conference and the Q&A," and President Christine Lagarde's overarching message at yesterday's press conference was hawkish, they say.
Furthermore, after the announced 50 bps hike in March, the ECB will be even more data-dependent as rates will solidly be in restrictive territory, they argue.
Deutsche Bank draws three scenarios. The ECB could hike into the summer up to 3.50-3.75%; it could pause at 3.25% in May and deliver a second wave of hikes to 3.75-4.00% later this year and into 2024; it could raise to 3.25-3.50% by mid-year and then hold that level through 2024.
"At the margin, our sense is there is a stronger consensus for holding at the terminal rate for longer than pushing the terminal rate much higher above 3.25-3.50%," they say.
Markets and the central bank might underestimate the risk of solid economic headwinds in 2023.
ECB euro short-term rate (ESTR) August 2023 forward EUESTECBF=ICAP was at around 3.3%, implying an ECB deposit rate at 3.4% this summer.
CENTRAL BANKS ARE NOW YOUR FRIEND (1049 GMT)
It's been a big week for central banks sounding less hawkish.
What started with the Fed hiking by a smaller increment on Wednesday, later saw the BoE and ECB both signal a slowdown in rate hikes is just around the corner, helping lift equity markets around the globe to their highest in months.
"Central banks not pushing back on dovish market expectations have turbocharged the Goldilocks mood, despite rather uninspiring Q4 earnings," say Barclays equity strategists, led by Emmanuel Cau.
Widespread optimism has pushed the pan-European STOXX 600 .STOXX up almost 8% this year, with the index up over 20% from its October 2022 low.
Barclays notes that a majority of investors have been reluctant to chase the recent rally and remain under-exposed to equities, but says this may change now after the central bank announcements, with market momentum now "firmly positive".
"Cyclical, rates sensitive and stagflation sector losers of 2022 may be prone to more short covering/chasing," Barclays says.
SLUGGISH START IN EUROPE; SANOFI SLIDES (0845 GMT)
Equity markets in Europe opened in the red on Friday, with losses broad-based across all sectors.
Shares in French pharma giant Sanofi are down almost 5% and are the biggest negative weight on the STOXX 600 .STOXX after the company said launches for two new drugs this year would drag earnings lower.
The pan-European benchmark index is down 0.5%, while Germany's DAX .GDAXI is off 0.9% and France's CAC 40 .FCHI is down 0.7%.
Britain's FTSE 100 .FTSE is little changed, but is outperforming most other major bourses as shares in oil majors BP and Shell trade higher.
Investor focus is now firmly on Friday's U.S. labour market report, which is expected to show nonfarm payrolls increased by 185,000 in January. That would mark the smallest number of monthly jobs created in two years.
Here's your opening snapshot:
STOCK FUTURES SIGNAL SOFTER OPEN; NFPs ON DECK (0731 GMT)
European stock futures are signalling a softer open on Friday, as a busy week draws to a close with even more risk events.
In Europe, services PMIs for January will be closely watched for more clues on the state of the economy, while in the U.S., the January payrolls report is the main focus.
A poll of economists surveyed by Reuters expects the U.S. to have added 185,000 jobs in last month, with the unemployment rate seen ticking up to 3.6%.
Futures on the Euro STOXX 50 STXEc1 are down 0.3%. Futures on the DAX FDXc1, CAC 40 FCEc1 and FTSE 100 FFIc1 are off by 0.1-0.4%.
Wall Street futures are also sliding, with Nasdaq futures NQcv1 down 1.5% after disappointing earnings from heavyweights Apple, Amazon and Alphabet.
In Asia, the fallout from the Hindenburg short-seller report continued to weigh on shares of companies in the Adani Group. Their market value now more than halved to below $100 billion.
Meanwhile, MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS eased 0.3%.
THE MORNING AFTER THE NIGHT BEFORE(0655 GMT)
After the central bank triple-header (that's the Fed, ECB and BoE) buoyed risk appetite and emboldened investor hopes of the end of the massive global tightening cycle came the Big Tech triple-header to revive worries over global economic conditions.
Dour fourth-quarter results from Apple AAPL.O, Google-parent Alphabet GOOGL.O and Amazon AMZN.O are likely to cast a shadow on the markets on Friday before the crucial non-farms payroll data is released later in the day.
Analysts expect 185,000 jobs were added last month and the report will likely paint a clearer picture of the labour market in the United States.
With the market facing up to the reality of the economic downturn, Asian stocks eased with MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS 0.7% lower and set to end the week in the red after five consecutive weekly gains. The dollar =USD firmed, while gold XAU= steadied.
Meanwhile, Adani Group shares continue to bleed with market losses now over $115 billion (for the seven listed Adani firms)in the wake of a scathing report from U.S short-seller Hindenburg that came out on Jan. 24. The meltdown in share prices have stoked fears of wider impact on the Indian equities.
A bright spot for the market was a private sector survey that showed China's services activity in January expanded for the first time in five months, sending business confidence to near 12-year highs.
Even amidst the dire earnings reports from U.S. bellwethers there was a hint of hope that consumer spending was beginning to rebound in China.
Key developments that could influence markets on Friday:
Economic events: Euro zone, UK, Germany S&P Global business surveys, U.S. non-farm payrolls data
Speakers, ECB's Christine Lagarde and BoE's Huw Pill to talk in separate events
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