The heavy weight of earnings misses

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STOXX 600 up 0.3%

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An earnings miss is likely to weigh on a company's shares in any season, but the divergence in relative performance between a beat and a miss looks particularly wide in Europe this quarter.

Morgan Stanley equity strategists have crunched the numbers and turns out that negative price reaction skew at the single stock level has reached record levels.

"The average 1-day price reaction to an EPS beat is +67bps versus -281bps for a miss," they wrote in a note.

During the season, though, broader European equity indices have generally traded "sideaways" with the STOXX 600 .STOXX now just a fraction below where it was in mid-January when earnings started to trickle through.

Around 13% of companies have reported earnings, which so far have sent a "considerably more sober" message than in previous quarters, the MS strategists said.

The lowest breadth of net sales beat since the fourth quarter of 2020 is emerging, alongside no aggregate net EPS beat for the first time since the fourth quarter of 2014 and top-line consensus beats at the lowest for seven quarters.

When it comes to EPS beats, only large-cap stocks are showing strength, MS noted, with 11% posting beats. Small and mid-caps have posted net EPS misses so far.

"With the caveat that only a handful of companies reported so far, we note how from a sector perspective Financials and Tech enjoyed the best results both in terms of the breadth and size of EPS beats until now."

They see the weakest results from industrials and materials.

(Lucy Raitano)



While it’s true that Southern Europe’s highly indebted countries will bear the brunt of a high rates regime, analysts often forget that those countries have the lowest levels of private debt in Europe.

“It was near impossible to convince investors last year that the ECB could hike rates above 3% without a European crisis,” says in a note George Saravelos, global head of forex research at Deutsche Bank.

“It is similarly an uphill struggle to argue that the ECB could hike rates to 4% this year,” he argues.

“But, investors focusing on public sector debt risk looking at the wrong variable.”

Sweden’s government debt is only 40% of GDP, yet its economy is the weakest in Europe; Greek government debt is the highest in Europe, yet its economy is the strongest, Saravelos recalls.

“Private sector debt is the key variable to watch in this cycle. ECB tightening is having a small impact on the European periphery. Why? Simply put, very few Italians or Greeks have a mortgage,” he adds.

Attractive yields on government bonds are expected to lure more Italian retail investors to the fixed income market in 2023, increasing demand for Italian bonds and returns on families’ savings parked in bank accounts.

(Stefano Rebaudo)



With U.S. recession signals alive and kicking and rate angst far from being cleared, investors still face a high degree of uncertainty over where Wall Street is heading.

But looking through the macro noise, market technicals might provide comfort. The S&P 500 .SPX in fact has powerfully crossed over its 200-day moving average last month and for Citi, this essentially means no new lows ahead.

"US equities rallied in January and have now crossed well over an important technical level. Although fundamentals continue to indicate a recession, markets historically do not revisit lows after significant breaks above the 200dma," Citi's Dirk Willer writes in a note.

"US equities should still underperform global equity markets even without making a new low," he concludes.

(Danilo Masoni)



European shares are faring better than earlier futures trading suggested, with the STOXX 600 .STOXX moving as much as 0.5% higher in early trading. The index is last up 0.2%.

Shares in Novartis PRX.AS - down 1.3% after fourth quarter results - are the biggest drag on the index on a net point weighted basis.

Sweden's Husqvarna HUSQb.ST, the world's biggest maker of gardening power tools, is the biggest riser, up 6.1% after Q4 results, while German reinsurer Hannover HNRGn.DE is at the bottom of the index, down 4.6%. Insurers .SXIP are the biggest sectoral losers, down 0.4%.

Travel and leisure .SXTP names are the sector winner of the morning, up 1.05% and supported by TUI TUIGn.DE shares which are up 2.2%.

(Lucy Raitano)



Global markets face their biggest test so far this year as the Federal Reserve appears poised to hint of an end to interest rate hikes at its meeting on Wednesday.

Investors are pricing in a quarter-of-a-percentage-point increase in the Fed's benchmark interest rate, which would mark the smallest hike since U.S. central bankers kicked off their tightening cycle 10 months ago with one the same size.

Still, there's an air of caution, with markets leaving little scope for any nasty surprises.

In Europe, the region's central bank is expected to deliver 50-basis-point rate rises at each of its next two meetings, with the first one taking place on Thursday.

But the forecasts still risk lagging behind policymakers' guidance on how high rates will go.

The Bank of England is also expected to raise its interest rates by half a percentage point to 4% on Thursday.

For today, European markets will focus on euro zone January flash PMI data, while results are due from Vodafone VOD.L, GSK GSK.L and Novartis NOVN.S.

While the euro zone unexpectedly managed to avoid a recession in the fourth quarter, high energy costs, waning confidence and rising interest rates are expected to take a toll on the economy this year.

Germany and Italy figured among the biggest euro zone countries that recorded negative growth rates for the quarter but France and Spain expanded.

Surveys published on Wednesday showed Asia's factory activity contracted in January as the boost from China's COVID reopening had yet to offset headwinds from slowing U.S. and European growth, underscoring the fragility of the region's economic recovery.

Asian stock markets held steady, supported by signs of a slowdown in U.S. wages that buoyed Wall Street overnight.

Meanwhile, European Union banking regulators on Tuesday launched a stress test to check how banks could cope with a long period of high inflation and interest rates just as the European Central Bank is expected to raise borrowing costs further.

Bayer BAYGn.DE came under pressure after a top-10 shareholder called on the group's supervisory board to replace CEO Werner Baumann quickly, in a move aimed at restoring investor trust and reviving the German drugmaker's sagging share price.

Key developments that could influence markets on Wednesday:

Economic data: Euro zone Jan flash PMI

Europe results: Vodafone, GSK, Novartis, Banco Bilbao

Fed rate decision at 1900 GMT followed by news conference at 1930 GMT

U.S. economic data: Jan ISM

U.S. results: eBay

(Anshuman Daga)



European shares are set for a muted start to Wednesday, though the mood permeating markets is anything but ahead of the outcome of the Fed's two-day meeting later on, euro zone inflation data and more earnings.

EuroSTOXX50 STXEc1 index futures are ticking up a tiny 0.05%, ahead of a day that could see the world's largest economy begin hinting at an end to interest rate hikes.

The Fed's meeting will precede decisions from the European Central Bank and the Bank of England - both due on Thursday.

Euro zone inflation data is expected to be a market-mover today, due for release at 1000 GMT, and earnings are also continuing to pour in.

Spain's BBVA BBVA.MC said its fourth quarter net profit rose 17.6% from the same quarter in 2021 while Swiss drugmaker Novartis NOVN.S predicted that core operating income would grow in a "mid single digit" percentage range in 2023.

In other corporate news, higher global raw material and logistics costs have pushed German automaker BMW BMWG.DE to raise suggested retail prices for some models sold in China.

Veteran Hollywood producer Peter Chernin and French TV production group Banijay's parent have expressed interest in UK broadcaster ITV's Studios, the maker of hit show "Love Island", sources familiar with the matter told Reuters.

(Lucy Raitano)



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