European shares facing 20% downside - BofA

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European equities have been remarkably resilient in the face of an uncertain economic outlook, U.S. banking worries and an ECB intent on tightening policy further, but Bank of America equity strategists expect the market to decline in coming months.

"The market rally over the past six months has been entirely driven by a compression in the equity risk premium (ERP) and periods of ERP compression are typically associated with an economic recovery," BofA Global Research strategists write.

"The market is priced as though we were just coming out of a recession, not heading into one."

The bank remains negative on European equities, taking no comfort in the argument that this is a well-anticipated recession and so downside risk is minimal.

BofA cites recent credit and money supply data for evidence of a renewed growth slowdown.

The ECB's latest bank lending survey showed a net 38% of banks in the euro area reported a decline in demand for credit from companies in the first three months of this year, the biggest proportion since the global financial crisis of 2008-09.

BofA says the decline in credit conditions is consistent with a euro area PMI of just below 40 in the second quarter.

"We expect weakening growth momentum to translate into rising risk premia and accelerating EPS downgrades," the bank says. These would be "consistent with 20% downside for the Stoxx 600 to 365 by early Q4."

(Samuel Indyk)



Turmoil in the banking sector, particularly in the U.S., is having an impact on monetary policy. On Wednesday the Fed signalled it could be at the end of its tightening cycle, while the ECB on Thursday raised rates by 25 bps, its smallest hike since it started lifting rates last summer.

"The Fed's mention of "economic and financial developments" looks like a clear reference to the continuing turmoil in the US regional banking sector, and for now we think further hikes are off the table," Barclays equity strategists write.

However, they're not expecting easing any time soon, even as markets fully price a quarter-point cut as soon as September.

"Absent a quick drop in inflation, only a sharp weakening in growth (i.e. labour market), or a major financial accident, will prompt the Fed to deliver the expected rates cuts," they say.

Barclays notes that equities have mostly been higher after the Fed stopped hiking rates, unless a recession unfolded quickly like in 1974 or 1980/81, and only dropped after the first rate cut.

On earnings, Barclays notes that results have continued to come in better than expected which have been "a relief for equity markets" and don't point to an imminent downturn.

For now, Barclays says the path of least resistance for equities may be to the upside, but they still favour positioning defensively.

"Equities are in late-cycle limbo, torn between peak rates hope and recession fear," they write.

"More cracks are showing, with more banking stress and sharply lower oil prices, so growth outlook does not get better... Hence a more defensive tilt still makes sense to us, with yields likely to be capped for now."

(Samuel Indyk)



Europe's STOXX 600 was eking out gains on Friday morning but was still set for a second straight weekly loss after rate hikes from the Fed and ECB and as concerns about the financial health of the U.S. continued to lurk in the background.

Still, Europe's banks seem relatively immune to the pain faced by their U.S. counterparts, and the STOXX banks index .SX7P is up 1.7% on Friday, although still looks set to close the week in the red.

The STOXX 600 .STOXX is up 0.3%, while Germany's DAX .GDAXI, France's CAC 40 .FCHI and Britain's FTSE 100 .FTSE are up between 0.4%-0.6%.

Sportswear manufacturer Adidas tops the pan-European benchmark after upbeat quarterly earnings, and there have been differing fortunes for major airlines with British Airways owner IAG rising after results and Air-France KLM shares retreating.

Attention is now turning to today's U.S. labour market report, with job growth expected to slow but gains in average hourly earnings likely to remain strong.

Here's your opening snapshot:

(Samuel Indyk)



European futures are edging higher on Friday morning, a day after the ECB raised its key interest rates for the seventh consecutive meeting, with concerns about the state of the U.S. financial sector on pause as Apple earnings boosted sentiment.

The world's largest company by market cap surprised investors with a rise in iPhone sales even as the global smartphone market slumps. Its Frankfurt-listed shares AAPL.F are up 2.1% this morning.

Futures on the Euro STOXX 50 STXEc1 are up 0.4%, with Germany's DAX FDXc1, France's CAC 40 FCEc1 and Britain's FTSE 100 FFIc1 futures all rising between 0.3%-0.4%.

Wall Street futures EScv1 are also higher, while MSCI's broadest index of Asia-Pac shares ex-Japan .MIAPJ0000PUS is up 0.4%.

Key U.S. labour market data is in focus later for signs on whether previous tightening is starting to impact the economy.

Nonfarm payrolls are expected to have increased by 180,000 last month, the smallest increase in nearly 2-1/2 years, although wage growth is expected to have remained strong, rising 0.3% on the month and 4.2% y/y, which may offer little comfort in the Fed's inflation fight.

(Samuel Indyk)



The euro EUR=EBS is digesting a widely anticipated hawkish quarter-point rate rise from the European Central Bank, and is off its one-year highs. While ECB President Christine Lagarde was clear more tightening will come, markets are paring back their expectations for further rate rises 0#ECBWATCH.

Preoccupied with the ECB and tightening credit conditions in the region, investors are likely to riffle over a bunch of delayed March indicators in Germany - chiefly industrial orders and consumer goods, both of which have been volatile.

In the background, there's also evidence that travellers from a reopened China flocked to Europe during their May Day break early this week.

Their luxury shopping has played no mean part in Europe's economies. An index of European luxury retailers .dMIEU0TA00PUS is up 30% this year and French luxury firm LVHM LVMH.PA has joined the league of top 10 global firms by value and become the first European firm to have a market cap of more than $500 billion.

Swiss FX reserves are due too. The franc CHF=D3 is at its strongest level in a couple of years as concerns over U.S. banks drive cash into safe havens, meaning there's opportunity here for the Swiss to recoup the reserves they lost to bond market volatility in 2022.

Speaking of the Swiss, UBS UBSG.S is reviewing options for Credit Suisse's CSGN.S Swiss bank, including potentially keeping the unit's investment banking operations while selling the rest, Reuters reported.

Non-farm payrolls data is the main thing on the watchlist during U.S. hours. Tightness in the labour market is a given, so the questions are around how the Fed balances falling unemployment with its need to see inflation trend lower.

Key developments that could influence markets on Friday:

Economic data: German March industrial orders, Swiss forex reserves, UK PMI, US non-farm payrolls.

(Vidya Ranganathan)


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