JPMorgan sees potential for $1 trillion equity selling
STOXX 600 down 0.34%
Euro zone PMI returns to growth
U.S. stock futures dip
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JPMORGAN SEES POTENTIAL FOR $1 TRILLION EQUITY SELLING (1304 GMT)
Several segments of the market, including European equities, are "trading as if the energy crisis, war, and sharp monetary tightening did not happen," according to JP Morgan market strategists who say global stocks are not pricing in a recession and are likely to move lower.
Weakening economic data as well as an anticipated decline in earnings expectations and 2023 guidance are one factor pointing to the potential fall in markets.
"Recent equity inflows are likely running out of steam, while pensions’ overfunded status could drive an increase in their reallocation from equities to bonds this year," the J.P. Morgan strategists wrote.
They point out that increased interest rates mean defined benefit plans are now overfunded, and this along with market developments could lead to reallocations.
"If this increases to 3-4% of assets (vs 1-2% typically), this could translate to ~$1T of equity selling over a year," the JP Morgan strategists warned.
Higher growth and lower inflation forecasts have also led JP Morgan to close its tactical steepener on two-year and ten-year Eurozone bonds, with the more positive outlook also bringing down their European natural gas price forecasts.
"In Europe, likely misplaced optimism caused trend-following programs to reverse positions from fully short to long", they write, adding that they think these drivers are running out of steam.
They also highlight that market crises tend to evolve in a non-linear fashion, informally known as ‘gradually then suddenly’.
"Currently, there are a number of potential segments that are at risk e.g. CRE, VC, PE, cryptos, and stock holdings popular with retail."
EUROZONE: "SOMETIMES YOU JUST NEED A BIT OF LUCK" (1043 GMT)
It looks the "no recession in the euro zone" camp is getting bigger by the day. And that's quite a turnaround from what was the consensus thinking only a couple of months ago.
The latest sign the currency bloc may escape deep negative growth in 2023 came from PMI data that showed business activity made a surprise return to modest growth in January.
That could strengthen the European Central Bank's hand for another 50 basis points interest rate hike next week. But it could also reassure those who recently started pouring money back into the region battered assets.
The STOXX 600 .STOXX is off to its best start to the year on data going back to 1987 and the euro EUR= has rallied 15% against the U.S. dollar from September's 20-year low.
"It's looking like 2023 could be a year of sluggish growth but not recession," said Steven Bell, economist at Columbia Threadneedle in London.
ING's Bert Colijn said whether there's a recession is now a matter of "semantics" and while "the overall sense of stagnation will likely prevail for most", mild temperatures and plentiful natural gas inventories mean more dramatic scenarios have been avoided.
"Sometimes you just need a bit of luck," Colijn wrote.
Read more here: After a long, cold year, investors are flocking back to Europe
STOXX DIPS ON HEALTHCARE DRAG (0912 GMT)
European shares slipped just below parity on Tuesday shortly after a slightly positive start, with the STOXX 600 .STOXX last down around 0.1%.
The top risers are a sea of Nordic names led by Norwegian fish farmer Salmar SALM.OL, with shares up 6.3% following a media report of possible changes to Norway's resource rent tax. Norway-based seafood company Mowi MOWI.OL is also rising 3%.
Danish insurer Topdanmark's TOP.CO shares are up 4.6%, as well as Norwegian semiconductor company NOD.OL, up 3.2%, and Dutch electric grid equipment maker Alfen ALFEN.AS - up 3%.
Insurers .SXIP are outperformers on a sector basis, up 0.6%, while healthcare names .SXDP are the worst off, making the sector the biggest negative weight on the STOXX.
AstraZeneca AZN.L is the biggest drag on a weighted basis for the index and one reason why the FTSE 100 .FTSE is down 0.43% today.
Investors are awaiting the UK's January business activity data due 0930 GMT.
IT'S ALL ABOUT THE WEATHER (0747 GMT)
It's been another quiet session in Asia with many markets still on holiday. Japan was open and the BOJ's dogged defence of Yield Curve Control seems to be working with 10-year yields holding around 0.39% and away from the 0.5% ceiling.
Notably, the BOJ's new 1 trillion yen ($7.7 billion) offer of five-year funds on Monday drew bids for three times as much, suggesting this could prove a useful method of injecting added liquidity into the market. Essentially banks could borrow at an average 0.145% fixed for five years to invest in JGBs - what could go wrong?
With spreads widening against the yen, the USD has gained 1.7% in the past two sessions and stands around 130.30, while the AUD is up over 3% as an old favourite of the carry trade.
The euro hasn't been able to regain its $1.0927 top but did find support at $1.0850. Bulls are hoping the flash S&P global surveys on Tuesday will confirm the EU economy is currently faring better than the United States, in a reversal of fortunes.
The EU manufacturing PMI is seen edging up to 48.5 in early January from 47.8, and services to 50.2 from 49.8, reflecting in part sharply lower gas prices and the relatively warm winter so far.
JPMorgan is forecasting NWE gas storage will be 56% full at the end of winter, nearly 30%-points higher than the five-year average and a drag on prices.
The U.S. manufacturing PMI is forecast to dip to 46.0 from 46.2, with services at 45.0 from 44.7. Ironically, the weather in the States in recent weeks has been a lot worse than in Europe, which was not how this story was supposed to pan out.
Elsewhere, U.S. stock futures have been becalmed in Asia after rallying overnight. Nasdaq futures gained 2% led by semiconductor and other tech stocks, with some suggesting the recent run of job layoffs in the sector represents a new focus on cutting costs and lifting profits.
Microsoft reports after the bell with the focus on how its cloud and enterprise units are doing, though its reported $10 billion investment in OpenAI is likely to get more column inches in the media. Others reporting include Johnson & Johnson, Verizon and Texas Instruments.
Key developments that could influence markets on Tuesday:
- ECB head Lagarde speaks, but a video message at a roundtable on "The euro as a guarantee of resilience" doesn't sound exactly market moving.
EUROPEAN STOCKS SET FOR MARGINAL GAINS (0734 GMT)
European futures are signalling marginal gains at the open, echoing a firmer tone on the U.S. market on Monday, where the S&P 500 .SPX closed 0.52% higher.
Eurostoxx 50 STXEc1 March futures are up 0.2%. European shares are steadily heading higher, even though the ECB is widely expected to deliver two consecutive 50bps in February and March, which has sent the euro surging.
But ECB policymakers have expressed diverging views, suggesting that the outlook beyond next week's meeting is not quite as clear.
German consumer sentiment is set to improve for a fourth consecutive month in February as energy prices fall, a GfK institute survey showed on Tuesday.
Over in Japan, manufacturing activity contracted for a third straight month in January.
Meanwhile, U.S. tech stocks have gained 5% in the last two trading sessions, lifted by an expectation of slower rate hikes by the Fed.
Microsoft will publish its fiscal year 2023 second-quarter financial results later today, which should offer more insight into the outlook for tech and growth stocks.
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