StreetAccount summary - EU weekly recap

StreetAccount summary - EU Weekly Recap: STOXX Europe 600 +0.91%, FTSE 0.21%, DAX +0.84%, CAC +0.44%
Friday, May 13, 2016 03:45:30 PM (GMT)

  • Overview:
    • European markets were higher overall in a week dictated by choppy trade. Brexit issues dominated the narrative in the UK, with more attention on the BoE's policy update than usual. It offered an explicit outline of the potential implications of Brexit. The Norges Bank's policy decision was uneventful, striking a balanced picture of the Norwegian economy and Greece made some headway on debt relief. Miners were the biggest underperformers as the commodity complex came under scrutiny. Q1 earnings season reached the half-way mark with earnings largely beating, but revenues missing for the 10th consecutive quarter.
  • BoE warns on technical recession:
    • The BoE voted unanimously to keep its key policy settings on hold and cut its 2016 GDP growth forecast to 2% vs 2.2% in February and expects growth to come in at 2.3% in 2017 and 2018, respectively. In line with the February Inflation Report, it said it expects to reach its 2% inflation target by mid-2018. The projections were based on the first rate hike in early 2018 and Britain remaining in the EU. However, it warned that in the event of Brexit growth could be materially weaker and inflation may rise sharply due to potential sterling losses. BoE Governor Carney said it would use all of its tools to support demand and meet its inflation target, but warned that monetary policy could not offset all of the effects and the economy could experience a technical recession.
  • More analysis on Brexit impact:
    • As well as the BoE's intervention on the Brexit issue, there were more warnings from the IMF and the UK government. UK Chancellor Osborne confirmed that the Treasury was involved in contingency planning and highlighted that every credible financial body backed the economic case for remaining in the bloc. The IMF warned that interest rates could rise and there could be falls in equity and house prices, along with the risk of contagion. Sell-side research reiterated expectations for sterling losses of up to 20% and banking sector weakness from potential funding strains and balance sheet pressures. The property sector was already showing signs of a slowdown, while there were mixed thoughts on Gilts given the obvious move to safety vs concerns over financing of the current account deficit.
  • Norges Bank holds fire, for now:
    • As expected, the Norges Bank left its benchmark rate unchanged and offered a largely balanced, yet brief statement, in part, due to the absence of any meaningful macro developments ahead of the meeting. It said not much has changed since the March decision and stuck to its rate path which gives a 100% probability for a September cut. Takeaways were mixed; while CPI remains elevated (well above the 2.5% target), recent krone strength was seen as a potential headwind to the inflation forecast. That said, the recent rise in oil prices (positive for exports) was viewed as supportive for economic growth prospects (Q1 GDP rebounded sharply). Governor Olsen again did not rule out negative rates and stressed the importance of managing a weaker currency. Economists expect a cut in H2 this year but agreed that June easing appears less likely.
  • Greece gets debt relief break through:
    • Greece finally made some headway in its debt relief demands after Germany reportedly softened its position on the issue. The options on the table, prepared by the European Stability Mechanism (ESM), included an extension of the maximum weighted maturity by 5 years to 37.5 years, setting loan repayments at 1% of GDP until 2050 and linearly amortized thereafter, and capping interest on debt at 2%, with any interest that would have payable above this deferred until 2050. Other options include returning profits generated by ECB holdings of Greek bonds to Athens and having the ESM buyout Greece’s IMF loans. The terms of the debt plans are based on Greece maintaining a 3.5% primary surplus from 2018 to 2025, which the IMF thinks is unrealistic.
  • Mining stocks underperform sharply:
    • Miners were the biggest underperformers as the commodity complex came under pressure again amid ongoing US dollar strength. Despite a continued string of softer US data, Fedspeak this week contained hawkish tilts with a June hike not off the cards. The US dollar index rose ~1%. In response, industrial and base metals languished, particularly copper and iron ore, pressuring the resources sector. In the absence of major corporate updates out of miners, the sell-side discussed whether the sector has peaked following a strong performance since February, driven by speculative Chinese private investors, who analysts say, have been steadily closing their short-positions. Indeed, UBS pointed out that in the base metals sector, short positioning has also been reduced by ~28% from the mid-January peak.
  • Earnings season a tale of two halves:
    • It’s been a tale of two halves for Q1 earnings with the season reaching the half-way mark this week. So far, companies have reported the worst revenue misses for 10 quarters, but after the bar was lowered sharply in the Q4 reporting season, they've have also delivered the biggest beats on earnings since 2010. UBS said the gap between earnings beats and revenue misses has never been higher, as companies cut costs by more than expected and avoided worst case expectations. It argued that this is not a sustainable solution, as for proper earnings recovery, companies need top-line growth to return. The press meanwhile warned over chasing dividend growing stocks for higher income against a backdrop of depressed bond yields, which can push up the prices of dividend stocks, in turn making income funds attractive in a reinforcing loop.
  • Sector Performance:
    • Notable outperformers: Telecom +3.21%, Health Care +2.73%, Food & Beverage +1.92%, Travel & Leisure +1.86%.
    • Notable underperformers: Basic Resources (4.86%), Media (0.72%), Chemicals (0.47%), Insurance (0.17%).

Subjects: Market Summaries - EU, Weekly Recap - EU


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