StreetAccount summary - EU weekly recap

StreetAccount summary - EU Weekly Recap: STOXX Europe 600 +0.99%
Friday, May 20, 2016 03:48:23 PM (GMT)

  • Overview:
    • European markets were higher overall in a week dictated by choppy range-bound action. Brexit risk remained in the forefront, though support to leave the bloc seemed to be losing traction. Policy divergence was a talking point after minutes from the recent FOMC and ECB meetings. Greek debt relief talks continued, but the issue was dominated by differences between the IMF and the EU. The banking sector was a highlight, with bargain hunting and rate dynamics supporting, and there were more corporates taking advantage of low rates. Meanwhile, Brussels continued to take a lenient view of countries that missed budget targets.
  • Markets re-price Brexit risk:
    • There was a re-pricing in Brexit risk after several polls pointed to increased support for those in favor of EU membership. Two notable releases stood out, with the ORB poll for the Telegraph showing a 15% lead for the "Remain" camp, while another poll by Ipsos Mori showed the margin of support at 55% vs 37%. There was a wide variation between telephone polls and online polls, with the latter putting the "Leave" camp marginally in front. The FT poll tracker, taking into account all releases, showed those that want to stay in the bloc at 47% and those that want to leave on 41%. The pickup in momentum lifted sterling ~1% to $1.4510 and Gilt yields increased 8bps to 1.45%. Sectors such as banks, financial services and housebuilders also performed well.
  • Policy divergence a mixed driver for Europe:
    • Policy divergence received attention after the FOMC minutes from April showed most participants judged that if Q2 data showed a pickup in economic growth, then a rate increase might be appropriate, which increased the odds of a June rate hike. However, several Fed speakers highlighted the June Brexit vote as a risk and most sell-side firms thought the Fed was more likely to wait until July. In contrast, there were no surprises from the ECB minutes, which left the door open for further easing and also noted downside risks to growth and inflation. For now though, the focus was on the full implementation of its March policy measures. Against this backdrop, the euro ended ~0.9% lower to levels from late March near $1.1200, but bond yields backed up, with the German 10-year up 4bps after the US T-Note increases ~16bps.
  • Bargain hunters snap up cheap European banks:
    • European banks put in a strong performance as value hunters piled into the sector, which is off ~20% YTD. UBS called it the cheapest sector around, compiling data on P/E ratios of pan-European banks, which shows that bank-stocks are now trading at two standard deviations below historic prices after a series of estimate revisions. The firm favored ING (INGA.NA) (2%), Lloyds Banking Group (LLOY.LN) +4.8% and Swedbank (SWED.A.SS) +0.7%, citing excess capital, high dividend payout policies and focused operations. Bernstein added that while banks continue to face NIM pressure due to ECB negative rates, QE boost to lending can still result in revenue growth. It added that banks have been subject to severe downgrades this year, so earnings expectations are already very low.
  • Debt market warms up ahead of ECB buying:
    • This week saw a deluge of corporate issuance ahead of the ECB’s corporate bond-buying campaign which starts next month. The FT reported that ~€36.4B of euro-denominated bonds were sold this week as companies took advantage of low Eurozone borrowing costs, naming LafargeHolcim (LHN.SW) (8.4%), Vivendi (VIV.FP) +3.1% and Telecom Italia (TIT.IM) (2.6%), as notable issuers. BofA-Merrill Lynch said that ECB corporate bond buying could result in the Eurozone credit market doubling in size over the next five years, implying euro investment-grade issuance of ~€2.5T between now and 2021. It added that ~€70B issuance seen in March could become the norm. In other notable corporate activity, Bayer (BAYN.GR) (~11%) approached Monsanto (MON) with a takeover offer valued at ~$42B.
  • Greek debt relief continues to divide EU, IMF:
    • Greek debt restructuring continued to divide creditors. The IMF said debt needs to be restructured with a long grace period, extended maturities and very low interest rates (which Germany opposes), and insisted that there would be no extra funds without credible reform policies by Athens, which include deeper pension overhauls (which Greece rejects). EU sources were forced to dampen hopes for a breakthrough at the 24-May Eurogroup meeting. Meanwhile, Germany’s Finance Minister Schaeuble said he doesn't want to decide on Greek debt relief until after German elections held in 2017. EU sources also added that Greece might unlock double the funds (up to €11B) in the next tranche, which would prop up the economy until end-2016 and offer creditors more time to negotiate the next installment.
  • EU gives more time on budgets:
    • The European Commission set out its economic policy guidance for individual member states for the next 12-18 months and granted Italy flexibility in meeting debt reduction targets. Rome was given extra fiscal room equivalent to 0.85% of GDP in 2016 compared with the target outlined in the EU's budget rules. It was conditional on Italy meeting targets for 2017 and it will review the situation in November. Spain and Portugal won a reprieve on the excessive deficit ruling, with the Commission deciding to come back to the issue in early July. Spain could still receive a censure or a fine, but it may depend on the party that wins the 26-Jun elections. In addition, it closed the excessive deficit procedures against Ireland, Slovenia and Cyrpus, with deficits now largely below 3% of GDP.
  • Sector Performance:
    • Notable outperformers: Banks +3.12%, Insurance +2.60%, Travel & Leisure +2.44%, Technology +2.12%.
    • Notable underperformers: Auto & Parts (2.16%), Chemicals (1.74%), Food & Beverage (0.71%), Utilities (0.53%).

Subjects: Market Summaries - EU, Weekly Recap - EU


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