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UK EQUITIES LACK LOVE WHILE FRANCE STORMS AHEAD (1040 GMT)
UK equities are looking oversold as 2022's outperformance wanes, but across the channel France is now trading at a premium to MSCI Europe on price to book value for the first time since 2005, according to Morgan Stanley equity strategists.
Weakness in UK stocks can be attributed to the country’s deteriorating fundamentals, they write in a note.
"Earnings revisions are at their lowest levels year to date on both an absolute and relative basis while forward margins peaked at the tail end of last year."
But even after 2022's rerating, relative UK valuations still appear historically depressed
"UK stocks trade at a 19% discount to the market on a blend of metrics – equivalent to the 30th percentile versus the last 10Y."
Relative performance in French stocks, meanwhile, is being driven by luxury stocks enjoying a boost from China's reopening.
"This strong run does, however, appear to have moderately overshot forward earnings trends, which have been range bound year to date," they write of French equities.
Spain has recently outperformed, with the country's earnings revisions still at supportive levels. At a 30% discount versus a 22% long run median average discount, Spanish valuations are looking attractive according to the MS strategists.
Some of the best EPS momentum in Europe is coming out of Germany, but recent performance has been modest despite this fundamental strength.
"The country trades at a 17% discount to the market across a blend of metrics, which is considerably below its long run median of a 1% discount," write the strategists.
For the Netherlands, a round of recent downgrades is still not enough to make the team at Morgan Stanley see the country as cheap.
"Average valuations are at a 32% premium to the market across a blend of PE, PBV and DY, which equates to the 80th percentile relative to its 10Y history."
(Lucy Raitano)
EUROPEAN STOCKS ON U.S. RECESSION WATCHLIST (1025 GMT)
There's a broad consensus that the economy in the United States will slip into recession at some point this year. And that's highly unlikely to leave European equities unscathed.
"In the past three decades, Europe has never avoided an EPS contraction around a US EPS recession," says Citi.
"European earnings also remain more cyclical than their US peers, and the European index underperforms relative to the US during EPS contractions," it adds.
That being said, Citi screens for European firms with big U.S. business but differentiates them between those with "cyclical" and "defensive" exposures. According to the U.S. bank, cyclical U.S.-exposed stocks have outperformed the defensive group so far in 2023.
Among the stocks with high/cyclical exposure to the U.S., Citi includes LVMH, Assa Abloy and BP, while those with high/defensive exposures include Novo Nordisk , Nestle and Vestas.
And here's a factbox with Wall Street banks' rate hike and U.S. recession forecasts.
EUROPEAN STOCKS SLIDE ON FRESH BANKING WORRIES (0822 GMT)
The STOXX 600 is down 0.5%, with banks and basic resources proving a drag as negative sentiment around bank stocks returns and traders digest a spate of earnings.
Euro zone banks are down 2.4%, with the index on track for its biggest one-day drop in a month, while a broader index of European banks is also down 2%.
Traders attributed the gloom around the financial sector to First Republic Bank saying its deposits dropped by over $100 billion in the first quarter, which has also sent the U.S.'s bank's down 21.9% in Tuesday's pre-market.
Basic resources are also weighing on the broader market, with the index down 2%. The biggest loser is Boliden, whose shares are down 5.4% after the Swedish high-tech metal company posted first-quarter results with EBIT coming in below estimates.
Associated British Foods, which owns Primark, is the biggest loser in both the STOXX 600 and FTSE 350, with share sliding 6.5% after interim results showed a fall in profits.
(Lucy Raitano)
ZOOMING IN ON AI, RATES AND CHIPS WARS (0657 GMT)
ChatGPT vs Bard. Earnings from U.S. tech giants Microsoft Corp, which backs ChatGPT, and Google parent Alphabet Inc, top the watchlist on Tuesday. Profits at these two, Facebook-owner Meta and Amazon Inc are due this week, and estimates show their cloud businesses could be a drag. Yet, as was the case in the last quarter, their efforts around artificial intelligence will predominate earnings calls.
Fed vs ECB. The Fed is in a blackout period ahead of its meeting next week, while the European Central Bank is out and about hinting a half point rate hike is possible next week. The euro is up and has also hit an eight-year high versus the yen as the Bank of Japan's new governor, Kazuo Ueda, has been signalling he is not in a hurry to shift policy.
This week's BOJ meeting, which concludes on Friday, is Ueda's first in charge. U.S. debt ceiling debates and news of plunging deposits at First Republic Bank also serve as a reminder that financial and fiscal stability risks could spur the Fed to shift quickly from hiking to cutting.
Chip wars. South Korea reported barely averting a recession in the first quarter and sagging exports, much of which is chip shipments to China and hence a recurrent issue in Sino-U.S. tensions.
South Korean President Yoon Suk Yeol is in the U.S., and America wants South Korea to urge its chipmakers not to boost sales to China if Beijing bans memory chipmaker Micron Technology from selling chips, the Financial Times reported on Sunday.
Key developments that could influence markets on Tuesday:
U.S. April consumer confidence, March new home sales
Earnings: Microsoft Corp, Alphabet Inc, Visa Inc, General Motors Co, Texas Instruments Inc, PepsiCo Inc.
(Vidya Ranganathan)
FUTURES FLASHING RED AS MARKET AWAITS KEY EARNINGS (0647 GMT)
Futures are flashing red this morning, with key earnings starting to trickle in ahead of a busy week for corporate reporting as investors mull the interest rate paths of major central banks.
Futures on the STOXX 50 are 0.3% lower, while FTSE futures are down 0.4% and DAX futures are 0.1% lower.
Nestle reported slightly better-than-expected first-quarter sales on Tuesday, as the world's biggest packaged food company increased prices to offset tepid sales volume.
Switzerland's biggest bank UBS Group reported a 52% slide in quarterly profit, and set aside more money to draw a line under its involvement in toxic mortgages as it prepares to integrate fallen rival Credit Suisse
Bank of Japan (BOJ) Governor Kazuo Ueda on Tuesday stressed the need to keep monetary policy ultra-loose for now, but signalled the chance of raising interest rates if inflation and wage growth overshot expectations.
Meanwhile, economists polled by Reuters think the European Central Bank will almost certainly add 25 basis points to its deposit rate on May 4 and then take it to 3.50% or higher in June as core inflation remains persistently high.
(Lucy Raitano)
