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CHEAP EURO RUNNING OUT OF JUICE FOR EUROPEAN STOCKS (1157 GMT)
A weakening euro has helped cushion value-for-money European equities from bigger drops, but how much upside is left to squeeze out of the struggling single currency?
Not much, according to Bofa equity strategists.
Slowing growth and rising interest rates have contributed to a 19% fall in Europe's STOXX 600 index from its peak in January. This was somewhat tempered by the 6% peak-to-trough decline in the euro trade-weighted index, the BofA analysts say in a note.
"Without the support from EUR depreciation, the market would likely have been down by close to 25%," they say.
The flagging euro has also helped European shares outperform on a relative basis to their global peers, with the more than 10% fall in the EUR/USD spread accounting for most of the 5% outperformance for European equities seen since January according to the BofA strategists.
But with no further downside expected for the euro, they think much of the benefit of FX weakness has already played out for European stocks, leaving them more vulnerable to weaker growth going forward.
Relative to global equities, their base-case macro assumptions are consistent with around 5% underperformance for European equities but this rises to 7% in a recession scenario.
The BofA strategists remain neutral on European equities, overweight on staples and utilities, and underweight on banks and autos.
(Lucy Raitano)
THE SIGNAL AND THE NOISE (0957 GMT)
In the 2008 global financial crisis, investors lost about $9 trillion of wealth. This time around, losses are about $23 trillion and counting. And while investing in global markets may seem the equivalent of whack-a-mole on most days, Gavekal strategists point to three important trends that distinguish this bear market episode from previous ones.
The single most important one is the disappearing negative correlation between stocks and bonds. Hallmark of an inflationary environment, bonds can no longer be relied as an asset to hedge equity market risk. That perhaps explains the amplified skittishness among investors at the first signs of equity market wobbles.
The second big change is the spectacular meltdown of cryptocurrencies. Trillions of dollars wiped off the valuations of these coins, once hailed as inflation and equity market hedges, has driven home the point that they are nothing more but a leveraged play on central bank policy making.
And the final major change is how well emerging market assets have held up so far this year in the face of rapid Federal Reserve rate hikes, growing recession risks and a deepening bear market. Emerging market bonds and currencies have also held up well.
RUSSIA GAS FUELS EUROPEAN SHARES, SET FOR WEEKLY GAINS (0733 GMT)
The pan European index is flat but set for best week in two months as Russia resuming pumping gas via its biggest pipeline to Europe brought some relief to stocks grappling with higher cost of borrowing and a political crisis in Italy.
Russia resumed pumping Nord Stream gas to Europe on Thursday after a 10-day outage, allaying some of Europe's immediate supply fears.
In the meantime, a first batch of earnings results have started to come in showing mixed results.
On Friday, shares in Beazley jump 11% to the top of the STOXX 600 after the Lloyd's of London insurer reports profit plunge, but raises full year profitability outlook.
The STOXX 600 index is flat, set for its best week since end of May. EZ blue chips are down 0.2% but are also set for their best week since May. London-listed shares, up 0.2% on the day, are on track for best weekly gains in one months.
(Joice Alves)
DRAWING THE BATTLE LINES (0655 GMT)
For all the excitement about the European Central Bank's first rate hike since 2011 and the launch of a new tool to contain a blowout in borrowing costs, the euro and core bond yields are back to levels where they were before Thursday's meeting.
As pleased as bond vigilantes may be that the ECB has not wasted any time in hiking by a more aggressive 50 bps and still thinks it should be able to repeat that feat in September, for markets the TPI (Transmission Protection Instrument) appeared to be strong on promises but weak on detail.
The ECB may be able to finesse that and clear some of the market confusion in time, but the question remains what happens if markets have reason to test it sooner?
Throw into the mix an expectation that soft U.S. economic data this week will not deter the Federal Reserve from raising interest rates by another whopping 75 bps next week even as the economy slows under the weight of soaring inflation.
So, it's not surprising that investors are singing a gloomy tune on Friday.
World stocks are set to snap a three-day rising streak, the U.S. dollar index has rebounded smartly from Thursday's lows and the Treasury yield curve, a gauge of recession risks, is pushing deeper into negative territory.
U.S. stock futures are in the red thanks to grim earnings from social media darling stock Snap Inc sending its shares down by 25%. That's a reminder that stock punters are quick to dump richly valued mega cap stocks at the first signs of trouble.
Key developments that should provide more direction to markets on Friday:
Italy's national election will be held on Sept. 25, government source told Reuters on Thursday.
PMI: France, Germany, EU Composite, UK
UK retail sales fall by 0.1% in June
Schindler cuts 2022 revenue guidance on China slowdown
(Saikat Chatterjee)
ECB HANGOVER, ITALIAN POLITICAL TURMOIL IN FOCUS (0640 GMT)
Euro zone futures are trading lower the day after the European Central Bank raised interest rates by more than expected in its first hike in 11 years, bolstering economic growth slowdown fears.
In the meantime, Italian futures are underperforming, down 0.7% as the political crisis widened in Italy sending tremors through financial markets. Italy will hold a snap national election on Sept. 25 after Prime Minister Mario Draghi resigned following the collapse of his national unity government.
ECB concerns about runaway inflation trumped worries about growth. But that added to pressures on EZ stocks as the euro zone economy is suffering from the impact of Russia's war in Ukraine.
EZ futures are between flat and 0.7% lower, while London FTSE futures are up 0.2%.
The ECB raised its benchmark deposit rate by 50 basis points to zero percent.
Next, the U.S. Federal Reserve meets next week and expectations of a 100 bp hike have faded in favour of pricing for a 75 bp move.
(Joice Alves)