Equities: reasons for optimism and reasons for caution

STOXX 600 hits fresh 14-month high

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Financials biggest uplift

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BofA profit up, eyes on Goldman

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U.S. stock futures up 0.4%

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EQUITIES: REASONS FOR OPTIMISM AND REASONS FOR CAUTION (1115 GMT)

Europe's volatility index is trading at 17-month lows, as investor jitters that peaked during last month's banking crisis apparently recover completely.

When it comes to the outlook for global equities, Credit Suisse equity strategists have listed their big picture reasons for both optimism as well as caution.

The turning up of the 'Coppock Curve' is the first improvement they note, given that with the exception of 2001, this has consistently signalled the start of a new bull market. A slowing in U.S. wage growth to 3.2% is the next.

"If wage growth remains at this level, then the Fed can cut aggressively, bond yields can fall to c2.5% and profit margins can be protected," the CS strategists write.

A fall in bond yields is another improvement for global equity outlook, they say, as well as earnings revisions becoming less negative, although on the latter the CS strategists do forecast earnings revisions to deteriorate.

Finally the fact that the Fed’s balance sheet expanded in March is seen as a positive signal.

But they also have reason for caution, including recession risk that "is flashing bright red" and the current equity risk premium which they view as too low.

And the reasons don't end there.

"Equity performance implicitly assumes we are early-cycle (risk appetite is pricing in ISM new orders of 66), when we are in fact late-cycle. Non-financial cyclicals look vulnerable on many factors, which normally is negative for equities overall."

Earnings risk remains very high, they add, and they also point out that credit and equity have been moving in different directions since early March and market breadth has been poor.

The final rationale for additional caution is positioning.

"Corporate net buying is set to slow very sharply from very high levels. Asset allocators are close to neutrally positioned. We had record retail buying in February. Only very low speculative positions are supportive."

(Lucy Raitano)

SHORT SQUEEZES COMING ACROSS EUROPEAN REAL ESTATE? (0923 GMT)

Real estate has become quite unpopular, with today's BofA survey showing investors are at their most bearish on the space since July 2009 just as commercial real estate is viewed as the most likely source of the next credit event.

Crowding data from UBS quant analysts that uses the bank's prime brokerage data and other sources is pretty gloomy too and has some interesting findings.

One is that European real estate is "the most crowded short of all sectors and markets" with bearish bets almost doubling to 16.2% of market cap from 8.8% last month.

But a too crowded short also carries risk of short squeezes.

"European real estate remains a crowded short, pointing to potential short squeezes into the companies’ Q1 23 earnings results, which started in recent days, in particular in Sweden," UBS analysts including Charles Boissier write in a note.

The five most shorted stocks are SBB, Aroundtown, Castellum, Klepierre and URW, according to UBS.

(Danilo Masoni)

LOOK OUT FOR THE MOST ANTICIPATED RECESSION EVER - BNP (0912 GMT)

We are likely to see a moderate U.S. recession in the fourth quarter of 2023, and markets are cautious, but this is also likely to be the most anticipated one ever, said Grace Tam, Chief Investment Advisor with the CIO Asia at BNP Paribas Wealth Management.

"Time to lock in higher yields in quality bonds," Tam told the Reuters Global Markets Forum (GMF).

"We are overweight equities with focus on non-U.S. equities. This is a bit contrarian, as most investors are very cautious on equities, but we think sentiment is too bearish. A lot of the bad news is already priced in."

Tam said bright spots in the current environment include European banks, as well as A-shares and H-shares in China.

China's economy grew at a faster-than-expected clip in the first quarter, data showed on Tuesday.

"China’s economy is recovering faster than market expectations - we expect to see stronger data in coming months. A lot of foreign investors are still cautious on China, but this is a positive as the market is still far from crowded."

Since consumption took the biggest hit during China's zero-COVID policy, there is significant pent up demand and excessive savings, added Tam.

(Anisha Sircar)

FINANCIALS KEEP STOXX AFLOAT (0754 GMT)

European shares rose slightly in early deals on Tuesday, aided by low equity volatility, and with financials providing the biggest uplift to the STOXX 600 on another big day for Wall Street bank earnings releases.

The pan-European equity benchmark index was last up around 0.2%. Banks rose 0.9%, making them the biggest sectoral gainer in the region. Travel and leisure was buoyed by airline stocks after easyJet raised its profit guidance.

The euro STOXX volatility index, a European equivalent of Wall Street's so-called fear gauge VIX, was near the lowest levels since November 2021, and well below the peak hit in the aftermath of last month's banking turmoil.

Here's your opening snapshot:

(Danilo Masoni)

EUROPE EYES SLIGHTLY POSITIVE START (0640 GMT)

European shares were set to inch higher on Tuesday, supported by late gains on Wall Street overnight and stronger-than-expected China GDP data with results from Goldman Sachs and Bank of America due to take centre stage later in the day.

EuroSTOXX50 and FTSE futures rose around 0.1-0.2% ahead of the cash market open and U.S. contracts pointed to a muted start on Wall Street. Asian shares fell slightly, unimpressed by the upbeat Chinese data.

European bank stocks futures rose 0.6%, recovering partly from losses across the sector on Monday that drove the region-wide STOXX 600 equity benchmark into its first daily decline in six sessions.

Swiss bank UBS, which lost almost 4% on Monday, said after the market close it would use some of its treasury shares for the takeover of Credit Suisse rather than cancelling them as originally planned.

Elsewhere, in earnings news, airline easyJet said it expects full-year profit to beat market forecasts, while Sweden's Ericsson reported first-quarter core earnings that beat expectations. Revenues at military aircraft engine maker MTU Aero topped expectations.

(Danilo Masoni)

CHINA'S ECONOMY GATHERS PACE BUT MARKETS UNIMPRESSED (0549 GMT)

China's post-Covid recovery is firmly on track, according to a barrage of data on Tuesday. The economy expanded 4.5% in the first quarter year-on-year, accelerating from the previous 2.9% reading and handily outstripping forecasts for 4% growth. Retail sales surged more than 10%, giving hope that hitherto flaccid domestic demand could also turn around.

But market reaction was fairly muted and the yuan was little changed. That's perhaps a sign traders are worrying this could be a one-off and are bracing for more subdued data for the rest of the year.

Tensions between Washington and Beijing continue to give investors pause.

U.S. law enforcement officials on Monday arrested two New York residents for allegedly operating a Chinese "secret police station" in Manhattan's Chinatown, part of a crackdown on Beijing's alleged targeting of U.S.-based dissidents.

Asia stocks were mostly weaker on Tuesday, with investors possibly fretting about the implications of further Fed tightening after strong manufacturing data boosted bets for a hike in May.

Investors are also unlikely to be buying aggressively ahead of upcoming bank earnings, keen to see if any have been affected by turmoil in the sector. Goldman Sachs and Bank of America report later in the day while Morgan Stanley is on Wednesday.

JPMorgan, Citigroup and Wells Fargo have all beaten Wall Street forecasts but State Street tumbled more than 9% overnight after fee income fell.

Japan equities, though, were on track for an eighth straight day of gains, feeding off a weakening yen and some buoyant domestic financial results.

The European stock open will be watched closely after the week started with a pullback from one-year highs, ending a five-day winning run.

Bank Indonesia is widely expected to leave its key rate unchanged for a third consecutive meeting in the coming hours, one of a growing number of central banks which are opting to watch how policy tightening so far plays out in the economy.

For the Reserve Bank of Australia, the decision to pause last month after 10 consecutive hikes was a close one, minutes of the meeting revealed, and a potential return to tightening is very much alive.

Key developments that could influence markets on Tuesday:

UK labour data

German ZEW survey

Goldman Sachs, BofA earnings

(Kevin Buckland)