Growth risks from Europe, China recipe for sluggish 2023 growth

STOXX 600 up 0.9%

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UK fiscal U-turn provides relief

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Eyes on U.S. earnings: Goldman and Netflix

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Futures point to strong Wall Street open

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GROWTH RISKS FROM EUROPE, CHINA RECIPE FOR SLUGGISH 2023 GROWTH (1148 GMT)

With spillovers from China and Europe weighing on markets globally, Goldman Sachs expects 2.5% annual average global growth in 2023.

In energy-driven Europe, upcoming winter weather skews risks to a deeper recession in Europe, Goldman Sachs chief economist Jan Hatzius and senior global economist Daan Struyven wrote in a note.

In their downside scenario, where the European winter is colder than normal, it will boost gas prices in the region already struggling with high energy prices. In contrast, a warmer winter will boost growth only modestly, in the upside scenario.

In China, without reopening of its crippling COVID-19 curbs and a decline in property activity at a faster rate than this year, 2023 economic growth could weaken to just 1.5%, the economists said.

A recent Reuters poll sees China's 2022 economic growth at 3.2%, quickening to 5.0% in 2023.

In the upside scenario more full reopening and flat housing activity would accelerate growth in China sharply to 7%, according to Goldman Sachs.

They see risk skewed to the downside for the world's second largest economy. Combine that with weakness in other top economies of the world that are situated in Europe, the global economy is in for a sluggish 2023.

WEAKNESS AHEAD FOR EUROPE, BUT ALSO TAILWINDS (1025 GMT)

Earnings-per-share revisions have been incredibly resilient so far in 2022, but weakness lies ahead in Q3 according to JP Morgan strategists.

But even though they expect a Eurozone recession to begin in Q4, the strategists have reason to believe European earnings could hold up better than in past downturns.

They expect EPS to shrink by 10% next year in Europe; a smaller drop than the usual 20%-40% decline.

So why the tempered pessimism?

Their first reason is stronger topline growth this time around, with the gap between nominal and real GDP growth wider than in past downturns.

“Profit margins are at historical highs, and are likely to move lower, together with a peaking out in corporate pricing, but might not fall more than typical, especially if long bond yields start stalling, as we now expect.”

Reduced delinquency risk and the prospect of fewer dilutive recapitalizations is their second reason for expecting a smaller hit than usual to EPS in Europe.

The third is low bond yields, and the fact that bank balance sheets are significantly stronger than ahead of past downturns – meaning credit is likely to keep flowing.

JPM strategists say geopolitics in Europe “is a wild card” given risk of further escalation, but they don’t expect more forced shutdowns this winter. They also note that gas storage in Europe is full and prices have more than halved since August.

Continued government intervention to shield consumers and industry from energy price spikes is expected, and serves as another reason behind their EPS prediction.

FX is a fourth factor helping Europe out, with weaker currencies in the region a boon for exporters.

Finally, another year of weak Chinese growth could provide more of a tailwind for Europe according to JP Morgan, given the easy hurdle rate, just as the region is in a recession.

FTSE 250 VS FTSE 100 (0957 GMT)

The UK government's U-turn on fiscal policy has brought some relief to markets and help stabilise the pound and gilts.

Typically that would support UK domestic stocks but Barclays says restoring fiscal credibility may take some time and for now it says exporters are still investors' best choice.

"We remain OW UK large caps/exporters given their favourable sector exposure between stagflation hedging energy and defensives, and the benefit of a weaker for longer GBP," say strategists at the UK bank.

"FTSE250 too is under owned and offers selective opportunities, but growth/policy trade off in the UK remains unfavourable for now, in our view," they add.

The FTSE 100, which is heavily geared towards exporters that benefit from pound weakness, is down 5.7% YTD, a much better performance compared to the domestically exposed FTSE 250, which has lost over one quarter of its value.

According to Refinitiv Datastream, the FTSE 250 has now reached its lowest level relative to the FTSE 100 since just after the Brexit referendum in June 2016 but still trades above the average 10-year valuation premium, as you see in the chart.

(Danilo Masoni)

GREENER PASTURES (0819 GMT)

European stocks have kicked off their fourth day flashing green, with the pan-European STOXX 600 rising 1%.

All sectors are trading up, with autos in the lead, rising 2.2%. Banks and tech are next, up about 1.9%.

Real estate shares and basic resources are underperforming the rest of the market, but still up 0.3% a piece.

Sweden's Avanza Bank is at the top of the STOXX, up 13.5% after some positive earnings - and other Swedish stocks including Nordnet, GN Store Nord and Fortnox are enjoying the afterglow, up between 6 and 8%.

MORE RESPITE FOR MARKETS, FOR NOW AT LEAST (0642 GMT)

European stocks look set to get a nice uplift at the open this morning, with STOXX 50 futures indicating a 1.3% gain for the index.

It's a similar story for the DAX, while FTSE futures are lagging slightly, up 0.9%.

After yesterday's stunning reversal of Truss's fiscal plan by new finance minister Jeremy Hunt, news reports this morning that the Bank of England might hold off on winding down its holdings of UK gilts is likely to provide even more respite for markets - for now at least.

The looming earnings season has not been top of the priority list in what has been a chaotic few weeks in markets. But it will provide an important read on how the unfolding economic slowdown is impacting different sectors.

The effects should be clearer this time around compared to last quarter, when outlooks were blurry - and some telltale signs are already emerging.

Roche's quarterly sales declined 6% after a slump in COVID-19 treatments and diagnostic testing, while Rio Tinto, has tempered its annual iron ore shipments outlook as demand weakens.

UK homebuilder Bellway flagged moderating demand amid increased pressure from rising mortgage rates as the housing sector faces the risk of a slowdown amid a deepening cost-of-living crisis.

On a positive note for European IPO market - which has been defined by plunging volumes in 2022 - British exploration and production company Ithaca Energy is planning a London listing.

GOOD WILL HUNTING (0615 GMT)

Three days into the job, Jeremy Hunt has pretty much gutted British Prime Minister Liz Truss' entire economic plan that propelled her to lead the government less than six weeks ago. The new finance minister's policy reversal has lifted investors' mood, leading to a rally across equities, bonds and some currencies.

With Truss's spokesman batting down suggestions that Hunt was running the country, it remains to be seen how long the PM is able to survive the political maelstrom, even though she remains defiant. "I'm sticking around because I was elected to deliver for this country."

The dramatic U-turn might lead to BoE not hiking interest rates in November by as much as previously anticipated (75-basis-point hike vs previous estimate of 100 basis points, according to Morgan Stanley analysts). Meanwhile, a report from the Financial Times said that the BoE is likely to delay the sale of billions of pounds of government bonds.

Over in Australia, the central bank expects to raise interest rates further over the coming months, while minutes of its meeting last month showed that the surprise decision to slow the pace of rate increases was "finely balanced".

Elsewhere, another day of intervention watch awaits the currency market as the yen remains perilously close to the major psychological barrier of 150 after touching a 32-year low of 149.10 against the dollar overnight.

The new low led to yet another response from the Japanese authorities that they are closely watching excessive currency moves.

On the corporate front, a source told Reuters that Credit Suisse Group AG has approached at least one Middle Eastern sovereign wealth fund for a capital injection.

Key developments that could influence markets on Tuesday:

Economic events: Sept car registration data from UK, Germany, France and Italy, Germany Oct ZEW survey, U.S. Sept industrial output data

Speakers: Riksbank's Per Jansson and Bank of Canada's Carolyn Rogers to speak at different events

Earnings on the deck: J&J, Goldman and Netflix