Equity markets pause with bias to downside

Equity markets pause with bias to downside.
by Ipek Ozkardeskaya

Consolidation is the name of the game this morning as European equity traders lick their wounds following yesterday’s sell-off. The FTSE remains above the 6000 level but is down 0.22% in early trade. The technical picture would suggest that this psychological level is breakable.

The energy sector is in the red this morning, as oil prices spurn the recent rally and consolidate. Every other sector is finding a little relief rally after yesterday’s sell-off aided by some broker upgrades and bargain hunting within the defensive stocks.

The Dax is oscillating around the key 10,000 marker and tends to beg the question whether or not we will see some dovish jawboning from the ECB – any ramping up or extension of the current QE programme is unlikely in the near term and certainly won’t take place until after the next Fed meeting.

News that the ECB has fallen short to replace its maturing asset-backed debt despite fuelling efforts to buy ABS shows that the market size could soon become a broader limitation to ECB’s balance sheet expansion program. European issuance of asset-backed debt has totalled 59 billion euros so far this year, compared with the 255 billion euros raised in the same period of 2006, the busiest year for sales, according to JPMorgan.

Since the beginning, it has been a known fact that the eligible asset pool would fall short of ECB’s ambitions at some point, perhaps it has come just a bit earlier than anticipated. Hence, the ECB has little manoeuvre margin, while President Mario Draghi will certainly deliver a sanguine press conference on Thursday to curb the building appetite in euro. Dovish comments from the ECB and a strong US jobs are the major downside risks for the euro market at the second part of the week.

UK construction data came in lower than expected but remains above the key pivot point of 50. The sector is in recovery mode with business activity and job levels expanding. The pound has however relinquished the $1.53 level against the dollar in the immediate aftermath of the release.

Some equity highlights:

Hikma Pharmaceutical (+5.39%) Included in the FTSE 100 in March. Its focus has so far been on generic drugs and acquisitions. BarCap has today raised its price target to 2760p. stating that the company has transformed its US exposure and long-term visibility through the $2.65bn acquisition of Roxane.

Ashtead Group (+4.14%) The company has stated that it expects FY results to be in line with expectations and will monitor the market and adjust capex plans appropriately. Also plans to open 50 new locations in new year. Q1 pre-tax profit was £160.7m with revenue at £619m.

AstraZeneca (+2.05%) raised to buy at HSBC. The pharma company has entered an agreement with Daiichi Sankyo Company to develop flu vaccines.

Arm Holdings (+3.01%) Raised to Neutral at JP Morgan. Outperform rating at Credit Suisse and a buy rating from Numis Securities. Average broker 12 month price target is now 1211p suggesting a 12% upside form current levels.

The US ADP number is due for release today and many will look to it as an indication for this Friday’s Non-Farm Payroll number. There will likely be a huge emphasis placed on the employment number this month yet while the Fed decision will be data dependent it’s unlikely that a single number will sway one way or the other. The consensus is for 204,000 jobs to be added last month, an improvement on the prior 185,000.

We call the Dow higher to 16173 – 114 points higher.

Pending downside risks for the euro

As the euro is back in use as a funding currency, the broad-based appreciation in euro does only see limited enthusiasm among the ECB board members.

In addition, the volatility in the euro markets has become a supplementary threat for the good conduct of the ECB’s ultra-expansive balance sheet program. Over the past week, the Eurozone inflation expectations have bottomed; the 5y5y EUR inflation swap rate hit 1.60% - the lowest since January. The early recovery back to 1.70% this week is not given an eloquent life expectancy given that the recovery in oil prices are seen temporary and generally strengthening euro is not supportive of higher inflation.

Aussie below 0.70c first time since 2009.

The slide in commodity prices and slowing exports to China continues weighing on Australian growth; the GDP almost stalled with a poor 0.2% q/q performance in the second quarter, slower than 0.4% expected and 0.9% previously.

The iron ore futures remain in steep backwardation with slight pick-up in one-year maturity contracts over the past week, on a downhearted hope that aggressive intervention from Chinese authorities may fuel demand in commodity futures. The visibility is very much limited yet.

The softer-than-expected growth has been the trigger for a decisive move below 0.70c against the US dollar. AUDUSD traded below the critical 0.70c mark for the first time since April 2009 yet managed to remain contained within its eight-week descending channel. Buyers and sellers are touted at the bottom and top of the 0.6963/0.7270 band.

On a trade weighted basis, the Australian dollar has already given back more than 60% of gains accumulated since 2008 dip to July 2013 top, hence reached levels to keep the RBA comfortable.

The appetite in AUD remains limited given the softening swap curve across the board. Additional rate easing could not be ruled out. Given the rout in commodity prices, the RBA will certainly be contented with further depreciation in the currency, which is a solid barrier to a carry rush back to the Aussie.