What Happens to Shares If the Euro Starts Rising?: Taking Stock

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Shares are gaining traction. The Stoxx Europe 600 has now almost filled the gap created in the last quarter of 2018 and all sectors have risen. Even telecoms, the laggard of this year, is showing the best monthly performance in the benchmark with a 5.6 percent surge. By contrast, the euro is hovering near a 21-month low, and averaged at around 1.16 to the dollar over the past year. The direction of the bloc’s currency is key to what comes next.

The backdrop of a dovish ECB policy, falling PMIs and a diminishing euro wasn’t the prettiest for European equities last year. On the positive side, the weak currency may have allowed exporters to at least partially sustain margins. Sectors such as luxury goods or aerospace and defense would have benefited.

But now things may be turning. The region’s macro data is showing signs of a rebound, and Credit Suisse strategists noted that when European macro surprises rise relative to the U.S., the euro tends to appreciate with a three-month lag. What’s more, speculative positions suggest investors are now net short the euro, according to the strategists, which could prove to be a decisive moment.

To add to the global bullish picture, Europe’s domestic matters that weighed in the second half of 2018 are starting to fade, Morgan Stanley wrote, noting rising French consumer confidence, the recovering German auto sector, and easing financial conditions.

With a clear upside risk to the euro, Credit Suisse strategists prefer domestic cyclicals and name Zalando, CapGemini, Faurecia, Lufthansa, Prysmian, Smurfit Kappa, ABN, Caixabank and SAP as their preferred plays. Positioning in favor of cyclicals has been on the rise since January, and several strategists agree there’s further upside, especially with a turn in activity.

Deutsche Bank strategists confirm this view and see gains ahead for cyclicals against defensives. Yet, they think the market went too far, too soon. Even with stronger Bund yields, euro and PMIs on the cards, they see some downside for European equities in the coming months and keep a neutral stance generally.

In the meantime, the single currency is up 0.1% and Euro Stoxx 50 Futures are trading up 0.2% ahead of the open.

SECTORS IN FOCUS TODAY:

COMMENT:

• “Last week marked the 10th anniversary of the current equity bull-run which – in Europe – has been almost entirely driven by valuations,” Goldman Sachs strategists write in a note. “In light of this prolonged re-rating (and the YTD market bounce), our strategy team sees limited further valuation upside in Europe for now and continues to look for idiosyncratic opportunities.”

COMPANY NEWS AND M&A:

NOTES FROM THE SELL SIDE:

• Morgan Stanley says Fortum offers improving earnings, good free cash flow generation and potential for a dividend upside, and resumes coverage at overweight with PT EU22.
• Citi upgraded Nordex to neutral, looking toward 2020 with more optimism after the 2019 "trough year," as the wind firm converts its more profitable order backlog. PT is raised to EU13.5 from EU7.5.
• Improving cash-flow quality at Rolls-Royce is likely to trigger a progressive re-rating, Morgan Stanley says in note, upgrading the jet engine maker to overweight from equal-weight (PT to 1,100p from 820p).

TECHNICAL OUTLOOK for Stoxx 600 index:

• Resistance at 383 (trend line); 392.7 (July high)
• Support at 379.9 (23.6% Fibo); 369.3 (200-DMA)
• RSI: 72.2

TECHNICAL OUTLOOK for Euro Stoxx 50 index:

• Resistance at 3,466 (23.6% Fibo); 3,596 (May high)
• Support at 3,349 (August low); 3,315 (38.2% Fibo)
• RSI: 74.9

MAIN RESEARCH AND RATING CHANGES:
UPGRADES:

• Alstom upgraded to buy at Kepler Cheuvreux; PT 43.50 Euros
• Deutsche Post upgraded to buy at Jefferies
• IWG upgraded to sector perform at RBC; PT 2.60 Pounds
• Legal & General upgraded to neutral at JPMorgan; PT 2.85 Pounds
• Nordex upgraded to neutral at Citi
• Rolls-Royce raised to overweight at Morgan Stanley; PT 11 Pounds

DOWNGRADES:

• Adidas downgraded to no position at Evercore ISI
• EDF downgraded to hold at HSBC; PT 13.80 Euros
• Gima TT cut to underperform at Mediobanca SpA; PT 5.40 Euros
• IMCD downgraded to hold at HSBC; PT 70 Euros
• VAT downgraded to hold at Kepler Cheuvreux; PT 105 Francs
• Zalando downgraded to underperform at MainFirst; PT 31 Euros

INITIATIONS:

• Fortum resumed at morgan stanley With Overweight; PT 22 Euros
• Gocompare.com rated new hold at Stifel; PT 79 Pence
• Moneysupermarket rated new buy at Stifel; PT 4.10 Pounds

MARKETS:

• MSCI Asia Pacific up 0.8%, Nikkei 225 up 0.6%
• S&P 500 up 0.5%, Dow up 0.5%, Nasdaq up 0.8%
• Euro up 0.12% at $1.134
• Dollar Index down 0.11% at 96.49
• Yen down 0.07% at 111.56
• Brent up 0.1% at $67.2/bbl, WTI down 0.2% to $58.4/bbl
• LME 3m Copper up 0.6% at $6472.5/MT
• Gold spot down 0.1% at $1300.9/oz
• US 10Yr yield up 1bps at 2.6%

MAIN MACRO DATA (all times CET):

• 11am: (EC) Jan. Trade Balance SA, est. 15b, prior 15.6b
• 11am: (EC) Jan. Trade Balance NSA, prior 17b

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