Will European policy makers pull out the bazooka tomorrow?

Equities 5 minutes to read
Peter Garnry

Chief Investment Strategist

Summary:  European equities are down 22% from the peak and investors are preparing for more lockdowns and thus are cutting risk exposure. The pressure is on the ECB and EU to deliver a coordinated stimulus response to offset the weakness from the COVID-19 and future lockdowns similar to the one currently in Italy. Equity markets could easily see a short-lived rebound tomorrow on the likely policy response in Europe and thus we are again flagging our 'bounce back basket'.


Global equities are weak today despite a 50 bps rate cut from BOE, heavily expected in money markets, and reassuring but cheap words from Angela Merkel that Germany will do ‘whatever is necessary’ to face crisis from coronavirus. Sentiment is weak and investors are still cutting risk exposure as it looks inevitable that more national lockdowns will follow after Italy crumbling demand in the US and Europe. The STOXX 600 Index is up 0.6% today but still down 22% from the peak. With the VIX Index remaining above 50 our view is that volatility will stay high and future returns will be skewed to the downside. Global high yield credit bonds are seeing terrible liquidity and despite the rebound in oil prices high yield energy bonds are selling off in a sign of market stress. As we have been saying for a while the real threat, which ECB President Lagard acknowledged today, is that this turns into a credit crisis that definitely will force European policy makers to bail out more weak European banks.

Source: Bloomberg

The EU and ECB have overall been quiet regarding COVID-19 and anticipation is building for tomorrow’s ECB meeting. With Lagarde’s comments to the press today it’s likely that some coordinated stimulus package could be announced infusing equity markets with short-term confidence and a rebound. But already on Friday the selling pressure could come back as investors will most likely cut risk into the weekend. This market is in a tug-of-war between reality and economic impact from COVID-19 and policy makers trying to respond with a lag. At point into the future there is an equilibrium between those two forces and when we reach that point the equity market will bottom and investors will have to aggressively jump the rebound.

Our ‘bounce back basket’ (see the list in SaxoTraderGO) announced on Monday is still up 1.2% in local currency since Monday’s close which is better for now than the European equity market down 0.7% measured on the STOXX 600 Index. The two worst performing stocks are Inditex and Adidas which obviously are hurting from changing consumer behaviour on main street. Today Adidas announced that they expect a €800mn to €1bn hit to revenue in Q1 from China which is little less 5% of overall revenue. Adidas’ overall expectation globally is 10% decline in revenue in Q1. This is before impact from Europe and the US which will come as regions will follow Italy and be quarantined. Inditex is weak for now as their e-commerce size of overall revenue makes it vulnerable on relative basis to fashion retailers such as Zalando which doesn’t rely on physical stores to drive revenue.

As we wrote in our equity update ‘Lessons from 2008 on how to navigate equities in high volatility’ we will publish later today mean-reversion watchlists on US and European equities. These will provide clients and investors in general with inspiration for tactically navigating the daily volatility in global equity markets.

Quarterly Outlook 2024 Q4

01 /

  • Macro Outlook: The US rate cut cycle has begun

    Quarterly Outlook

    Macro Outlook: The US rate cut cycle has begun

    Peter Garnry

    Chief Investment Strategist

    The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c...
  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

  • Equity Outlook: Will lower rates lift all boats in equities?

    Quarterly Outlook

    Equity Outlook: Will lower rates lift all boats in equities?

    Peter Garnry

    Chief Investment Strategist

    After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto...
  • FX Outlook: USD in limbo amid political and policy jitters

    Quarterly Outlook

    FX Outlook: USD in limbo amid political and policy jitters

    Charu Chanana

    Head of FX Strategy

    As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ...
  • Commodity Outlook: Gold and silver continue to shine bright

    Quarterly Outlook

    Commodity Outlook: Gold and silver continue to shine bright

    Ole Hansen

    Head of Commodity Strategy

  • FX: Risk-on currencies to surge against havens

    Quarterly Outlook

    FX: Risk-on currencies to surge against havens

    Charu Chanana

    Head of FX Strategy

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperfo...
  • Equities: Are we blowing bubbles again

    Quarterly Outlook

    Equities: Are we blowing bubbles again

    Peter Garnry

    Chief Investment Strategist

    Explore key trends and opportunities in European equities and electrification theme as market dynami...
  • Macro: Sandcastle economics

    Quarterly Outlook

    Macro: Sandcastle economics

    Peter Garnry

    Chief Investment Strategist

    Explore the "two-lane economy," European equities, energy commodities, and the impact of US fiscal p...
  • Bonds: What to do until inflation stabilises

    Quarterly Outlook

    Bonds: What to do until inflation stabilises

    Althea Spinozzi

    Head of Fixed Income Strategy

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain ...
  • Commodities: Energy and grains in focus as metals pause

    Quarterly Outlook

    Commodities: Energy and grains in focus as metals pause

    Ole Hansen

    Head of Commodity Strategy

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities i...

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)

Saxo
40 Bank Street, 26th floor
E14 5DA
London
United Kingdom

Contact Saxo

Select region

United Kingdom
United Kingdom

Trade Responsibly
All trading carries risk. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more
Additional Key Information Documents are available in our trading platform.

Saxo is a registered Trading Name of Saxo Capital Markets UK Ltd (‘Saxo’). Saxo is authorised and regulated by the Financial Conduct Authority, Firm Reference Number 551422. Registered address: 26th Floor, 40 Bank Street, Canary Wharf, London E14 5DA. Company number 7413871. Registered in England & Wales.

This website, including the information and materials contained in it, are not directed at, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in the United States, Belgium or any other jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation.

It is important that you understand that with investments, your capital is at risk. Past performance is not a guide to future performance. It is your responsibility to ensure that you make an informed decision about whether or not to invest with us. If you are still unsure if investing is right for you, please seek independent advice. Saxo assumes no liability for any loss sustained from trading in accordance with a recommendation.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc. Android is a trademark of Google Inc.

©   since 1992