A sharp rebound in U.S. jobs growth in June has pushed European stocks and U.S. futures further lower as investors grow nervous this will lead to Fed delaying rate cuts. The pan-European STOXX 600 has just hit day lows, sliding 0.7%, while banking stocks turned positive. The move pretty has brought an end to a six-day winning streak in European stocks. Analysts and traders still believe in a July rate cut of 25 bps, but it looks like hopes of a 50 bps cut are off the table for now. “These are good numbers, but a rate cut in July is still all but inevitable,” says Luke Bartholomew, investment strategist at Aberdeen Standard Investments. “The Fed never makes a decision off of one economic data point and the narrative remains inflation is subdued, and global growth concerns are heightened,” Edward Moya, analyst at OANDA, says.
A big disappointment in German industrial orders for May is roiling European industrial stocks this morning — the STOXX industrial goods index is sliding 1.7%, coming off a strong rally (+20%) so far this year. Ahead of the Q2 earnings season, Deutsche Bank analysts warn of widespread risks: “We expect sector growth to get worse before it gets better and the tone of management during Q2 calls to be more pessimistic than optimistic”. Deutsche Bank and Bank of America Merrill Lynch analysts have both turned bearish on the world’s largest industrial bearings maker SKF. BAML downgraded the stock to “underperform” citing “continued weakness in automotive end markets and soft industrial demand”. Deutsche Bank also downgraded its earnings estimates for ABB, Siemens Gamesa and Alstom. With the EU capital goods sector trading at a premium to the wider indices, any small disappointment in earnings is likely to lead to a sharp fall in stock prices.
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