Markets Wrap (27 September – 10 October)
The combination of growth concerns, energy crunch and increasingly hawkish ECB sent the average price-to-earnings ratio of European stocks to the lowest level in a decade (10.5x at the time of writing), whereas hopes for a year-end rally are fading given persistently complicated geopolitical situation in the region.
Investor sentiment towards European banks and the sector’s earnings prospects have drifted further apart, as Stoxx Europe 600 banks remains on a downtrend, whereas forward 12-month earnings per share estimates are bolstered by higher interest rate environment (Chart 2).
Despite difficult market conditions, Porsche became Europe's fifth-largest IPO ever, as Volkswagen raised EUR 9.1bn for shares in the prized sports-car brand.
The US September job market report caused another sharp selloff of US stocks and bonds, as investors, fearing an even more assertive FED, have lately embraced the 'good news is bad news' attitude – non-farm payrolls (263k) remained well above the pre-pandemic level of 180k, unemployment unexpectedly dropped to 3.5% (from 3.7%), and 5.0% y-o-y growth of annual average earnings is well above of what is needed to tame record inflation.
The outlook for the euro area industry and service sectors worsened for the fifth straight month, as PMI indices declined further below the 50 point threshold in September, which separates expansion from contraction (to 48.4 and 48.1 points respectively).
Following super strong US jobs data, the market currently attributes close to 100% probability for a 75 bps hike at the upcoming 2 November meeting; the ECB, being well behind the curve, should deliver a move of the same magnitude on 27 October.
European real estate
Euro area mortgage rates hit a seven-year high of 2.26% in August – almost a full percentage point up since the beginning of 2022 (Chart 3) amid the ECB's monetary policy tightening cycle.
European real estate stocks trade at the lowest valuation levels since the global financial crisis – following a 45% rout since the peak in December 2021, the price-to-book ratio currently translates into a 40% discount (Chart 4), as the sector is being squeezed by rising rates and an increasing prospect of a recession.
OPEC+ group of countries unexpectedly decided to cut the output by 2 million barrels per day (instead of 1 million barrels, which was discussed previously); although WTI jumped to a three-week high, the impact of the decision was somewhat muted, as the White House announced its plan to release another 10 million barrels from the Strategic Petroleum Reserve.