European stocks waver on China Covid spread, French uncertainty

 

Bloomberg

European equities started the week on a negative note as investors weighed an array of risks from China’s Covid-19 flare up to an uncomfortably tight race for the French presidency, surging bond yields and the war in Ukraine.
The Stoxx 600 Europe Index falls 0.2% as of 8:52 am in London, tracking Asian stocks lower. Technology stocks were the biggest drag on the gauge, while banks outperformed on rising bond yields.
The benchmark’s losses were cushioned by gains in French equities after the first round of the country’s election gave incumbent President Emmanuel Macron a narrow lead over nationalist challenger Marine Le Pen. The CAC 40 index rises as much as 0.8%.
While Paris stocks could remain volatile until the second round of voting in two weeks, the base case remains that Macron will win, according to Mathieu Racheter, head of equity strategy at Julius Baer. “Moreover, the risks to French assets if Le Pen wins have also diminished compared to 2017, as she is no longer advocating for a ‘Frexit’ and the likelihood of her party winning a majority in the parliamentary elections in June is slim, which would likely result in limited power,” Racheter wrote in a note to clients.
A less forgiving macroeconomic backdrop, coupled with geopolitical jitters, has left optimists awaiting quarterly
earnings reports this month to restore confidence in the outlook for European equities.
While the Stoxx 600 has recouped the losses suffered after Russia’s invasion of Ukraine, the enthusiasm that catapulted the benchmark to successive records last year has waned, amid fears that record inflation will cause central banks to tighten liquidity screws, just as economic growth slows.
“While geopolitics is dominating, we believe that equities still offer supportive risk-reward over the medium term, and that the cycle is not over,” JPMorgan Chase & Co. strategists led by Mislav Matejka wrote in a note. “We look for more gains in earnings, bottoming out in China activity, after being cautious on the space last year, and expect the Fed not to turn ever more hawkish, relative to what is currently priced in.”
French equities, including banks BNP Paribas and Societe Generale, were hurt last week. Stocks have outperformed other European markets over the course of Macron’s presidency.
The euro slid 1.5% last week against the dollar to its lowest since the early stages of Russia’s invasion of Ukraine. Negative sentiment in the options market was close to levels seen before the 2017 French election, though that also reflects hedging over the war in Ukraine, inflation and monetary policy.
The difference in benchmark French and German yields has risen to most since March 2020. The equivalent between Italian and German debt, a gauge of euro-area wide sentiment, is up 20 basis points this month to around 170 basis points.

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