The drop in volatility was palpable yesterday on the equity markets, even if the closing balance sheet was far from uniform. The broad STOXX Europe 600 index was almost flat, while the DAX and the CAC40 fell slightly, while the FTSE and the SMI rose moderately. Same topo in the United States where the Nasdaq lost 1.2% after its big rebound on Friday, while the Dow Jones grabbed 0.08%. The hearts of financiers (yes, yes, they have one) are still balancing between the attraction of valuations that have become affordable, even very affordable, and the fear of a tomorrow filled with inflation, economic recession and shortages.
When stock markets fall, all investors are looking for the tipping point. It is for this reason that financiers have developed a whole vocabulary of decline, which is supposed to provide milestones. Thus we speak of a “correction” (the word is identical in English) when the shares fall by more than 10% before recovering. A correction that exceeds 20% turns into a bear market. In this type of market, we can witness a capitulation (again, the word is the same in English): this is the moment when investors’ nerves let go and when panic increases an already well-established decline. We can also witness the “dead cat bounce”, which is a kind of swan song to stay in the animal domain: it is a rebound before a resumption of the fall.
Over time, these milestones have also become anchor points. For example, investors more easily expect to see the indices rebound just after the -10% barrier, or the -20% barrier. It’s a bit arbitrary since these levels are above all round numbers, but it makes it easier to imagine finding the low point and therefore taking full advantage of the rebound (if it is not the start of the dead cat , if you have followed correctly). Obviously, if you are looking for the low point at the bend of a “correction” and it turns into a “bear market”, it’s off again for a ride to the floor below.
These periods come up at regular intervals on the markets. They are part of the “shock cycle” depicted by the American columnist Morgan Housel, of which I have already spoken very recently but which it is worth recalling here.
Panic is often a bad advisor, because it greatly increases an investor’s risk of being in the wrong timing, which amounts to making stupid choices. The excess of pessimism manifests itself during the events but also afterwards, because it is difficult to pass from one mental scheme to another. In the shock cycle, this corresponds to the period from when the investor thinks the bad news is permanent to when he denies the good news. But of course, determining the tipping point I was talking about at the beginning is probably the most complicated exercise. On the other hand, it is possible to measure the degree of irrational optimism or pessimism of investors. This is what the British bank Liberum did, which estimates that the American markets are currently 10% below what is rationally justifiable by the economic context, while the discount in Europe is rather around 5%.
The method for arriving at these figures is interesting and I will try to explain it without getting lost and without being too long. Liberum relies on the deviation between day-to-day stock market performance and intra-day market performance. Indeed, research has shown that intraday prices are driven by investors’ emotions and biases, while post-day prices are much more rational (and much less volatile) because they rely more on economic data. Or to simplify, “returns that occur overnight reflect macro risk, while those that occur during the day reflect investor behavior“, to borrow a quote from one of the studies used by Liberum.
When the market is excessively optimistic, intraday variations are systematically higher than day-to-day variations, as was the case for example in 2021. Since the beginning of 2022, it has been the opposite, except during the surge in March. At this stage, the gap is still not quite as extreme as in the most violent episodes of the last decade, according to the Liberum model, which estimates that if the reversal is not yet in order of the day, the low point of the market is approaching. Expressed like that, it’s almost a door opener worthy of the best influencers of the financial Twittersphere, but in reality, it’s still a little more subtle than that. During previous episodes of severe decline, arrival near these levels of deviation signaled a bottom.
European markets are expected higher this morning. Yesterday, the US session ended rather badly with renewed selling pressure on tech and cyclical stocks. The Nasdaq lost a little more than 1%, but with less exacerbated volatility than in previous sessions. There will be a series of important statistics in the United States this afternoon, and some publications of emblematic results, in particular in distribution with Walmart or The Home Depot. The opportunity to learn a little more about the cost and labor constraints faced by these pillars of the American economy. Fed boss Jerome Powell is due to deliver a speech around 8:00 p.m., when European markets will already be closed. His colleague James Bullard will no doubt have paved the ground at 2:00 p.m.
The CAC40 gained 0.8% to 6398 points shortly after opening.
Economic highlights of the day
Several statistics in the United States, with retail sales (2:30 p.m.) and industrial production for April (3:15 p.m.), then the NAHB housing index for May and business stocks for March (4:00 p.m.).
The euro rallied a little to 1.0440 USD. The ounce of gold offers a meager rebound to 1824 USD. Oil rose again yesterday, with Brent from the North Sea at 112.66 USD a barrel and US light crude WTI at 111.67 USD, with a narrowing spread. The yield on US 10-year debt rose a little to 2.91%. Bitcoin is trading around $30,300.
The main changes in recommendations
- Allianz: Jefferies remains long with a price target reduced from 260 to 255 EUR.
- Aryzta: UBS remains long with a price target reduced from 1.65 to 1.60 CHF.
- BMW: Bernstein starts tracking at outperformance by aiming for EUR 100.
- Delivery Hero: Bryan Garnier goes from neutral to buy, targeting EUR 66.
- Just Eat Takeaway: Bryan Garnier goes from selling to buying, aiming for 55 EUR.
- Krones: HSBC goes from holding to buying, targeting EUR 96.
- Mercedes: Bernstein starts tracking at outperformance by aiming for EUR 85.
- Porsche: Bernstein resumes underperformance tracking, targeting EUR 60.
- Prosus: JP Morgan goes from neutral to overweight, targeting EUR 73.40. Jefferies remains to be kept with a price target raised from 46 to 50 EUR.
- Rational: DZ Bank goes from selling to holding, targeting EUR 550.
- Renault: Bernstein resumes market performance monitoring, targeting EUR 25.
- Roche: AlphaValue remains to be accumulated with a reduced target of 427 to 380 CHF.
- Stellantis: Bernstein resumes market performance monitoring.
- Ubisoft: Societe Generale goes from keeping to buying, aiming for EUR 55.30.
- Unilever: goes from keeping to selling, aiming for 3400 GBp.
- Volkswagen: Bernstein resumes market performance monitoring, targeting EUR 208.
- Volvo Car: Bernstein starts the outperformance follow-up, aiming for SEK 90.
In France
- Engie raises its objectives for 2022 after a jump in its results in the 1st quarter.
- LVMH Launches a share buyback program.
- Thales has won a contract to supply the US Army with advanced tactical radios. The group has signed a definitive agreement to acquire S21sec and Excellium, in cybersecurity, for €120 million.
- Societe Generale launches an employee shareholding plan.
- Vinci said traffic on its highways rose 55.7% in April from a year ago and passenger traffic at its airports more than quadrupled.
- Eiffage won two contracts with Orsted in offshore wind power off the coast of Germany.
- Aéroports de Paris saw its total traffic increase to 20.6 million passengers in April, against 13.1 million a year earlier.
- Theraclion launches a robotic vein treatment platform.
- Deinove reached the first milestones of the Boost-ID project with the operational installation of its microfluidic screening platform.
- Pharmasimple strengthens its network.
- DBT installs fast terminals on French motorways.
- Cellectis presents research data from a novel universal CAR T cell at the annual ASGCT meeting.
- Metavisio signs two contracts in Europe.
- Aramis, Plastiques du Val-de-Loire, Freelance, Avenir Telecom, Abeo, Geci, Inventiva, Union Financière de France have published their accounts.
In the world
Important announcements (and others)
- Berkshire Hathaway leaves Wells Fargo for Citigroup.
- Elon Musk believes that a deal to buy Twitter at a lower price than announced is not out of the question.
- CVC decides not to take over Bramble.
- Daimler Truck raises its forecast for annual turnover, record order book.
- JetBlue launched a $3.3 billion hostile takeover bid for Spirit Airlines.
- Sonova raises its dividend after a good 2021/2022 financial year.
- Enel wants to sell 50% of its subsidiary Gridspertise.
- Main results publications of the day: Walmart, The Home Depot, com, Vodafone, Engie, Daimler Truck, Sonova, NIBE Industrier, Euronext, Deutsche Wohnen, Pershing Square… The whole agenda here.
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