Equity strategists at Deutsche Bank downgraded their view on European equities to ‘neutral’ after the Euro Stoxx 50 moved slightly above their year-end 2022 target of 3,640.
They also noted the risk of a larger energy price shock.
“Downside risks outweigh upside risks to our forecasts. Some of the “good songs” that had investors come back into the market were falling yields, a recovery in China from its lows in Q2, a better than feared earnings season, and trough P/E valuations,” they said.
“Unfortunately, the current playlist is less promising.”
More specifically, they cited the move in 10-year US Treasury note yields back above 3.0%, further pointing out how the inversion in the yield curve between the 2 and 10 year Treasuries was now the most since 2000.
Furthermore, the momentum of the economic recovery in China has faltered while slower growth in Europe meant an increased risk of negative earnings revisions.
“Our economists expect a mild recession in Europe over the coming quarters and see significant downside risks in case of an aggravating energy shortage.”
