DAX rally: "Aliens wouldn't believe you"

DAX RALLY: "ALIENS WOULDN'T BELIEVE YOU" (1150 GMT)

In a year marred by war and recession risks one may find it hard to believe the DAX DAX has managed a 22% rally from September lows, shrinking year-to-date losses to less than 10% from around 24% earlier in the year.

"Aliens from space wouldn't believe you," wrote UBS strategist Gerry Fowler last week as he warned about the risk of a reversal, arguing that supportive factors like U.S. yields, China re-opening and lower power prices looked exhausted.

But since he published that note calling time on the bounce, clients got back to the Swiss bank with a diverging view.

"The two areas of disagreement from investors have been that inflation and pricing pass-through will continue to support nominal sales and that China's re-opening will support volumes - both helping negate concerns over margins and profit growth in 2023," said Fowler.

So, to address clients' disagreements, the UBS strategist had a second look at the prospects for the DAX.

Result? He's sticking to his bearish call.

"Volumes hold the key to margin resilience and with global demand weakness now widely expected, we remain surprised that margin expectations remain at their peak for many companies. We think that rather than seeing a margin of error, we are seeing an error in margins," Fowler added in a note today.

According to UBS, earnings for the DAX will fall in 2023 by around 10% and that at current levels, valuations reflect a recovery that looks, at best, several quarters away.

(Danilo Masoni)

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"ONLY 40% OF THE SHORTS... HAVE BEEN COVERED" (1007 GMT)

The latest strategy piece by Generali Investments highlights how investor positioning remains extremely light.

Combine that with resilient macro momentum, peaking U.S. inflation and low volatility, then the mix is right for an extension of the current rally.

"Investors positioning remains low and can continue to encourage further short covering. Indeed, some brokers' desks state that, thanks to the rally started in October, only 40% of the shorts opened since January have been covered," says Michele Morganti, equity strategist at the Italian asset manager.

Yet, Morganti sees good reasons to remain cautious and stick to a neutral weighting on stocks.

"Valuations remain in an uncomfortable zone, though, and monetary tightening will continue to hurt over the next months. Lastly, earnings revisions should bottom only in mid-2023," he says.

(Danilo Masoni)

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STOXX DIPS, CHINA BOOST FOR MINERS (0934 GMT)

European equity markets got off to a muted start on Monday with the STOXX 600 SXXP easing just slightly in early trade, with a rally in mining stocks after an easing of COVID-19 curbs in top commodity consumer China helping limit losses.

The pan-European equity benchmark was last down around 0.1%, while the STOXX Basic Resources index (.SXPP) shone with a gain of 2.1% to its highest in almost six months. London-listed miners like Rio Tinto RIO and Glencore GLEN gained over 2%.

Financials also provided support with China-exposed Prudential rising 5%, helping offset losses spread elsewhere across most other sectors. Vodafone VOD shares flattened after an initial bounce as the UK group's CEO agreed to step down. The initial jump didn't provide any boost to telecoms (.SX3P), which fell 0.8%.

Here's your opening snapshot:

(Danilo Masoni)

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EUROPE SEEKS DIRECTION (0744 GMT)

European shares look set to start the first full week of December with no clear direction but China's easing of COVID-19 restrictions should keep main indices supported near recent highs.

Euro STOXX 50, DAX and FTSE futures moved around parity and were last down 0.1% and U.S. contracts also eased slightly. The Asian session was more buoyant after more Chinese cities announced an easing of coronavirus curbs.

The macro data calendar is light and so is newsflow on the European corporate front. Vodafone though could grab attention after saying its CEO Nick Read would step down and be replaced by finance chief Margherita Della Valle.

Among mid-caps, a big slump is in store for Flatex after the online German broker cut its guidance. China-exposed stocks like miners finally could get support from the reopening measures in the world's No.2 economy.

(Danilo Masoni)

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CAPPED (0703 GMT)

The Fed is in blackout and the World Cup is starting to get serious.

And this week's calendar is relatively light, leaving traders free to focus on the soccer, save for the U.S. ISM services survey and European retail sales data on Monday, and central bank meetings in Canada and Australia later in the week.

Piecemeal easing of China's strict COVID-19 curbs kept the dollar in retreat in Asia, while the yuan USDCNY jumped to the strong side of 7-per-dollar for the first time in 2-1/2 months. Oil BRN1! rose and the Hang Seng HSI leapt 3.5%.

Positioning suggests bets against the dollar remain pretty light, and even lightened a little bit last week. (0#NETUSDFX=)

Frustration and confusion yet remain on the ground in China. Beijing has dropped testing requirements for public transport, but entry to many buildings still requires negative results.

Protests persist here and there, though markets are staying optimistic on the momentum. Morgan Stanley, on Monday, was the latest big investment house to turn bullish.

Monday in Europe also marks the beginning of the G7's $60-a-barrel price cap on Russian oil. It's not clear what that means for oil supply and prices, because Russia says it won't abide by the measure, even if that means cutting production.

On the pitch, Asia's last contenders, Japan and South Korea, take on Croatia and Brazil, respectively.

Key developments that could influence markets on Monday:

Final November global PMIs, Eurozone retail sales, U.S. durable goods orders, U.S. ISM non-manufacturing PMI

(Tom Westbrook)

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