Europe close: Stocks dip, Deutsche Bank drops as investors mull restructuring

Stocks on the Continent dipped on the back of the better than expected US jobs report for June released during the previous session, which led economists to pare their bets for rate cuts by the Federal Reserve when rate-setters next met to decide on policy on 30-31 July.

"After a strong run over the past two weeks, equities continue to give back some ground. Markets continue to digest the implications of Friday’s jobs report, and expectations of dramatic Fed action have been rapidly scaled back.

"A modest rate cut is now the base case, with a ‘wait and see’ approach in place," said Chris Beauchamp, chief market analyst at IG.

In the background, over the weekend, strategists at Morgan Stanley moved from an 'equalweight' stance on global equities to 'underweight', telling clients that there was a poor risk/reward on offer for over the next three months and trimming their exposure to US and Emerging Market equities.

On a chipper note, JP Morgan's strategy team led by Mislav Matejka said they saw 15% upside for globak stocks for over the next 12 months, explaining that company earnings were set to rebound in the back half of 2019 and price-to-earings multiple had room to rise.

By the of trading, the benchmark Stoxx 600 had drifted lower by 0.05% to 389.90, alongside a drop of 0.20% for the German Dax to 12,543.51, while Milan's FTSE Mibtel had dipped 0.04% to 21,976.00.

Greek stocks also fell, with the Athens Stock Exchange's general index giving back 1.84% to 878.17, even after centre-right New Democracy party won the country's general elections at the weekend and possibly an absolute majority in the Parliament in Athens.

Greece's 10-year bonds initially jumped on news of new PM Kyriakos Mitsotakis's victory, pushing their yield down by another 14 basis points to 2.01%, but were last off by a lesser five points to 2.10%.

On 5 July, the US Department of Labor reported a 224,000 jump in monthly US non-farm payrolls (consensus: 158,000), leading economists to shelve forecasts for a 50 basis point rate cut in short-term interest rates at the July Federal Open Market Committee meeting, although a 25 basis point reduction continued to be fully priced-in, Fed funds futures showed.

On the corporate side of things, all eyes were on Deutsche Bank after it announced a wide-ranging cost-cutting plan involving roughly 18,000 layoffs.

Stock in the lender, which now expects to record a second quarter loss of €2.8bn and to cancel its dividend payout for both 2019 and 2020 traded down by roughly 6% with some market commentary pointing out how the lender had reduced its target capital cushion, which in turn weighed on its AT1 debt.

"The market might be less accommodating given that the fall in solvency resulting from restructuring costs (€ 7.4bn with € 5.1bn in 2019) will be swift while deleveraging will take two years at best," said analysts at Oddo Securities.

"This arrangement is in our view the confirmation that DBK is not able to raise capital in the current conditions and that public support is ruled out."

Analysts at JP Morgan and RBC labelled the plan a bold step and reacted positively, although the latter did note that "as the plan pushes the profitability improvement further out in time on our estimates, we see more value elsewhere in the sector."