Deutsche Bank downgrades Stoxx 600 year-end target

Deutsche Bank slashed its year-end target for the Stoxx 600 index and said it sees no further upside for European equities for the rest of the year.

The bank downgraded its Stoxx 600 target to 325 from 380, which is around 4% below current levels, and introduced an end-2017 target of 345.

In January, DB forecast that the Fed rate hike would lead to increased financial stress and falling equity markets. It argued that this would lead the US central bank to turn more dovish, which would allow equities to rebound.

“This has played out,” the bank said. “Yet, the Fed relent has been partial – and the latest FOMC minutes point to increasing risks that we will re-enter the ‘doom loop’ from a more hawkish Fed to a stronger dollar, lower oil prices, higher high-yield credit spreads and lower equity markets.”

Deutsche reckons the Fed’s increased sensitivity to the problem of dollar strength means it will quickly abandon its tightening intentions once asset prices are falling, limiting downside for markets.

“Overall, though, the combination of weak global growth, Fed risk, a likely fade in China’s growth rebound and fragilities in the US high-yield credit market significantly undermines the upside case for European equities from current levels.”

The bank said global macro momentum was likely to remain weak, the Fed will likely try to hike at least once this year, there are upside risks for US high-yield spreads and valuations and sentiment are not especially supportive.

“Any Fed hiking attempt is set to put renewed downside pressure on the RMB (as short-term yield differentials move against the Chinese currency) – as well as adding to dollar strength, which is set to push down oil prices and push up US HY credit spreads, hurting risk sentiment more broadly,” it said.

DB is ‘overweight’ pharmaceuticals and real estate, and ‘underweight’ energy, mining and industrials.

It is cautious on banks, which are attractively valued, but remain vulnerable to the risk of higher credit spreads and lower bond yields.