JP Morgan cuts Eurozone equities as it highlights dollar weakness

JP Morgan Cazenove has cut its stance on Eurozone equities to ‘neutral’ from ‘overweight’, pointing to weakness in the US dollar.

It said the Federal Reserve pushing out its hikes has clear implications for the US dollar.

Last week, the greenback lost ground in the wake of the Fed’s dovish stance and its projection of two rate hikes this year compared with the four set out in December. Resulting strength in the euro weighed on European exporters and in turn the region’s equities.

“Regionally, the recent euro and JPY up move is a problem for Eurozone and for Japanese equities, in our view,” the bank said, adding that their earnings delivery remains strongly linked to FX.

“The (Eurozone) region is still a crowded long, valuations are uninspiring, euro is a headwind and ECB action is behind us.”

The bank reiterated its recent downgrade of Japan and said that if the yen remains at current levels or strengthens further, Japanese earnings per share growth is likely to end up negative, versus the +13% consensus.

On the other hand, JPM pointed out the weaker dollar is a big help to emerging markets, where flows have just started to reverse.

“We move EM to overweight vs DM, tactically, as Chinese activity is unlikely to show a sustained rebound and credit excess has not gone away. In contrast to historical evidence though, we think that this time around EM can outperform even in the backdrop of US resuming its move lower.”