European Equities: A Choppy Day Ahead as the Trade War Begins to Hurt

After a day of heavy losses, the futures are pointing to a positive open. Holding onto any gains could prove to be a challenge, however.
Bob Mason
List of stock market indices

The Majors

It was risk off for the European majors on Thursday. Leading the way down was the CAC40, which slid by 1.81%. Close behind were the DAX30 and EuroStoxx600, which fell by 1.78% and by 1.42% respectively.

The losses on the day left the CAC down by 2.88% for the current week and the DAX down by 2.34%.

It wasn’t much better in the U.S markets, which pinned back any hopes of a recovery for the European majors. The Dow ended the day with a 1.06% loss, with the NASDAQ down by 1.58%.

Trade war jitters continued to plague the global financial markets, with economic data out of both the Eurozone and the U.S adding to the negative sentiment.

The Stats

Economic data released through the session was on the heavier side on Thursday. Germany’s 2nd estimate GDP figures for the 1st quarter, prelim May private-sector PMI numbers and Germany’s IFO Business Climate index figures provided direction through the early part of the day.

While Germany’s 2nd estimate GDP numbers were in line with prelim, both private sector PMI and business sentiment figures disappointed.

The PMIs

According to prelim figures, Germany’s manufacturing PMI fell from 44.4 to 44.3, falling short of a forecasted increase to 44.8.

  • Of concern was a 4th fall in new orders in 5-months.
  • The flash service PMI activity index fell to a 4-month low, with the manufacturing PMI falling to a 2-month low.
  • The Service sector PMI eased from 55.7 to 55.0. Forecasts were for the service PMI to ease to 55.5.
  • In spite of the pullback in both sectors, the Composite Output Index rose to its highest level since February. Up from 52.2 to 52.4.

Adding to the negative sentiment were disappointing Eurozone PMI numbers and German business sentiment figures.

The Eurozone Manufacturing PMI fell from 47.9 to 47.7, falling short of a forecasted rise to 48.1. Service sector activity also eased, with the PMI falling from 52.8 to 52.5. The composite PMI rose from 51.5 to 51.6, falling short of a forecasted 51.7. Of significance was a marked fall in new export orders, with new export orders falling for 8-months in a row.

The lack of new business and slide in backlogs led to a pullback in hiring. A material shift in labor market conditions would leave the ECB with little choice but to make a move. It won’t be the start that Draghi’s successor will be looking for…

On the day, the only bright spot was a pickup in private sector activity, with both the services and manufacturing sectors reporting a pickup in activity. It wasn’t enough to soften the blow on the CAC40, however.

Business Sentiment

If things weren’t bad enough with the PMI numbers, Germany’s Ifo Business Climate Index fell from 99.2 to 97.90 in May.

According to the latest ifo institute survey, a material fall in the current conditions index weighed. The index fell from 103.3 to 100.6.

While the business climate for manufacturing eased, the business climate for the services sector took a hit, falling from 26.4 to 20.9.

ECB Monetary Policy Minutes

Outside of the stats, the ECB released its monetary policy meeting minutes later in the day. The minutes revealed growing concern over the euro bloc’s economic growth prospects

The Market Movers

For the DAX, ThyssenKrupp (-4.46%), Wirecard (-3.91%) and Infineon Technologies (-3.83%) were amongst the worst performers on the day. The trio has seen heightened volatility as the markets respond to trade war chatter in recent weeks.

Unsurprisingly, both the autos and bank stocks also suffered, with the disappointing economic data and concerns over the extended trade war weighing on the day.

From the auto sector, Continental led the way down on the DAX, sliding by 2.25%. BMW (-1.08%), Daimler (-0.38%) and Volkswagen (-0.95%) saw more moderate losses.

From the financial sector, Deutsche Bank fell by 1.71%, while Commerzbank slid by 4.47%. From elsewhere, UniCredit S.p.A fell by 1.09%, with BNP Paribas ending the day down by -1.93%.

The Day Ahead

It’s a quiet day ahead on the economic calendar, with no material stats due out of the Eurozone.

The lack of stats will leave sentiment towards the U.S – China trade war and the EU Parliamentary elections to provide direction on the day.

At the time of writing, the DAX30 was up by 23.5 points. The U.S futures were also in the green, with the Dow Mini up by 69 points. While the futures are pointing to a positive open, a reversal could be on the cards. Economic data out of the U.S later today will be negative if in line with or worse than forecast. Support for the markets would need to come from Trump’s Twitter account…

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