European Equities: Another Bounce Expected as Speculation of Central Bank Support Mounts

The Majors

It was a mixed start to the week for the European majors.

The CAC40 and EuroStoxx600 rose by 0.44% and by 0.09% respectively, while the DAX30 fell by 0.27%.

Going into the European open, the majors had found support following BoJ Governor Kuroda’s promise of action to deliver liquidity to the global financial markets.

While the markets also priced in a FED rate cut later in the month, ECB President Lagarde had sent a different message last Friday.

The other question is whether monetary policy support would offset the effects of the coronavirus on the respective economies.

Cheaper lending may support increased business investment through lower cost of funds but it doesn’t reopen factories or address the supply chain issues that are likely to remain under stress near-term. For now, however, it’s certainly better than no action at all…

With the coronavirus continuing to spread across the region, plenty of uncertainty remains for the Eurozone’s economy and beyond.

The Stats

It was a busy day on the Eurozone economic calendar on Monday. Economic data included February Manufacturing PMI numbers out of Spain and Italy.

Finalized PMI numbers out of France, Germany, and Spain were also in focus early in the session.

According to the latest Markit surveys,

Spain’s Manufacturing PMI increased from 48.5 to 50.4 in February, coming in ahead of a forecast of 49.2.

Italy’s Manufacturing PMI fell from 48.9 to 48.7 in February, which was worse than a forecasted increase to 49.2.

Out of France, the Manufacturing PMI was revised up from a prelim 49.7 to a finalized 49.8. In January, the PMI had stood at 51.1.

Germany’s finalized Manufacturing PMI came in at 48.0, which was up from a prelim 47.8 and January’s 45.3.

The Eurozone

The Eurozone’s finalized Manufacturing PMI came in at 49.2, revised up from a prelim 49.1. In January, the PMI had stood at 47.9.

According to the Eurozone’s Markit Manufacturing PMI survey,

• Output and new orders declined at a slower pace in February.
• Average lead times lengthened, however.
• While registering a 13^th monthly contraction, the PMI hit its highest level in a year.
• Production and new order contractions were the weakest in 9 and 15-months respectively.
• Deflationary pressures remained prevalent, with both input and output charges continuing to fall.
• The fall in output prices was the greatest in just under 4-years, while input prices were the weakest in 8-months.
• On the employment front, firms reduced headcounts for a 10^th consecutive month.

By Country, Greece came in at the top of the table with a 10-month high 56.2, with the Netherlands ranked 2^nd with a 13-month high.

At the bottom end of the table, Germany was last in spite of a 13-month high. Italy came in just above, after a fall to a 2-month low, and France falling to 7-month low coming in at 3^rd from bottom.

Ireland, Spain, and Austria joined the Netherlands and Greece in expansive territory in February.

From the U.S, the stats were of little support, with the ISM Manufacturing PMI falling from 50.9 to 50.1. A downward revision to the finalized Markit PMI from 50.8 to 50.7 didn’t help…

The Market Movers

For the DAX: it was another mixed day for the auto sector. Volkswagen led the way, rallying by 2.83%, with BMW and Daimler rising by 0.46% and by 0.60%. Continental bucked the trend, sliding by 1.84%.

It was a particularly bearish day for the banks, however, with the prospects of yet lower interest rates weighing. Commerzbank slid by 4.05%, with Deutsche Bank falling by 1.74%.

Deutsche Lufthansa returned to the red, with a 2.62% fall. Monetary policy support is unlikely to reignite the travel and tourism sector.

From the CAC, it was another bearish day for the banks. BNP Paribas fell by 0.75%, with Credit Agricole and Soc Gen seeing heavier losses of 3.15% and 2.23% respectively.

The auto sector continued to struggle, with Peugeot and Renault ending the day down by 4.28% and 3.23% respectively.

Air France-KLM tumbled by 7.79% following a 6.40% slide last Friday.

On the VIX Index

The VIX hit reverse at the start of the week, falling by 16.68% on Monday. Reversing a 2.43% gain from Friday, the VIX ended the day at 33.4.

Upward momentum across the major U.S indices, including a 2.86% gain on the S&P500 delivered the blow on Monday.

Assurances of support from the FED Chair last Friday and BoJ Governor Kuroda on Monday led to increased speculation of a coordinated central bank effort to ease the effects of the coronavirus on the global economy.

Economic data from the U.S was far from impressive, with the manufacturing sector stalling in February, according to the ISM numbers.

The stats took a back seat once more, however, with the markets in wait-and-see mode to assess what central bank support will be given. Perhaps, more importantly, is what impact the support will have.

China’s private sector PMIs from the weekend and Manufacturing PMI on Tuesday were particularly dire and the global spread of the virus has yet to abate…

The Day Ahead

It’s a relatively busy day ahead on the Eurozone economic calendar. Key stats include the Eurozone’s prelim inflation figures for February and January’s unemployment rate.

Any weak numbers would support a move by the ECB, which would be positive for the majors.

With no material stats due out of the U.S later today, the majors will likely take their cues from central bank chatter and moves through the Asian session.

In the futures markets, at the time of writing, the DAX was up by 232.5 points, with the Dow up by 227 points.