European Equities: Economic Data and Brexit in Focus

The Majors

It was a bullish start to the week for the European majors, with a 4^th consecutive day in the green leading to a record high for the EuroStoxx600.

On the day, the EuroStoxx600 jumped by 1.39%, with the CAC40 and DAX30 gaining 1.23% and 0.94% respectively.

The markets were able to brush aside the negative stats from the Eurozone, with sentiment towards the U.S – China trade war providing support.

As anticipated, the markets were forgiving of weaker manufacturing PMI numbers, with a phase 1 trade agreement expected to deliver a recovery in the sector.

The Stats

It was a busy day on the Eurozone economic calendar on Monday. Key stats included December prelim private sector PMI figures and 3^rd quarter wage growth from the Eurozone.

The PMIs

The French Composite PMI slipped from 52.1 to 52.0, which was in line with forecasts.

• French Manufacturing PMI (Dec) Prelim fell from 51.7 to 51.3, which was worse than a forecast of 51.5.
• French Services PMI (Dec) Prelim rose from 52.2 to 52.4, coming in ahead of a forecast of 52.1.

The German Composite PMI held steady at 49.4, falling short of a forecast of 49.9.

• German Manufacturing PMI (Dec) Prelim slid from 44.1 to 43.4, which was worse than a forecasted rise to 44.5.
• German Services PMI (Dec) Prelim increased from 51.7 to 52.0, which was in line with forecasts.

The Eurozone Markit Composite PMI rose from 50.6 to 50.8 in December, according to prelim figures. According to the Markit Survey,

• The Eurozone Manufacturing PMI decreased from 46.9 to 45.9 in December, while the Eurozone Services PMI rose from 51.9 to 52.4.
• Service sector activity hit a 4-month high, while the manufacturing output index fell to an 86-month low.
• A failure to see a pickup in economic activity in the 4^th quarter left the rise in output at its slowest pace since 2013.
• Employment growth slowed to a five-year low.
• There was a rise in new orders in December, a first since August, though the increase was only marginal.
• Backlogs fell for a 10^th consecutive month, with depleting work-in-hand leading to further overcapacity.
• While up from recent lows, optimism continued to sit at one of the lowest levels seen since 2013.

For the ECB, a further deterioration in manufacturing sector activity, weak new orders and the weakest pace of hiring in 5-years will be a major concern.

From the Eurozone, wages grew by 2.6% in the 3^rd quarter, year-on-year, following a 2.8% increase in the 2^nd quarter.

According to Eurostat,

• Hourly labor costs rose by 2.9% in industry, by 2.3% in construction, by 2.5% in services and by 2.6% in non-business economy.
• Luxembourg reported the lowest increase in hourly labor costs, with wages growing by just 0.3%.

From the U.S

According to the prelim survey, the Composite PMI came in at 52.2, rising from a November 52.0.

• The Manufacturing PMI fell from 52.6 to 52.5 in December, while the services PMI rose from 51.6 to 52.2.

Earlier in the day, economic data out of China had given the markets reason to be bullish. China’s industrial production rose by 6.2%, year-on-year, coming in ahead of a forecasted 5% and October 4.7%. Retail sales were also on the rise, jumping by 8.0% in November, following a 7.2% rise in October, year-on-year. Economists had forecast a 7.6% increase.

The Market Movers

For the DAX: It was a mixed day for the auto sector. Volkswagen and BMW fell by 0.84% and by 0.09% respectively. Continental and Daimler rose by 0.30% and by 0.59% respectively.

It was a bullish day for the banks, however. Commerzbank rose by 2.52%, with Deutsche Bank rallying by 2.91%.

From the CAC, it was also a bullish day for the banks. BNP Paribas and Soc Gen led the way, rallying by 2.21% and by 1.53% respectively. Credit Agricole saw a more modest gain of 0.73%.

The French Auto sector also found support, with Peugeot and Renault rising by 0.14% and by 1.38% respectively on Monday.

On the VIX Index

The VIX saw red for a 5^th consecutive day, falling by 3.88% on Monday. Following on from a 9.4% decline on Friday, the VIX ended the day at 12.1.

Economic data from the Eurozone had a muted impact, with a pickup in service sector activity in the U.S providing support to the U.S majors.

The upbeat sentiment, following news of the phase 1 trade agreement between the U.S and China, also continued to pressure the VIX on the day.

The Day Ahead

It’s a quiet day ahead on the Eurozone economic calendar. October trade data from the Eurozone will provide direction in the early part of the day.

While trade data from Germany last week impressed, forecasts are for the trade surplus to narrow. An unexpected widening would be a boost for the European majors.

From the U.S, housing sector numbers, industrial production, and JOLTS job openings will also be in focus later in the day.

On the geopolitical front, we’ve got Brexit back in the driving seat. The big question is whether ‘The Establishment’ will be willing to give Boris an easy ride. It would certainly send the wrong message to other member states that had previously threatened referendums…

In the futures markets, at the time of writing, the DAX30 was down by 16 points, with the Dow down by 22 points.