European Equities: FED Reaction and Geopolitics to Provide Direction

A dovish FED should provide support in the early part of the day. Geopolitical risk and economic data will have an influence, however.
Bob Mason
Light Board

Economic Calendar:

Thursday, 20th June

  • ECB Economic Bulletin  
  • Eurozone Consumer Confidence Flash

Friday, 21st June

  • French Manufacturing PMI (Jun) Prelim
  • French Services PMI (Jun) Prelim
  • German Manufacturing PMI (Jun) Prelim
  • German Services PMI (Jun) Prelim
  • Eurozone Manufacturing PMI (Jun) Prelim
  • Eurozone Markit Composite PMI (Jun) Prelim
  • Eurozone Services PMI (Jun) Prelim

The Majors

The European majors had a mixed day on Wednesday. While the CAC40 eked out a 0.16% gain to make it 3 consecutive days in the green, the DAX30 slipped by 0.19%. The EuroStoxx600 ended the day flat.

Investors were looking ahead to the FED’s outlook on rates and economic projections that were released after the European close.

There was some support for the majors following further affirmation of Trump’s planned meeting with China Premier Xi at the G20 Summit.

The Stats

Economic data out of the Eurozone was on the lighter side on Wednesday.

Germany wholesale inflation figures for May released ahead of the European open, failed to provide direction early on in the day.

According to Destatis, producer prices of industrial products fell by 0.1% in May, month-on-month. Year-on-year, producer prices increased by 2.5%. Compared with the corresponding month of the year prior, producer prices rose by 1.9%.

  • Energy prices jumped by 4.5% on an annual basis, compared with a 0.6% fall in April 2019.
  • Prices of capital goods increased by 1.6%, compared with a 0.1% rise in April 2019.

Post the European close, the FED delivered a more dovish outlook on policy, but it was perhaps not as dovish as some had hoped for.

From the economic projections, whilst holding median growth forecasts unchanged for the current year at 2.1%, forecasts for 2020 were revised up to 2.0%.

In contrast, inflation forecasts were revised down from 1.8% to 1.5% for this year and down from 2% to 1.9% for next year.

While the markets and the U.S President had been hoping for a near-term rate cut, the FED remains in a wait-and-see mode vis-a-vis the ongoing U.S – China trade war.

The median projection for this year remained steady at 2.4%. The central tendency widened, however, from a March projection of 2.4 – 2.6 to 1.9 – 2.4.

7 of the 17 FOMC members projected 2 rate cuts this year, while 1 member projected a single rate cut. FED Chair Powell also stated in the press conference that the case for a rate cut had strengthened.

The Market Movers

From the DAX, Continental led the way on Wednesday, rallying by 3.65%. The gains across the auto sector were broad-based, with Daimler (+1.95%), Volkswagen (+1.4%) and BMW (+1.09%) amongst the top performers.

Bank stocks also got a boost, with Deutsche Bank rising by 1.75%. Commerzbank rallied by 2.8% on the day.

From the CAC40, Renault continued to buck the trend, falling by 0.27% following Tuesday’s 2.6% tumble. The banking sector found support, however. BNP Paribas rose by 1.76%, while Credit Agricole rallied by 2.28% on the day.

The Day Ahead

It’s another quiet day on the economic calendar. Flash consumer confidence figures are due out of the Eurozone. In the early part of the day, the ECB economic bulletin will be the main area of focus.

We can expect the European majors to also respond to the FOMC economic projections and press conference from late on Wednesday.  The latest projections should provide support to the European majors, though a sliding Dollar may limit any upside for the DAX.

On the geopolitical front, the latest UK Leadership ballot results may also draw some attention. With Rory Stewart out of the race on Wednesday, the prospects of a no-deal Brexit have risen as Boris Johnson remains the clear favorite.

From the U.S, Philly FED Manufacturing PMI figures will also influence. Forecasts are negative for the majors.

At the time of writing, the DAX was up by 30.5 points. The Dow Mini was up by 78 points.

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