European Equities: Geopolitics and U.S Stats to Influence

A bounce-back could be on the cards, though much will depend on chatter from the Middle East and economic data from the U.S…
Bob Mason
Growing Euro notes arrows over the flag of European Union.

Economic Calendar:

Tuesday, 7th January 2020

Eurozone CPI (YoY) (Dec) Prelim

Eurozone CPI Core (YoY) (Dec) Prelim

Eurozone Retail Sales (MoM) (Nov)

Wednesday, 8th January 2020

German Factory Orders (MoM) (Nov)

Thursday, 9th January 2020

German Industrial Production (MoM) (Nov)

German Trade Balance (Nov)

Eurozone Unemployment Rate (Nov)

ECB Monetary Policy Meeting Minutes

The Majors

It was a bearish start to the week for the European majors, with the DAX30 falling by 0.70% to lead the way down on the day. The CAC40 and EuroStoxx600 saw more modest losses of 0.51% and 0.41% respectively.

It could have been far worse on the day, with the DAX30 having fallen by as much as 2.05% before finding support.

Rising tension between the U.S and Iran, following Thursday night’s drone attack, continued to weigh on the majors.

In spite of the risk aversion through the early part of the day, the U.S majors bounced back to close out the day in positive territory.

Positive sentiment towards the U.S economic outlook overshadowed the negative sentiment towards tensions in the Middle East. Things could change rapidly should Iran retaliate, however…

The Stats

It was a busy day on the Eurozone economic calendar on Monday. Key stats included German retail sales figures for November and December service sector PMI numbers for Italy and Spain. Finalized PMI numbers for France, Germany and the Eurozone were also in focus alongside the composite PMIs.

Out of Spain

The Services PMI rose from 53.2 to 54.9 in December, coming in ahead of a forecasted 53.9.

  • Service sector growth strengthened to a 9-month high.
  • Strong domestic demand drove new business growth, while export sales saw weaker growth.
  • Political and economic uncertainties continued to weigh on demand in external markets.
  • Confidence hit a 5-month high in December, supported by strong demand over the last 2-months.

From Italy

The Service PMI increased from 50.4 to 51.1 in December, coming in ahead of a forecasted 51.0.

  • Business activity rose at a faster rate, supported by an improvement in domestic demand.
  • New orders were on the rise domestically, while new orders from overseas fell for a 7th consecutive month.
  • Strong domestic demand contributed to an increase in hiring, though the rate of job creation was the weakest since April.

Out of Germany

Retail sales jumped by 2.1% in November, month-on-month, reversing a revised 1.3% slide in October. According to Destatis,

  • Compared with the previous year, turnover in retail trade was in the 1st eleven months of 2019 in real terms 2.9% higher than in the corresponding period of the previous year.

Germany’s Service PMI came in at 52.9 for December, coming in ahead of a prelim and forecast of 52.0. In November the PMI had stood at 51.7.

  • Service sector growth picked up to the highest in 4-months, supported by a 1st increase in new business since August.
  • The pickup in new orders fuelled optimism, with business expectations rising to an 8-month high.
  • Despite the rise in new orders, new orders from overseas continued to decline, however, albeit at the weakest rate of decline in 10-months.
  • While firms continued to hire, the pace of job creation was the 2nd weakest in 19-months.

Out of France

The Service PMI came in at 52.4 for December, which was also in line with prelim and forecasts. In November, the PMI had stood at 52.2.

  • A marginal pickup in service sector business activity was supported by a solid expansion in new business.
  • New orders increased for a 9th consecutive month in December, with the upside coming from international sales.
  • The pickup in new business led to backlogs rising at the quickest pace since Oct-18.
  • Firms also continued to hire in December.
  • In spite of the continuing hiring and rise in backlogs, optimism fell to the weakest since August.

For the Eurozone

The Composite PMI came in at 50.9 for December, coming in ahead of a prelim and November 50.6.

According to the December Markit survey,

  • While the Output Index improved slightly, economic growth remained weak.
  • In spite of hitting a 4-month high, the PMI continued to sit at one of the lowest levels seen since the first half of 2013.
  • The divergence between the manufacturing and services sectors continued to be noticeable, with service sector growth hitting a 4-month high.
  • In contrast, the manufacturing sector saw output decline at a rate not exceeded in almost 7-years.
  • By country, Ireland moved into the top spot, with the composite hitting a 6-month high.
  • Spain hit an 8-month high, while Italy slid to an 11-month low to bring up the rear.
  • Amidst the doom and gloom, there was some good news, however. Germany moved off the bottom spot, with the composite hitting a 4-month high.
  • For the Eurozone, incoming new work expanded for the first time in 4-months, though demand from overseas limited growth.
  • The pace of hiring was the weakest for 5-years, which would be a concern, however.
  • Supporting the pickup in the composite was a rise in the Services Business Activity Index, which increased from 51.9 to 52.8.

From the U.S

The finalized Markit service sector and composite PMI figures for December were positive, with the services PMI rising from 51.6 to 52.8 in December. An upward revision from a prelim 52.2 supported the more hawkish sentiment towards the U.S economic outlook going into 2020.

The Market Movers

For the DAX: It was a mixed day for the auto sector. Continental and Daimler saw further losses, falling by 0.70% and by 0.05% respectively. BMW and Volkswagen bucked the trend, rising by 0.05% and by 0.52% respectively.

It was a bearish day for the banks, however. Commerzbank slid by 3.13%, with Deutsche Bank falling by 0.99% on the day.

From the CAC, it was also a bearish day for the banks. Credit Agricole and Soc Gen fell by 0.99% and by 0.81% respectively. BNP Paribas saw a more modest 0.49% loss on the day.

For the French auto sector, it was also a mixed day, with Peugeot falling by 1.59%, while Renault gained 0.32%.

Airline stocks continued to struggle at the start of the week. On the DAX30, Deutsche Lufthansa fell by a further 0.93% following Friday’s 6.45% slide. Air France – KLM declined by 0.93% following Friday’s 7.92% tumble.

Oil prices continued to rise on Monday in spite of risk aversion easing through the day, which pressured airline stocks further.

France’s Total rallied by 1.45% following a 1.13% gain from Friday.

On the VIX Index

The VIX fell by 1.21% on Monday. Partially reversing a 12.43% surge from Friday, the VIX ended the day at 13.9.

It was a mixed day for the VIX, which struck a day high 16.4 before hitting reverse. A shift in focus from Iran to the economic outlook led to a reversal on the day, which supported gains for the U.S equity markets.

The Day Ahead

It’s a relatively quiet day on the Eurozone economic calendar. Key stats include prelim inflation figures for the Eurozone.

We would expect the numbers to have a muted impact on the majors, however, with geopolitics and U.S stats likely to have a greater impact.

From the U.S, the markets’ preferred ISM Non-Manufacturing PMI for December and November factory order figures are due out.

Outside of the numbers, expect the Middle East to continue to draw attention. Iran has cranked up enrichment and the U.S is suggesting that ballistic missiles are at the ready. Perhaps an excuse for strategic airstrikes that would certainly see the majors return to the red…

The good news at the start of the week was that Iran had yet to retaliate to the U.S airstrike. It was Soleimani’s funeral, however, with little likely to happen until after he is laid to rest…

In the futures markets, at the time of writing, the DAX30 was up by 67 points, with the Dow up by 36 points.

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