European Equities: Italy and the Trade War to Drive the Majors

The Majors

The European majors saw their first day in the green since last Wednesday, as the markets reacted to trade war chatter on the day.

Leading the way was the CAC40, which rebounded from early losses to end the day up by 0.45%. While the DAX30 was close behind, rising by 0.4%, the EuroStoxx600 ended the day flat.

It was a choppy session that saw the majors in the red early on before rallying to intraday highs by late morning.

U.S President Trump’s latest comments on trade provided much-needed support. Following last week’s escalation that riled the markets, Trump said that trade negotiations were set to continue.

There’s still a long way to go before any kind of agreement is likely, but the change in mood was good enough for the markets.

Also providing support was news of political parties in Italy nearing an agreement to form government ahead of today’s deadline. Failure to form a government would mean a snap general election and more uncertainty for the world’s 8^th largest economy.

The Stats

It was a relatively quiet day on the Eurozone economic calendar on Monday. Economic data was limited to Germany’s IFO Business Climate Index figures.

According to the August IFO report,

• The ifo Business Climate Index fell from 95.8 to 94.3, its lowest level since Nov-12.
• German companies were also less satisfied with current conditions and the economic outlook.
• The Current Assessment sub-index fell 99.6 to 97.3, with the Business Expectations Index falling from 92.1 to 91.3.
• By sector, the Business Climate Indexes were all on the slide.
  • The manufacturing sub-index fell from -4.3 to -6.1, with the trade sub-index falling from 1.4 to -2.4.
  • Pessimism in the manufacturing sector reached levels last seen back in 2009.
  • Things were not much better for the service sector, where the index fell from 18 to 13. The ECB placed a lot of hope on support from the services sector. The deterioration in August, weighed by sentiment towards current conditions was ominous.
  • In construction, the sub-index fell from 23.1 to 21.4.

From the U.S, durable goods orders were mixed. While core durable goods orders fell by 0.4% in July, durable goods orders rose by 2.1%.

While the stats were negative, sentiment towards the U.S – China trade war overshadowed the numbers on the day.

The Market Movers

From the DAX, the auto sector led the way on the day. Daimler and BMW were the top performers rallying by 2.59% and 2.33% respectively. Continental and Volkswagen weren’t far behind with gains of 2.3% and 1.59% respectively.

The tech sector also found support, with Infineon Tech gaining 2.07%. The shift in sentiment towards trade also supported bank stocks. Deutsche Bank rose by 1.71%, with Commerzbank ending the day up by 1.43%.

From the CAC, BNP Paribas led the way for the banks, rising by 1.21%. Credit Agricole and Soc Gen saw more modest gains of 0.55% and 0.92% respectively. From the auto sector, Renault and Peugeot rose by 0.71% and 1.48% respectively.

The Day Ahead

It’s a relatively busy day ahead on the Eurozone economic calendar. Germany’s 2^nd estimate GDP numbers and French jobseeker figures are due out later this morning.

Barring any revisions to Germany’s 2^nd quarter GDP numbers, we would expect the stats to have a relatively muted impact on the majors.

Recent economic data out of Germany continues to point towards a recession. Any upward revision to the quarterly GDP number would be a boon for the majors.

From the U.S, we can expect August consumer confidence numbers to also provide direction later in the day.

Outside of the numbers, the markets will need to monitor how political parties in Italy progress to form government. Parties have until today to avoid a snap general election. Failure to form government would be considered negative for the majors.

Following Trump’s comments on trade from the G7 Summit, any further chatter will also need consideration…

In the futures markets, at the time of writing, the DAX was up by 13 points, while the Dow Mini was down by 55 points.