European Equities: The FED Reaction, the ECB and Geopolitics in Focus

It’s a big day ahead for the majors. While the markets respond to the FED’s outlook on growth and policy, the UK elections, the ECB and trade are in focus.
Bob Mason
Press Conference - Eurogroup finance ministers, Luxembourg

Economic Calendar:

Thursday, 12th December 2019

  • German CPI (MoM) (Nov) Final
  • French CPI (MoM) (Nov) Final
  • French HICP (MoM) (Nov) Final
  • Eurozone Industrial Production (MoM) (Oct)
  • ECB Deposit Facility Rate (Dec) / ECB Interest Rate Decision (Dec)
  • ECB Press Conference

Friday, 13th December 2019

  • Spanish CPI (YoY) (Nov) Final
  • Spanish HICP (YoY) (Nov) Final

The Majors

There was finally some green on the board for the European majors, with the DAX30 rising by 0.58% to lead the way. The CAC40 and EuroStoxx600 saw more modest gains, with both rising by 0.22% on the day.

On the day, the main areas of focus were updates from the U.S on whether the 15th December tariffs would go ahead.

Some caution was evident, however, with the FED delivering its final monetary policy of the year after the European close. Expectations were for the FED to hold rates unchanged, leaving the FOMC economic projections to have the greatest influence going into today.

From the UK, there was also a narrowing in Boris Johnson’s lead in the final opinion polls raising doubts over a Johnson majority.

The Stats

It was a quiet day on the Eurozone economic calendar on Wednesday. There were no material stats to provide the majors with direction on the day.

From the U.S,

From the U.S, inflation figures had a muted impact on the European majors, with the core annual rate of inflation holding steady at 2.3% in November.

Uncertainty over the interest rate path for 2020 left the majors on a more cautious footing. Economic data from the U.S had been quite mixed ahead of today’s decision. While nonfarm payrolls and wage growth had impressed last week, private sector PMI numbers for November had been disappointing…

Late on Wednesday, after the European close, the FED held rates unchanged as forecasted.

From the economic projections’ median numbers,

  • Economic growth for 2020 is projected to grow by 2.0%, which was in line with September forecasts.
  • For inflation, the Core PCE Price Index is forecasted to pick up to 1.9% in 2020 and to hit 2.0% by 2021. This is up from 1.5% for 2019.
  • On unemployment, while predicting an unemployment rate of 3.5% for 2020, revised from 3.7% in September, the FED predicts a longer-run rate of 4.1%.
  • Finally, on the projected path for interest rates, FOMC members see rates unchanged through 2020, with 1 rate hike in 2021.
  • The Federal funds rate had a median of 1.6% for 2020 and 1.9% for 2021. In September, the medians had stood at 1.9% and 2.1% respectively.
  • Trump may not like the anticipated hold and longer run FED Funds Rate of 2.5%, however…
  • When looking at the dot plot, just 4 members of the Committee predict a single rate hike next year. The remaining 14 members see rates on hold throughout next year.

All in all, no downward revisions to growth forecasts and an accommodative FED are considered positives for the equity markets.

The Market Movers

For the DAX: It was a bullish day for the auto sector. Volkswagen rallied by 1.77% to lead the way, with Daimler close behind, rising by 1.67%. BMW and Continental also found strong support, with the pair up by 1.5% and by 1.37% respectively. Upside on the day came as the markets responded to news of the U.S planning to delay 15th December tariffs.

It was also a bullish day for the banks. Deutsche Bank rose by 0.91%, with Commerzbank up by 0.48%.

From the CAC, it was a positive day for the banks. Credit Agricole led the way, rising by 0.36%. BNP Paribas and Soc Gen saw more modest gains of 0.26% and 0.31% respectively.

The French auto sector, bucked the trend, however, in spite of the more positive sentiment towards trade. Peugeot and Renault fell by 0.05% and by 0.16% respectively.

On the VIX Index

The VIX saw red for a 2nd consecutive day, falling by 4.4% on Wednesday. Following a 1.13% decline on Tuesday, the VIX ended the day at 15.0.

FED monetary policy contributed to the downside on the day, with the FOMC economic projections forecasting a hold on rates through 2020.

Earlier in the day, the VIX had hit an intraday high 16.0, with the upside coming in spite of news of the U.S administration planning to delay tariffs due to be rolled out on Sunday.

The Day Ahead

It’s a relatively busy day ahead on the Eurozone economic calendar. Economic data due out of the Eurozone includes October Eurozone industrial production figures.

Of less influence on the day, will be finalized November inflation figures out of Germany and France.

Outside of the numbers, while the FOMC’s latest projections are positive for the European majors, both trade and the UK General Election will also be in focus…

Any negative chatter and expect risk aversion to weigh, with uncertainty over the outcome of the UK General Election later today also a test for the bulls.

In the futures market, at the time of writing, the DAX30 was down by 13.5 points, with the Dow down by 4 points.

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