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European Equities: The Pendulum Could Swing Once More Following Tuesday’s Late Recovery

The EU shuts is borders, with market volatility likely to lead to a number of the closure of a number of EU boerses…
Bob Mason

Economic Calendar:

Wednesday, 18th March

Eurozone Core CPI (YoY) (Feb) Final

Eurozone CPI (YoY) (Feb) Final

Eurozone CPI (MoM) (Feb)

Eurozone Trade Balance (Jan)

Friday, 20th March

German PPI (MoM) (Feb)

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The Majors

The European majors closed out the day in the green on Tuesday, but it wasn’t plane sailing, with the majors having tumbled into the red before a late rebound.

Negative news over the spread of the coronavirus led the early reversal, with economic data out of Germany and the Eurozone also weighing.

There was ultimately little reason for the majors to hold onto any early gains, with the continued shutdown in the EU signaling economic doom and gloom.

Volkswagen announced a suspension of production, while regulators banned short selling in a number of key markets to provide some investor protection.

Should the short-selling ban fail to ease the sell-off, market closures could be next… One issue that is being seen across the EU is differing stances on how to deal with the impact of the virus on market stability and fiscal policy.

Belgium, France, Italy, and Spain delivered bans on the short-selling of the EU’s largest companies, while Germany and the departing UK felt it more appropriate to leave the markets free from restriction.

We hadn’t seen such moves since back in the global financial crisis, which was ultimately another red flag for investors…

On the day, however, the CAC40 led the way, rallying by 2.84%, with the DAX30 and EuroStoxx600 rising by 2.25% and 2.26% respectively.

The upside came from a rise in the U.S majors, driven by U.S administration plans to counter the impact of the coronavirus on the U.S economy.

The Stats

It was a relatively busy day on the Eurozone economic calendar on Tuesday. Key stats included Eurozone wage growth figures for the 4th quarter and Eurozone and German economic sentiment figures for March.

According to Eurostat,

  • Eurozone wages grew by 2.3% in the 4th quarter, with growth slowing from 2.6% in the 3rd quarter of last year.
  • While the cost of wages & salaries per hour worked grew by 2.3%, the non-wage component grew by 2.4%.

Unsurprisingly, the stats had a muted impact, with the markets far more interested in the March sentiment figures.

In March, Germany’s ZEW Current Conditions Index slumped from -15.7 to -43.1, with the Economic Sentiment Index tumbling from 8.7 to -49.5.

Things were no better for the Eurozone, with the economic sentiment index slumping from 10.4 to -49.5 in March.

From the U.S

Economic data certainly didn’t help the majors early on.

U.S retail sales fell by 0.5% in February, reversing a 0.3% increase in January. Economists had forecast a 0.2% increase.

While the fall in sales was not completely alarming, March and, April figures are likely to be far worst, which was the take away from the numbers.

Industrial production delivered some positive news, with U.S industrial production rising by 0.6% in February, reversing a 0.3% slide in January. The reality is, however, that production is expected to sink in March and April, which muted the impact of the positive numbers.

The Market Movers

For the DAX: it was a particularly bullish day for the auto sector. Daimler led the way, rallying by 5.64%, with Continental and Volkswagen rising by 2.88% and 3.09% respectively. BMW saw a more modest 0.91% gain on the day.

The upside came in spite of Volkswagen’s announcement that it would suspend production from Friday.

It was also a bullish day for the banks, with Commerzbank and Deutsche Bank rallying by 4.90% and 8.27% respectively.

Deutsche Lufthansa rose by 3.88%, with support coming in spite of the EU border shut down and other governments also taking containment measures.

From the CAC, it was a bullish day for the banks. Soc Gen and Credit Agricole led the way down, rallying by 7.84% and 7.31% respectively. BNP Paribas saw a more modest 6.41% gain on the day.

It was a mixed day for the auto sector, however, with Peugeot falling by 0.32%, while Renault rallied by 9.9%.

Air France-KLM joined its peers in the green, with a 1.23% gain, while Airbus SE slumped by 8.64%

On the VIX Index

The VIX fell by 8.2% on Tuesday to market only its 3rd day in the red out of 9. Partially reversing a 42.99% surge from Monday, the VIX ended the day at 75.9.

The U.S administration’s plans to combat the effects of the coronavirus on the U.S economy delivered support to the U.S majors on the day.

News of a stimulus package that could exceed US$1tn eased the pain on the day. The S&P500 rose by 6%, with Dow ending the day up by 5.2%.

U.S Treasury Secretary Mnuchin announced that the U.S President wants to give cash to the American people. This came off the back of Trump’s previous statement that the U.S could be heading towards a recession.

The President also acknowledged that the virus could continue to spread into the summer. Trump had previously stated that the spread of the virus should ease as temperatures rise.

While the support is certainly positive, with the Senate reportedly planning to seamlessly pass the Coronavirus Bill, the reality remains that the U.S and global economy are in for a hit. The only question, for now, is, whether the U.S can avoid a recession…

The Day Ahead

It’s a relatively busy day ahead on the Eurozone economic calendar. Key stats due out later this morning include finalized Eurozone inflation figures for February and January trade data.

The stats are unlikely to have an impact on the majors, with the focus likely to remain on government steps to combat the virus.

Another factor for the markets to also consider is the prospect of regulators shutting down markets. A number of EU member states have raised the possibility of closure, which could add to the market stress near-term.

In the futures markets, at the time of writing, the DAX was down by 151.5 points, with the Dow down by 451 points.

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