European Equities: A Month in Review – 01/05/20

The Majors

It was a bullish month of April for the European majors, with the DAX30 rallying by 9.32% to lead the way. The CAC40 and EuroStoxx600 saw more modest gains of 4.00% and 6.24% respectively.

Following the March sell-off across the majors, economic data took a back seat throughout the month.

The market focus was on COVID-19 numbers, the global lockdown, the government plans to ease lockdown measures, and fiscal and monetary policy.

Through the month of April, the number of new COVID-19 cases peaked and eased back through the final week.

The numbers supported moves by EU member states to begin easing lockdown measures that delivered much need support to the majors.

It certainly wasn’t plane sailing, however. The economic calendar delivered some alarming numbers, with the IMF also giving the markets a reality check with its 2020 economic growth forecasts.

In spite of all the negativity on the economic data front, however, the markets were able to avoid a full reversal.

The Stats

It was a hectic month on the Eurozone economic calendar in April. While the markets tended to show little interest in the historic numbers, there were some noteworthy stats…

The Eurozone’s April Composite and Services PMIs both fell to record lows, with business and consumer confidence in Germany also sliding to record lows.

For the manufacturing sector, the Eurozone manufacturing PMI fell to a 134-month low…

Following some quite dire stats and the IMF’s economic forecasts, the markets were somewhat prepared for the 1^st quarter GDP numbers.

According to 1^st estimates, the Eurozone’s economy contracted by 3.8% in the 1^st quarter, which was the worse contraction in the Eurozone’s history. The French economy contracted by 5.8%, also a record, with the Spanish economy contracting by 5.2%.

Monetary and Fiscal Policy

While EU member states managed to agree to a €540bn COVID-19 Bailout Fund, it fell well short of ECB and market expectations.

A failing by EU member states, less adversely impacted by the virus, to agree to a more meaningful sum was a red flag. While the broader market is expecting an agreement to a sizeable package to be reached, failure will bring into question the EU project itself.

EU member states including Italy and Spain will likely question their membership to the EU and the EUR.

On the monetary policy front, things were not much better if you compare the ECB response to that of the FED. At the month-end, Lagarde called on EU member states to deliver more fiscal support, as the ECB held back from expanding its bond-buying program. The ECB did cut funding costs for banks but stopped there…

Both the FED and the U.S administration continued to deliver throughout April, which added to the upside for the equity markets.

The Market Movers

For the DAX: It was a particularly bullish month for the auto sector. Continental and Volkswagen surged by 20.22% and by 21.68% to lead the way. BMW and Daimler weren’t far behind with gains of 17.24% and 16.76% respectively.

It was also a bullish month for the banks. Deutsche Bank rallied by 16.35%, while Commerzbank surged by 19.80%.

Deutsche Lufthansa struggled, however, with liquidity concerns and a negative outlook delivering a 4.66% loss. The downside came in spite of a sharp rise through the final days of the month.

From the CAC, it was a mixed month for the banking sector. BNP Paribas and Credit Agricole rose by 4.22% and by 8.82% respectively. Soc Gen bucked the trend with a 7.09% loss.

The auto sector found support, with Peugeot and Renault gaining by 7.44% and by 2.77% respectively.

Air France-KLM and Airbus SE saw red, however, with losses of 8.85% and 2.46% respectively.

On the VIX Index

In April, market fear melted away, with the VIX sliding by 36.22%. Reversing a 33.48% gain in March, the VIX ended the month at 34.2. The April reversal brought to an end a run of 4 consecutive months in the green. The VID had a March high 85.5 before the reversal began.

It was the best month since the 1980s for the U.S equity markets. Fiscal and monetary policy support were both key to the upside.

Plans to reopen parts of the U.S economy also provided support, though the gains could have been more significant. Progress in finding an effective COVID-19 treatment drug was key alongside the falling numbers and plans to reopen.

At the end of the month, earnings and disappointing economic data did weigh, however.

In spite of a Thursday pullback, the S&P500 ended the month up by 12.68%, which was the 3^rd largest monthly gain on record.

The Month Ahead

It will be another busy month on the Eurozone economic calendar. We will expect particular interest in the private sector PMIs for May, unemployment figures, and business and consumer confidence figures.

Following the record low PMIs in April, the markets will be looking for a less marked contraction in May.

As EU member states reopen for business, the badly hit services sector should see some improvement. The PMIs will give the markets an idea, however, of just how quickly the respective economies can rebound.

Looking at April’s gains, there are lingering hopes of a v-shaped economic rebound. This hope comes in spite of the economic data suggesting otherwise.

On the monetary and fiscal policy front, EU member states will need to deliver a sizeable stimulus package. Failure to reach an agreement will raise further questions over the continued viability of the EUR and the EU Project…

While we will expect chatter from the U.S to also influence throughout the month, COVID-19 news will remain key.

At a minimum, positive updates on the COVID-19 treatment drug remdesivir will be needed. Any positive updates will need to be accompanied by a continued fall in new cases.

A worst-case scenario would be negative updates on the effectiveness of remdesivir and a jump in new cases resulting from the easing of lockdown measures.