European Equities: A Month in Review – August 2020

The Majors

It was a bullish month for the European majors in August, though a bearish end of the month cut the gains from earlier on the month.

4 days in the red out of the last 5 left the majors with relatively modest gains for August.

The DAX30 gained 5.13%, following a 0.02% gain from July, with the CAC40 and EuroStoxx600 rising by 3.42% and by 2.86% respectively. The pair had fallen by 3.49% and by 2.98% respectively in the month prior.

There was plenty of action in the month, which ultimately provided the European majors with support.

While economic data influenced, geopolitics and fiscal and monetary policy were the key drivers in the month.

The German government announced extended fiscal support to combat the impact of the COVID-19 pandemic supporting the DAX30.

From France, the French government wasn’t far behind promising new measures in September to also support the economic recovery.

The measures from the respective governments muted the impact of fresh spikes in new COVID-19 cases across EU member states.

From the U.S, FED monetary policy pressured the European majors. Positive updates from the U.S and China trade talks added further support, however. China announced its willingness to stick to the terms of the phase 1 agreement, which eased tensions.

Tech was in the spotlight in the month once more, as Trump continued to target Chinese tech companies in the interest of national security.

All in all, however, the promise of more monetary support, unwavering fiscal support from member states, and talk of progress towards a COVID-19 vaccine were good enough.

The Stats

It was a busy month on the Eurozone economic calendar. Looking at the private sector PMIs, it was a mixed bag for the month.

While July numbers impressed at the start of the month, with finalized PMIs revised upwards, August numbers were less impressive.

Private sector activity waned in August, according to the prelim numbers. The Eurozone’s composite slipped from 54.7 to 51.6.

Significantly, France saw its manufacturing sector contract in August. From an economic outlook perspective, the figures certainly questioned the market’s outlook on the v-shaped economic recovery.

Other stats were also mixed in the month.

While German business sentiment improved in August, consumer sentiment took a hit, delivering yet more uncertainty.

From France, consumer spending was also lackluster as consumer confidence held steady in August.

The stats supported the ECB’s uncertainty over what lies ahead from an economic recovery perspective.

Consumer confidence and spending remain key. While fiscal stimulus will support, consumers will need to go about their business to support the economy.

From the U.S

Weekly jobless claims were a test for the markets in the month. While claims were in decline early in the month, claims moved northwards in the 2^nd half of the month. The figures suggested that the labor market recovery stalled mid-way through the 3^rd quarter.

On the positive, was a further pickup in service sector activity and continued rise in nonfarm payrolls.

Of concern late in the month would have been an unexpected slide in consumer confidence in August, however.

Ultimately, it was yet another mixed set of numbers from the U.S, adding uncertainty to plague the markets at current levels.

Monetary Policy

On the monetary policy front, the FED was in action. A gloomy set of FOMC minutes weighed on riskier assets. The FED Chair and the FED’s revised monetary policy also weighed late in the month.

The promise of support for longer delivered monetary policy divergence favoring the EUR. A pickup in the EUR was an added negative for the European majors.

The Market Movers

For the DAX: It was a bullish month for the auto sector. Daimler led the way, rallying by 14.48%. BMW (+10.97%), Continental (+11.32%), and Volkswagen (+11.87%) also saw solid gains in the month.

It was also a bullish month for the banks. Deutsche Bank rose by 5.94%, with Commerzbank ended the month up by 11.82%.

From the CAC, it was a bullish month for the banking sector. BNP Paribas led the way, rising by 7.15%. Credit Agricole and Soc Gen saw more modest gains of 5.66% and 4.62% respectively.

It was also a bullish month for the auto sector. Peugeot rose by 5.35%, with Renault jumping by 18.84%.

Air France-KLM and Airbus SE also saw green, with the pair ending the month up by 8.23% and 11.01% respectively.

On the VIX Index

The VIX rose by 7.97% in August, delivering just a 2^nd monthly gain in 5-months. Partially reversing a 19.62% slide from July, the VIX ended the month at 26.41.

The VIX had seen 4 consecutive months in the green before the downward trend began in April.

Across the U.S equity markets, it was yet another impressive run. The S&P500 and NASDAQ hit fresh record highs in the month, with the Dow also finding strong support.

For the month of August, the NASDAQ rallied by 9.59%, with the S&P500 and Dow seeing gains of 7.01% and 7.57% respectively.

The Month Ahead

It’s another busy month ahead on the Eurozone economic calendar.

After some mixed private-sector numbers for August, the markets will need some convincing in the month ahead.

An uptick in private sector activity, consumer and business confidence, and spending will be a must. Labor market conditions will also need to improve considerably to support any hope of a consumption-driven recovery.

A stronger EUR and any pick up in inflationary pressures would test consumption, however, putting pressure on the ECB. Prelim figures from the end of the month, however, point to a buildup of deflationary pressures suggesting the need of more support from the ECB.

Additionally, any failure by the ECB to pin back the EUR could make things a little testier in the month ahead.

From elsewhere, economic data from the U.S and China will also need to provide support.

On the geopolitical front, Brexit, U.S and China relations, and U.S politics will also influence.

We’re moving into the choppy time of the year and there are enough downside risks to test majors at current levels.