European Equities: A Month in Review – August 2021

The Majors

It was yet another bullish month for the European majors in August, logging a 7^th consecutive monthly gain.

The DAX30 and the EuroStoxx600 rose by 1.87% and by 1.98% respectively, with the CAC40 trailing once more with a 1.02% gain.

It was another choppy month for the European majors, with economic data, FED monetary policy, and COVID-19 key areas of focus.

While economic data was mixed in the month, from the U.S and the Eurozone, the numbers were good enough to avoid a sell-off.

Market jitters over FED monetary policy tested support ahead of the Jackson Hole Symposium late in the month. FED Chair Powell’s assurances that tapering did not constitute tightening was good enough for the markets in August.

On the negative, however, was the continued spread of the Delta variant, which raised concerns over the economic recovery.

The Stats

Key stats in the month included inflation, consumer spending, consumer sentiment, private sector PMIs and 2^nd quarter GDP numbers.

Private Sector PMIs

Private sector PMIs for August were better than expected easing concerns over a material slowdown in economic growth.

For the Eurozone, the Manufacturing PMI fell from 62.8 to 61.5, while the services PMI slipped from 59.8 to 59.7.

Both France and Germany saw slower growth across the manufacturing and the services sectors. For Germany, the manufacturing PMI slipped from 65.9 to 62.7. Avoiding a PMI of sub-60 was key.

2^nd Quarter Growth

GDP numbers for France and Germany were in focus in the month, with the numbers beating expectations.

For Germany, the economy grew by 1.6% in the 2^nd quarter versus a forecasted 1.5%. The economy had contracted by 1.8% in the quarter prior.

Quarter-on-quarter, the French economy expanded by 1.1%, coming in ahead of a forecasted 0.9%. In the previous quarter, the economy had stalled.

For the Eurozone, 2^nd estimate GDP numbers were also market positive in spite of a modest downward revision from the 1st estimate. In the 2^nd quarter, the Eurozone economy expanded by 2.0%, quarter-on-quarter, which was in line with prelim numbers.

Year-on-year, however, the economy expanded by 13.6%, revised down from a 1^st estimate 13.7%. In the 1^st quarter, the economy had contracted by 1.3%.

Inflation

With the ECB in action next week, inflation figures for August also drew plenty of attention. The markets were looking for any further pickup in inflationary pressure that could question the ECB’s transitory view.

For the Eurozone, the annual rate of inflation accelerated from 2.2% to 3.0%. The core annual rate of inflation picked up from 0.7% to 1.6%.

Business and Consumer Sentiment

For the markets, a deterioration in business and consumer sentiment was palatable, as a result of the Delta variant.

Germany and the Eurozone saw business and consumer confidence wane in the 3^rd quarter.

From Germany, the GfK Consumer Climate Indicator fell from -0.3 to -1.2 in August. The all-important Ifo Business Climate Index declined from 100.7 to 99.4.

For the Eurozone, consumer confidence fell from -4.4 to-5.3 in August, with the business climate index falling from 1.88 to 1.75.

From the U.S

Economic data delivered mixed results once more.

Labor market numbers impressed, with nonfarm payrolls surging by a further 943k in July. In June, nonfarm payrolls had jumped by 938k.

Jobless claims failed to fall below the 300k mark in the month, however, in spite of the NFP numbers.

Private sector PMI numbers also impressed.

The all-important ISM Non-Manufacturing PMI rose from 60.1 to 64.1 in July, supporting the optimistic economic outlook.

Manufacturing sector saw slower growth, but only modestly, with the PMI falling from 60.6 to 59.6.

On the consumption front, retail sales figures were weak, with retail sales falling by 1.1% in July. In June, retail sales had risen by 0.7%.

The figures coincided with weaker consumer sentiment driven by the Delta variant.

In August, the Michigan Consumer Expectations Index fell from 79.0 to 70.3, with the expectations index sliding from 81.2 to 65.1.

The markets preferred CB Consumer Confidence also showed weakness. In August, the consumer confidence index fell from 129.1 to 113.8. Economists had forecast a more modest decline to 124.0.

On the inflation front, the annual rate of inflation softened from 4.5% to 4.3% in July, easing concerns over a further build up. The FED’s preferred Core PCE Price Index was up 3.6%, year-on-year, the rate of inflation unchanged from June. This was also a positive for riskier assets. From a market perspective, softer numbers are going to be needed near-term, however, to further support the FED’s transitory outlook.

The Market Movers

For the DAX: It was a bearish month for the auto sector in August. Daimler slid by 5.41%, with BMW and Volkswagen down by 4.30% and by 2.52% respectively. Continental ended the month with a more modest 0.87% loss.

It was also a bearish month for the banks. Deutsche Bank fell by 1.82%, with Commerzbank declining by 2.39%.

From the CAC, it was a bullish month for the banking sector. BNP Paribas and Credit Agricole rose by 4.43% and by 3.83% respectively. Soc Gen led the way, however, rallying by 7.76%.

It was a mixed month for the auto sector. Renault fell by 1.81%, while Stellantis NV ended the month up by 4.71%.

Air France-KLM avoided the red, rising by 0.66%, while Airbus SE ended the month flat.

On the VIX Index

It was a back into the red for the VIX in August, marking a 6^th monthly decline in 7-months.

Partially reversing a 15.22% rise from July, the VIX fell by 9.65% to end the month at 16.48.

In August, the NASDAQ rallied by 4.00%, with the Dow and the S&P500 ending the month up by 1.22% and by 2.90% respectively.

The Month Ahead

The usual data sets will need continued monitoring. With progress made on the vaccination front, however, the markets will be looking for a pickup in business and consumer confidence.

Inflation numbers will also need to soften to support the transitory view shared by both the ECB and the FOMC.

Following some mixed numbers from China of late, economic data will also need to resume an upward trend to ease any concerns over growth.

Away from the economic calendar, COVID-19 news will need monitoring. As new cases continued to rise in August, the threat of a vaccine resilient variant remains.