European Equities: A Month in Review – June 2020

The Majors

It was another bullish month for the European majors in June, as the markets continued to recover from The Meltdown.

The DAX30 and CAC40 rallied by 6.25% and 5.12% respectively to lead the way, with the EuroStoxx600 gaining 2.85%.

Themes throughout the month included the reopening of economies across the EU and the U.S and stimulus…

Central banks and governments stepped in to provide much-needed support, as the markets digested post lockdown economic indicators.

Late in the month, a threat of U.S tariffs on EU goods and a pause in the easing of lockdown measures tested risk sentiment.

In the U.S, news of U.S states hitting pause on reopening questioned the more optimistic outlook on the economic recovery.

It was not enough to sink the markets, however. Continued support from the FED and other central banks propped up the markets late in the month.

While June’s gains may seem minor, the 2^nd quarter rebound was more impressive. The DAX30 rallied by 23.9%, with the CAC40 and EuroStoxx600 rising by 12.28% and 12.59% respectively.

Optimism coupled with monetary and fiscal policy support and the easing of lockdown measures fuelled the gains in the quarter.

The Stats

It was a busy month on the Eurozone economic calendar. June’s prelim private sector PMIs were the headline stats of the month, which led to a less gloomy economic outlook for the Eurozone.

Following an uptick in May, further improvement in June was key to the upside in the European majors.

Supporting the uptick in service sector activity was a pickup in both business and consumer confidence. For the economic recovery, consumer confidence and spending remained key to supporting a service sector-driven recovery.

From the U.S

Private sector PMIs reflected a similar trend, with both the manufacturing and services sectors seeing a slower pace of contraction. This was coupled with a rebound in durable and core durable goods orders.

While retail sales also bounced back from April’s, there was evidence, however, that labor market conditions would likely take longer to recover.

In spite of May’s nonfarm payrolls impressing at the start of the month, the weekly jobless claims continued to report high numbers.

From an economic and service sector perspective, however, improving consumer confidence was key. At the end of the month, June’s CB Consumer Confidence Index jumped from 85.9 to 98.1.

Monetary and Fiscal Policy

In the June monetary policy decision, the ECB left interest rate and deposit rates unchanged, which was in line with market expectations. The ECB did crank up the size of the emergency purchasing program of bonds to €1.35tn and extended it by an additional 6-months to 30^th June 2021.

Outside of the monthly policy meeting, the ECB also delivered a Eurosystem repo facility for central banks outside of the Eurozone. The move provided further support to the European majors late in the month.

Perhaps the FED’s move to begin acquiring individual corporate bonds was most impressive in June. Mid-month, the FED announced that it would purchase up to $250bn in individual corporate bonds. Named the Secondary Market Corporate Credit Facility, eligible bonds had to be rated investment grade as at March 22^nd, 2020.

The Market Movers

For the DAX: It was another mixed month for the auto sector. Continental fell by 2.17% to buck the trend in the month. BMW and Daimler rallied by 7.47% and by 7.67% respectively, while Volkswagen rose by 2.16%.

It was another bullish month for the banks. Deutsche Bank rallied by 11.74%, with Commerzbank up by 13.31%.

Deutsche Lufthansa rose by a more modest 7.79%.

From the CAC, it was a bullish month for the banking sector. BNP Paribas and Credit Agricole rose by 9.64% and by 7.80% respectively. Soc Gen rallied by 11.87%, however, to lead the way.

It was also a bullish month for the auto sector. Peugeot and Renault rallied by 13.04% and by 11.78% respectively.

Air France-KLM and Airbus SE had a mixed month. While Air France-KLM fell by 0.74%, Airbus SE rallied by 12.03%.

On the VIX Index

In June, COVID-19 and geopolitics provided some upside in the VIX following the pullback in May.

The VIX rose by 10.61% in June to bring to an end 2 consecutive months in the red. Partially reversing a 19.44% slide from May, the VIX ended the month at 30.43.

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

Across the U.S equity markets, the S&P500 rose by 1.84%, with the Dow and NASDAQ gaining 1.69% and 5.99% respectively.

FED support and plenty of fiscal stimulus delivered the upside. Late in the month, U.S states began hitting pause on reopening as new COVID-19 cases began to spike.

The Month Ahead

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

An upward trend in the private sector PMIs through to July would need to continue for the markets to find a further upside.

The markets would also need to see a further pickup in both business and consumer confidence to support consumption.

Consumers would need to see improved labor market conditions to fuel consumption and a service sector-driven economic recovery.

On the monetary policy front, the ECB will need to continue to assure the markets of further support. Brussels and EU member states will also need to be on the same page vis-à-vis distribution of funds to support COVID-19 stricken economies.

From elsewhere, we continue to expect stats from the U.S and China to also garner plenty of attention.

Geopolitics and COVID-19 will also remain in focus. In June, Trump looked to distract U.S voters, by threatening the EU with tariffs. There had also been the talk of the U.S – China trade agreement being “over”.

With Trump on the back foot, election wise, expect more of the same if not more in the month ahead. Politically, the U.S President couldn’t have got things more wrong in June. Racism also took center stage, with protests and riots gripping the U.S following the unlawful killing of Floyd George.

If that’s not enough to keep the markets busy, it’s also corporate earnings season…