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Bob Mason
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The Majors

It was a bullish month for the European majors in May. The DAX30 rallied by 6.68% to lead the way, with the CAC30 and EuroStoxx600 gaining 5.64% and 3.00% respectively.

Through the early part of the month, economic data and lockdown measures had weighed on the majors. There was also disappointment over the COVID-19 aid package and rising tensions between the U.S and China.

Sentiment shifted, however. The DAX30 reversed a 3.65% loss from the 1st half of the month.

Economic data, an easing in lockdown measures, and progress towards a COVID-19 vaccine delivered the rebound in the 2nd half of the month.

While member states eased lockdown measures through May, a downward trend in new coronavirus cases continued until a marginal rise at the end of the month.

The trend allowed governments to announce plans to remove border controls, which drove demand for travel and tourism stocks.

Banks were also on the move as hopes of a pickup in economic activity provided support.

In the final week of the month, the EU announced a €750bn recovery fund that also gave the majors a boost. For the European majors, the lion’s share of the gains came from the final week. The recovery fund will not only support the economic recovery but also pour cold water on any doubters of the EU project that had come into question…

The Stats

It was a busy month on the Eurozone economic calendar. While the numbers continued to reflect a dire economic environment, the stats did suggest that the economies had seen the worst in April…

Key stats in the month included April’s final and May’s prelim private sector PMIs and business and consumer confidence figures.

The Eurozone’s composite PMI increase from 13.6 to 30.5 in May, according to prelim figures.

According to the prelim May survey:

  • The Composite Output Index rose from 13.6 to a 3-month high 30.5.
  • Service and manufacturing sector activity hit 3-month and 2-month highs respectively.
  • While service sector activity contracted at a slower pace, it was still the 3rd steepest decline on record. Social distancing and lockdown measures continued to weigh on businesses including hotels, restaurants, and travel tourism.
  • Jobs continued to be cut at an unprecedented rate, with both sectors contributing.
  • Inflows of new business fell to the 3rd greatest extent ever recorded. In spite of this, the smallest decline in new business in 3 months suggested that the downturn had bottomed out.

The key take away was that April had been the bottom and economic activity should pick up as economies reopen.

Consumer and business confidence improved, as a result, supported by the easing of lockdown measures. There was no major rebound, however, as labor market conditions remained a concern across member states.

The ZEW Economic Sentiment Index for the Eurozone jumped from 25.2 to 46.0 in May. By contrast, the flash consumer confidence index saw a more modest increase in May, rising from -22.0 to -18.8.

While the markets were able to brush aside particularly dire GDP numbers, they are also worth highlighting.

The German economy contracted by 2.2% in the 1st quarter, with the Eurozone economy contracting by 3.8%, quarter-on-quarter.

From the U.S

While there was plenty of influence from the private sector PMIs, it was labor market numbers that drew the greatest attention.

Unprecedented increases in weekly jobless claims weighed on risk appetite early in the month. A downward trend late in the month provided support, however, in spite of claims continuing to hit the 2m mark…

Monetary and Fiscal Policy

In April we had seen the market’s disappointment as EU member states came up short with a €540bn COVID-19 Bailout Fund.

It was a different story in May, however, with the €750bn beating market expectations… Combined with the EU Budget also announced in the final week that delivered in excess of €2trn to support the economic recovery.

More than 60% of the total €820 Recovery Fund would be made available as grants, with the remainder available as repayable loans.

On the monetary policy front, there was no monetary policy decision within the month of May. The ECB did release the financial stability review and economic bulletin, however.

Both continued to paint a gloomy picture of the economic outlook, with ECB Lagarde pointing out that the economic meltdown was likely to be closer to the ECB’s worst-case scenario…

The Market Movers

For the DAX: It was a mixed month for the auto sector. Continental rallied by 15.47% to lead the way, with and Volkswagen and Daimler rising by 4.13% and by 6.50% respectively. BMW bucked the trend, however, with a 1.81% loss.

It was also another bullish month for the banks. Deutsche Bank rallied by 12.13% following a 16.35% jump from April, while Commerzbank saw a more modest 3.76% gain.

Deutsche Lufthansa managed to reverse April’s 4.66% loss, with a 14.55% gain. A 17.13% rally in the final week delivered the upside for the month.

From the CAC, it was another mixed month for the banking sector. BNP Paribas and Credit Agricole rose by 12.52% and by 7.42% respectively. Soc Gen bucked the trend for a 2nd month with a 7.22% loss.

It was also a mixed month for the auto sector in May. Peugeot fell by 1.99%, while Renault rallied by 11.54%. A 17.17% surge in the final week delivered the upside, which came off the back of plans for Nissan and Renault to strengthen ties.

Air France-KLM and Airbus SE saw red for a 2nd month, however, with losses of 12.57% and 2.04% respectively.

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On the VIX Index

In May, market fear continued to melt away, with the VIX falling by 19.44%. Following on from a 36.22% slide in April, the VIX ended the month at 27.5. The VIX had seen 4 consecutive months in the green before the reversal began in April.

After April’s best month since the 1980s, it was a relatively bullish month for the U.S equity markets in May. The S&P500 and Dow saw gains of 4.53% and 4.26% respectively, with the NASDAQ rallying by 6.75%.

For the NASDAQ the 6.75% gain completed the current year recovery, with the index up 5.76% year-to-date. The Dow and S&P500 still have some way to go, however, with the pair down by 11.06% and by 5.77% respectively.

Through May, the majors found support from the continued easing of lockdown measures. It wasn’t plain sailing, however, with geopolitics and some quite dire economic data testing the markets in the month.

The S&P500 managed to recover a 3% loss from earlier in the month to close out the month in the green.

For the VIX, while the easing of lockdown measures weighed, the sheer number of unemployed also limited the downside.

The Month Ahead

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

While we had seen the PMIs and business and consumer confidence as the key drivers, May and June stats will have a material influence.

The markets will need to see employment conditions improve and confidence across businesses and consumers to rise.

For the June PMIs, a fall back from May’s finalized figures due out in the week ahead will be a test for the majors.

This would support a pickup in consumption to spur a service sector fueled economic recovery. It is worth noting that, prior to the COVID-19 pandemic, the ECB had looked towards the services sector and consumer spending for economic support. We can expect this to continue.

On the monetary policy front, the ECB will need to continue to assure support on Thursday. Perhaps more significantly, however, will be the progress by Brussels to disperse funds from the COVID-19 recovery fund.

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

Geopolitical risk will also likely remain a key driver, however, with tensions between the U.S and China unlikely to ease any time soon. We may even see the markets begin to consider the U.S Presidential Election.

In relation to COVID-19, that downward trend in new cases will need to persist to the point of no new cases. Progress towards a vaccine would also support a more marked pickup in economic activity that would support riskier assets.

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