European Equities: A Month in Review – October 2020

The Majors

It was another bearish month for the European majors in October, with COVID-19 and U.S politics weighing on risk sentiment.

A particularly bearish final 2-weeks of the month did the damage as EU member states reintroduced lockdown measures.

New COVID-19 cases surged by record levels across EU member states forcing governments to respond. The reintroduction of lockdown measures is expected to drag the Eurozone economy back into the red for the 4^th quarter.

From the U.S, a failure to deliver a fiscal stimulus package ahead of the U.S Presidential Election added to the market angst in the month.

With the U.S Presidential Election in the 1^st week of November, there was also some uncertainty over the likely outcome.

Trump’s unwillingness to concede in a closely fought race was also a concern in the run into Election Day.

The DAX30 slid by 9.44%, following a 1.43% decline in September. Things were not much better for the CAC40 and EuroStoxx600, which ended the month down by 4.36% and by 5.19% respectively. In September, the pair had fallen by 2.91% and by 1.48% respectively.

The Stats

It was a busy month on the Eurozone economic calendar. Looking at the private sector PMIs, it was another mixed bag for the month of October. While the manufacturing sector saw activity pick up, service sector activity contracted at a faster pace in October.

With the Eurozone reintroducing lockdown measures, things are likely to get worse for the services sector before there is any pickup in sector activity.

The Eurozone’s Service PMI fell from 48.0 to 46.2, with the composite PMI falling from 50.4 to 49.4.

Other stats were also mixed in the month.

Consumer and business sentiment weakened in October as a result of the 2^nd wave of the pandemic, Brexit, and the U.S Presidential Election.

At the end of the month, German unemployment figures impressed. The impact on the EUR and the majors were modest, however, with labor market conditions expected to deteriorate.

GDP numbers for the 3^rd quarter were also impressive, though expectations of a 4^th quarter contraction muted the impact on the majors.

In the 3^rd quarter, the Eurozone’s economy expanded by 12.7%, recovering from the 2^nd quarter 11.8% contraction. Year-on-year, however, the economy shrank by 4.3%, following a 14.7% contraction in the 2^nd quarter.

Germany’s economy expanded by 8.2% in the 3^rd quarter, with France’s surging by 18.2%. Concerns over the economic outlook for the 4th quarter softened the impact of the stats, however.

While the GDP numbers were upbeat, consumer spending figures for September disappointed.

In France, consumer spending slumped by 5.1%, with retail sales falling by 2.2% in Germany. Both reported numbers that reversed August figures ahead of lockdown measures introduced in October and next week.

Prelim inflation figures for October continued to reflect deflationary pressures at the turn of the quarter. For the Eurozone, consumer prices fell by 0.3%, year-on-year, following a 0.3% decline in September. The annual core rate of inflation held steady at 0.2%, however.

From the U.S

Labor market conditions saw a modest improvement, with weekly jobless claims falling to sub-800k levels

Private sector PMI numbers were positive for October, according to prelim figures. The all-important Services PMI rose from 54.6 to 56.0, with the Manufacturing PMI rising from 53.2 to 53.3.

At the end of the month, 3^rd quarter GDP numbers also impressed, with the U.S economy recovering from the 2^nd quarter meltdown.

While the v-shaped economic rebound was affirmed, the impact was modest as a result of the jump in new COVID-19 cases. The threat of new containment measures tested market risk appetite late in the month.

This was also reflected in consumer sentiment figures, with the CB Consumer Confidence Index disappointing in October.

Monetary Policy

For the ECB, there were no major surprises, with the ECB holding monetary policy unchanged.

ECB President Lagarde did assure the markets of further easing in December, however, which left the EUR at sub-$1.17 levels.

Ahead of 3^rd quarter GDP numbers on Friday, the ECB President had also noted that, while 3^rd quarter GDP numbers will likely impress, the Eurozone economy would likely contract in the 4^th quarter.

The comments muted the impact of the GDP numbers on the European majors on the final day of the month.

The Market Movers

For the DAX: It was a bearish month for the auto sector in October. Volkswagen slid by 9.05% to lead the way down. BMW and Daimler also struggled, falling by 4.93% and by 2.92% respectively. Continental saw a more modest 0.39% loss in the month.

It was a mixed month for the banks, however. Deutsche Bank rallied by 11.76%, while Commerzbank ended the month down by 3.53%.

From the CAC, it was a mixed month for the banking sector. Soc Gen rose by 2.83%, while BNP Paribas and Credit Agricole fell by 3.65% and by 2.94% respectively.

It was a bearish month for the auto sector, however. Peugeot fell by 0.45%, with Renault sliding by 4.24%.

Air France-KLM followed September’s 21.56% slump with a 5.13% loss, while Airbus SE rose by 0.84%.

On the VIX Index

The VIX surged by 44.18% in October, marking a 3^rd monthly rise in 7-months. Following a 0.15% decline in September, the VIX ended the month at 38.02.

Across the U.S equity markets, it was a bearish month as Presidential Election jitters and a surge in new COVID-19 cases weighed in market risk appetite. The Dow slid by 4.61%, with the NASDAQ and the S&P500 ending the month down by 2.29% and by 2.77% respectively.

The Month Ahead

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

After yet more mixed private-sector numbers for October, the markets will be looking to assess the damage stemming from the 2^nd wave of the COVID-19 pandemic

Expectations are for economic conditions to see a marked deterioration as a result of new lockdown measures.

With the Eurozone entering the winter months, updates on COVID-19 will remain a key driver.

A continued rise in new cases and further lockdown measures would likely weigh on consumer and business confidence.

Consumer spending and business investment would then take a hit, all of which would be negative for the majors.

Upside could come, however, should there be progress towards an effective COVID-19 vaccination.

On the geopolitical front, there’s never a dull moment. Both Brexit and the U.S Presidential Election will be front and center.

Brexit talks continued through October, with the EU eager to make progress following Boris Johnson’s decision to end negotiations. UK fisheries remained the stumbling block going into November, with mid-November considered the ultimate deadline for any agreement.