European Equities: A Month in Review – September 2020

The Majors

It was a relatively bearish end to the quarter for the European majors in September, with the downside coming off a bullish month of August.

A final week reversal left the majors in the red for the month. The DAX30 had been up by more than 2% before a downward trend kicked in from mid-month.

The DAX30 fell by 1.43%, partially reversing a 5.13% gain from August. Things were not much better for the CAC40 and EuroStoxx600, which ended the month down by 2.91% and by 1.48% respectively. In August, the CAC40 and EuroStoxx600 had risen by 3.42% and by 2.86% respectively.

September’s pullback left the CAC40 (-2.69%) in the red for the quarter. The DAX30 and EuroStoxx600 rose by 3.65% and by 0.21% respectively, however.

Mixed economic data once more tested market sentiment towards the global and Eurozone economic recovery.

Fresh spikes in new COVID-19 cases across the EU sounded the alarm bells as the summer came to an end. Concerns over the reintroduction of more stringent containment measures to curb the latest spike weighed.

Negative sentiment towards Brexit and the chances of both sides reaching an agreement added further pressure in the month.

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 once more.

Following disappointing August PMIs, September’s prelim PMIs delivered mixed results.

While manufacturing sector activity picked up, service sector activity contracted at the end of the quarter. With the ECB looking for a consumer-driven economic recovery, the service sector PMIs were a concern…

The Eurozone’s Service PMI fell from 50.5 to 47.6, with the composite PMI falling from 51.9 to 50.1.

Other stats were also mixed in the month.

Consumer and business sentiment saw marginal improvements in September. By contrast, deflationary pressures raised concerns, pressuring the European majors in the month.

At the end of the month, unemployment and consumer spending figures impressed, though provided little support. The pickup in new COVID-19 cases and further evidence of deflationary pressures countered the upbeat numbers.

Prelim inflation figures for September pointed to a pickup in deflationary pressures at the end of the quarter.

While economic data from the Eurozone failed to impress, stats from China continued to support the optimistic economic outlook.

From the U.S

Weekly jobless claims failed to continue to slide, raising concerns that the U.S economic recovery had hit a speed bump.

Non-manufacturing PMI numbers for August and prelim service sector PMIs for September also pointed to slower growth in the sector.

In spite of this, nonfarm payrolls continued to add, with the U.S unemployment rate falling to 8.4% in August.

Other positives in the month included a jump in consumer confidence and solid ADP nonfarm figures ahead of September NFP numbers tomorrow.

While the stats were somewhat mixed, Trump’s targeting of Chinese companies and chip suppliers continued to test market risk appetite.

There was some reprieve late in the month, with the court’s ruling to temporarily block Trump’s attempted ban on TikTok.

On the final day of the month, the 1^st presidential debate also drew plenty of market attention… Ultimately, a disruptive debate weighed heavily on riskier assets at the end of the month.

Monetary Policy

On the monetary policy front, the FED was in action. Lower for longer was the message, with Powell highlighting economic uncertainty stemming from COVID-19.

Projections showed that interest rates would sit at close to zero until 2023, which caught the markets off-guard, weighing on riskier assets. There was also a revised framework, though much of the revisions had been telegraphed well in advance.

Later in the month, there was much the same from the FED Chair, who delivered testimony on Capitol Hill.

For the ECB, there were no major surprises, with the ECB also talking of economic uncertainty.

A hot topic in the September ECB press conference was EUR appreciation. The ECB President was quick to point out that the ECB does not target exchange rates. Lagarde did note, however, that price stability would continue to be monitored. The comments followed on from concerns raised over a pickup in deflationary pressures.

The Market Movers

For the DAX: It was a mixed month for the auto sector in September. Daimler led the way once more, rallying by 7.54%. BMW and Continental also found support, with gains of 2.08% and 1.19% respectively, while Volkswagen fell by 1.04%.

It was also a bearish month for the banks, however. Deutsche Bank slid by 11.08%, with Commerzbank ended the month down by 13.78%.

Another bank scandal contributed to the demise of the banks in the month.

From the CAC, it was a particularly bearish month for the banking sector. Soc Gen slumped by 16.64% to lead the way down. BNP Paribas and Credit Agricole weren’t far behind, with losses of 15.26% and 13.04% respectively.

It was a mixed month for the auto sector, however. Peugeot rose by 7.86%, while Renault slid by 6.92%.

Air France-KLM stumbled by 21.56%, as a result of the spike in new COVID-19 cases, with Airbus SE falling by 9.83%.

On the VIX Index

The VIX slipped by just 0.15% in September to market a 4^th monthly decline in 6-months. Partially reversing a 7.97% gain from August, the VIX ended the month at 26.37.

The VIX had seen 4 consecutive months in the green that had led to its recent high 85.47 in March before the downward trend began in April.

Across the U.S equity markets, it was a bearish month in spite of a visit to fresh record highs at the start of the month. The Dow and the S&P500 fell by 2.28% and by 3.92% in September, with NASDAQ sliding by 5.16%.

The Month Ahead

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

After yet more mixed private-sector numbers for September, the markets will be looking for private sector activity to pick up.

The key to any pickup will be a continued improvement in consumer and business confidence. While employment conditions have improved, the latest spikes in new COVID-19 cases ahead of the winter months is a concern. The COVID-19 numbers will influence as winter dawns on Europe.

A failure for economic data to reflect improving economic conditions will test market risk appetite at the turn of the quarter.

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

Expect Trump to continue to target China over trade and the COVID-19 pandemic throughout the month that could test already frayed relations.

For the Pound, the EUR, and the European majors, the EU and the UK government will be looking for a last-minute agreement. Failure to reach an agreement in the month may well leave Britain without a deal, which would be market negative.