European Equities: A Month in Review – September 2021

The Majors

It was a choppy end to the 3^rd quarter for the European majors, which saw a 7-month winning streak come to an end.

The EuroStoxx600 and the DAX30 slid by 3.19% and by 3.63% respectively, with the CAC40 ending the month down by 2.40%.

While economic data continued to influence, monetary policy, Evergrande, concerns over China, and the threat of a U.S government shutdown weighed on riskier assets.

A jump in U.S Treasury yields late in the month led to a Dollar rally and also a tech stock sell-off, adding heavy downside pressure.

The sell-off in the month was severe enough for dip-buyers to remain on the side-lines and let the end of the quarter come to an end.

The Stats

It was a mixed set of numbers for the markets in September. Consumer and business sentiment waned as COVID-19 continued to impact the economic recovery.

Private sector activity also reflected slower growth, while inflationary pressures continued to spike.

Private Sector PMIs

Growth across the private sector did slow at the end of the 3^rd quarter, according to prelim figures, however.

The Eurozone’s Composite PMI fell from 59.0 to 56.1, with slower growth in both the manufacturing and services sectors contributing.

In September, the Eurozone’s Services PMI fell from 59.0 to 56.3, with the Manufacturing PMI declining from 61.4 to 58.7.

Both Germany and France reported slower growth, with Germany’s Manufacturing PMI falling from 62.6 to 58.5.

2^nd Quarter Growth

Economic activity in the 2^nd quarter fared better than had been expected, however. Quarter-on-quarter, the Eurozone economy expanded by 2.2%, which was up from a previous estimate of 2.0%.

Inflation

In August, inflationary pressures were on the rise once more. The Eurozone’s annual rate of inflation accelerated from 2.2% to 3.0%, overshooting the ECB’s 2% objective.

Supply chain issues continued to push prices higher as prices for raw materials spiked.

Business and Consumer Sentiment

Germany’s IFO Business Climate Index fell from 99.6 to 98.8 in September, with the Eurozone’s ZEW Economic Sentiment Index sliding from 42.7 to 31.1 in September.

A pick up in German consumer confidence provided little comfort, in spite of the GfK Consumer Climate Indicator rising from -1.40 to +0.30.

From the U.S

Economic data also delivered mixed signals.

Labor Market Numbers

Nonfarm payrolls saw a more modest 235k increase in September after having jumped by 1,053k in August.

Weekly jobless claims were also disappointing. After having fallen to a pandemic low of 310k early in the month, claims jumped back to 362k in the week ending 24^th September.

Consumption and Consumer Confidence

Retail sales impressed, however, in spite of weakening consumer confidence. In August, core retail sales jumped by 1.8%, with retail sales up 0.7%. Consumer spending had fallen back in July.

The all-important CB Consumer Confidence Survey raised some red flags, however. In September, the CB Consumer Confidence Index fell from 115.2 to 109.3.

Service Sector Activity

While reflecting softer growth, service sector activity remained resilient mid-way through the quarter. The market’s preferred ISM Non-Manufacturing PMI slipped from 64.1 to 61.7 in August.

Inflation

There was no respite from inflationary pressures, however. In August, the annual core rate of inflation softened from 4.3% to 4.0%. While softer, inflationary pressures remained elevated, supporting the need for policy action by the FED.

Monetary Policy

While the ECB continued to talk of inflationary pressures being transitory, the FED delivered a more hawkish outlook on policy.

The markets had been looking for a definitive date on which the FED would beginning tapering its asset purchasing program.

While failing to commit to a date, the interest rate projections highlighted a divided Committee, with some committee members pointing to rate hikes as early as next year.

Sentiment towards the economy and labor market conditions, coupled persistent inflation supported the more hawkish outlook.

The Market Movers

For the DAX: It was a mixed month for the auto sector in September. Continental tumbled by 16.54% to lead the way down, with Volkswagen sliding by 3.05%. BMW and Daimler found support, however, rising by 3.53% and by 8.47% respectively.

It was a bullish month for the banks. Deutsche Bank and Commerzbank ended the month up by 5.58% and by 8.47% respectively.

From the CAC, it was a mixed month for the banking sector. BNP Paribas and Soc Gen rose by 3.18% and by 2.03% respectively. Credit Agricole bucked the trend, however, falling by 2.13%.

It was a bearish month for the auto sector. Renault and Stellantis NV ended the month down by 1.75% and by 3.28% respectively.

Air France-KLM rallied by 7.30%, while Airbus SE slipped by 0.52%.

On the VIX Index

It was a back into the green for the VIX in September, marking just the 2^nd monthly gain in 8-months.

Reversing a 9.65% fall from August, the VIX surged by 40.41% to end the month at 23.14.

In August, the NASDAQ slid by 5.31%, with the Dow and the S&P500 ending the month down by 4.28% and by 4.76% respectively.

The Month Ahead

With market concerns over the growth outlook and monetary policy now driving the markets, sensitivity to the economic data will likely be heightened.

Labor market numbers, private sector PMIs, consumption, and inflation will remain key areas of focus.

From the U.S, another jump in nonfarm payrolls and persistent inflation would support the more hawkish outlook on policy.

Also of influence, however, will be economic data from China, with any further weak data sets likely to test support for the majors.

Away from the economic calendar, COVID-19 and geopolitics will be other areas of focus in the final quarter of the year.