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European Equities: A Week in Review – 04/04/20

It was a bearish week for the European majors, with the prospects of a recession and continued spread of COVID-19 doing the damage.
Bob Mason
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The Majors

It was a bearish week for the European majors, with a sharp sell-off on Wednesday doing the damage.

A combination of particularly disappointing economic data and the continued spread of the coronavirus weighed in the week.

The Wednesday sell-off came in response to projections of as many as 240,000 deaths in the U.S and a warning from the U.S President on what lies ahead.

For the week, the CAC40 slid by 4.53%, with the DAX30 and EuroStoxx600 falling by 1.11% and 0.59% respectively.

The Stats

It was a busy week on the Eurozone economic calendar.

Key stats in the week included March private sector PMI numbers out of Italy and Spain. Finalized PMI numbers out of France, Germany and the Eurozone also garnered plenty of attention.

While manufacturing sector activity in France and Germany held up relatively well, it was a different story for Italy in particular. Italy’s manufacturing PMI tumbled from 48.7 to 40.3.

With the weaker numbers leaving the Eurozone’s manufacturing PMI at 44.5, the focus shifted to service sector PMI numbers, which were particularly dire.

Italy’s Services PMI slumped from 52.1 to 17.0, with Spain’s Services PMI sliding from 52.1 to 23.0. Downward revisions to France and Germany’s Services PMIs added to the doom and gloom on Friday.

While economists had been less pessimistic about the numbers, the ECB had talked of a looming recession at the start of the week to set the tone.

From China, better than expected private sector PMI numbers provided some support in the week. China’s manufacturing sector returned to expansion after having seen the PMIs fall to record lows in February.

Service sector activity did trail, however, with the preferred Caixin Services PMI coming in at 43.0.

From the U.S, the markets preferred ISM numbers delivered far better than expected numbers. The all-important ISM Non-Manufacturing PMI fell from 57.3 to 52.5 in March.

While the private sector held up pretty well, labor market numbers painted an entirely different picture.

Weekly initial jobless claims surged to 6.648m in the week ending 27th March, contributing to a 701k fall in nonfarm payrolls in March. The surge in claims led to a sharp rise in the unemployment rate from 3.5% to 4.4%.

Alongside the weak numbers was a continued rise in the number of coronavirus cases across the EU. There had been talk of the spread of the virus slowing in Italy and even Germany had stated that the virus may have peaked.

The numbers suggested otherwise, however. For France, Germany, Italy, and Spain, the total number of cases stood at 394,522. Both Italy and Spain reported sharp rises in the week, with the total number standing at 119,827 and 119,199 respectively.

Things were not much better in the U.S, where the total number of cases stood at 277,161 at the time of writing. Globally, the total number of cases stood at 1,098,025, with the total number of deaths climbing to 59,145.

An extension to the shutdown in Italy until Easter that will likely extend to the end of April coupled with the broader shutdown across the EU was also negative for the majors…

The Market Movers

From the DAX, it was a bearish week for the auto sector. Daimler tumbled by 8.76% to lead the way down. Continental and Volkswagen slid by 6.55% and by 5.01% respectively, while BMW fell by just 0.95%.

It was also a bearish week for the banking sector. Commerzbank tumbled by 13.81%, with Deutsche Bank sliding by 6.03%.

Lufthansa slid by 11.58% in the week, with the prospect of a prolonged shutdown weighing heavily.

From the CAC, banks also took heavy losses in the week. Soc Gen led the way down, tumbling by 21.28%. BNP Paribas and Credit Agricole weren’t far behind, however, with losses of 17.2% and 14.12% respectively.

The French auto sector joined the sell-off, with Renault and Peugeot ending the week with losses of 11.82% and 2.07% respectively.

Air France-KLM managed to avoid red in the week, rising by 0.83%, while Airbus slumped by 27.37%.


On the VIX Index

It was another week in the red for the VIX, which fell by 8.07% in the week ending 3rd April. Following a 0.76% decline from the previous week, the VIX ended the week at 46.8.

For the VIX, the downside came in spite of the S&P500 and its peers ending the week in the red. There’s been plenty of speculation over where the bottom of the market sits. Looking at the downward trend, the decline in the week suggests that the bottom may be close. The reality remains, however, that the VIX remains at elevated levels.

A continued spread of the coronavirus would make a far greater dent in the global economy and earnings.

The Week Ahead

It’s a particularly quiet week ahead on the Eurozone economic calendar. German factory orders and industrial production figures for February are due out on Monday and Tuesday.

With the markets showing little to no interest in February numbers, the stats in the week will likely have a muted impact on the majors.

That will leave the majors in the hands of the coronavirus updates. A continued spread at the rate seen last week would add further pressure on the majors.  This would also likely lead to an extension of the lockdown beyond the end of April.

While the primary focus will be on the European numbers, expect updates from Asia and the U.S to also influence. Trump warned of a grim 2-weeks ahead, with the number of COVID-19 numbers in the U.S expected to surge. This coupled with another sizeable jump in weekly jobless claims would certainly add more pressure on riskier assets…

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