European Equities: A Week in Review – 04/09/20

The Majors

It was a bearish week for the European majors in the week ending 4th September. The EuroStoxx600 and DAX40 fell by 1.86% and by 1.46 respectively, while the CAC40 saw a more modest 0.76% loss for the week.

2 consecutive days in the red that included a late sell-off on Friday delivered the blow for the majors. In spite of a Thursday slide, the majors had continued to hold onto gains before a late Friday reversal.

It had been a bearish start to the week. Italian GDP numbers for the 2^nd quarter and August prelim inflation figures from member states weighed on the European majors.

Ahead of a mid-week breakout, the European majors continued to struggle on Tuesday. August manufacturing PMIs tested the majors on the day.

Amidst the mixed economic data for the Eurozone, the EUR hit a high $1.20114 on Tuesday adding to the downside for the European majors.

Sentiment shifted on Wednesday, however, with the majors finding much-needed support. The support came from ECB Member Lane who reminded the markets, late on Tuesday that the ECB does continue to eye the EUR/USD exchange rate.

It was enough to send the EUR back to $1.18 levels, delivering the broader European markets with a boost mid-week.

Economic data weighed once more on Thursday, however, with the service sector and composite PMIs suggesting that the economic recovery had hit a wall.

Friday’s late sell-off came in spite of banks and autos finding strong support on the day. Bank merger talks from Spain supported European banking stocks that had struggled ahead of Friday’s bounce.

Economic data from the U.S on Friday failed to deliver a recovery from Thursday’s losses.

The Stats

It was another busy week on the Eurozone economic calendar.

In the 1^st half of the week, August prelim inflation figures, manufacturing PMIs, and unemployment data were in focus.

Mid-week, the focus shifted to Germany and retail sales figures ahead of August service and composite PMIs on Thursday.

Economic data from Germany wrapped things up, with construction PMI and factory order numbers in focus.

The PMIs

For the Eurozone, the August manufacturing PMI came in at 51.7, which was in line with prelim while down from a July 51.8.

• At the country level, it was a mixed bag, however.
  • Italy led the way, registering the best improvement in operating conditions in over 2-years.
  • Ireland, the Netherlands, and Germany also delivered.
  • While Austria registered modest growth, Spain and France stagnated.
  • Greece saw manufacturing conditions deteriorate for a 6^th consecutive month.

Service sector activity also struggled in August. The Eurozone’s August services PMI came in at 50.5, which was up from a prelim 50.1% while down from a July 54.7.

The composite PMI came in at 51.9, which was up from a prelim 51.6. In July, the PMI had stood at 54.9.

According to the Eurozone’s August Composite Markit Survey,

• The private sector recovery lost momentum as growth eased markedly on July’s peak.
• While the manufacturing sector output rose at the fastest pace since Apr-18, the rate of growth in the services sector eased sharply.
• Germany was the best performer, supported by a strong performance in the manufacturing sector.
• Ireland and France also recorded gains, though France saw the rate of expansion come in much slower than in July.
• Subdued service sector performances meant that Italy and Spain recorded outright declines in private sector activity.
• While new business increased for a 2^nd consecutive month, new export sales reportedly declined again. The decline extended the period of contraction to nearly 2-years.
• Companies again made cuts to employment numbers in August, extended the current period of contraction to 6-months.
• Looking to the year ahead, business confidence remained in positive territory. Sentiment was slightly lower than in July, however.

Unemployment

Unemployment figures delivered mixed results…

Germany’s unemployment rate held steady at 6.4%, with the number of unemployed falling by 9,000. Economists had forecast a 1k rise.

For the Eurozone, the unemployment rate ticked up from 7.7% to 7.9%. This was better than a forecasted rise to 8%, however.

The Rest

On the inflation front, the Eurozone’s annual rate of core inflation softened from 1.2% to 0.4%. Year-on-year, consumer prices fell by 0.2%, partially reversing a 0.4% rise in July. In August, consumer prices fell by 0.4%, following on from a 0.4% decline in July.

Also of disappointment were retail sales figures from Germany, with sales falling by 0.9%. With retail sales from Germany disappointing, the numbers were not much better from the Eurozone. Retail sales fell by 1.3%.

At the end of the week, German factory orders saw a 2.8% rise in July. In June, orders had surged by 28.8%. The rise had provided early support to the DAX30 before the late reversal.

From the U.S

It was yet another mixed week on the economic data front.

While manufacturing sector activity picked up, according to the August ISM PMI, non-manufacturing sector growth slowed.

Employment numbers were also mixed. While ADP nonfarm figures disappointed, the weekly jobless claims fell to 881k, which was the best figure on some time.

It all boiled down to the nonfarm payroll figures and the unemployment rate on Friday. Ahead of the numbers, the markets were in limbo following the U.S sell-off on Thursday.

In August, nonfarm payrolls rose by 1,371k, with the unemployment rate tumbling from 10.2% to 8.4%.

The Market Movers

From the DAX, it was another particularly bullish week for the auto sector. BMW and Continental rallied by 3.69% and by 4.07% respectively, with Volkswagen ending the week up by 3.00%. Daimler trailed, however, with a more modest 2.29% gain.

It was a mixed week for the banking sector, however. Commerzbank rose by 3.60%, while Deutsche Bank slipped by 0.96%.

Bank merger talks from Spain delivered the pair solid gains on Friday, with Commerzbank rallying by 9.11% to end the week in the green. Deutsche Bank rose by a more modest 5.12% on the day.

From the CAC, it was a bearish week for the banks. Credit Agricole and Soc Gen fell by 2.58% and by 3.39% respectively. BNP Paribas ended the week down by 1.56%.

The French auto sector found support in the week. Peugeot and Renault rose by 3.77% and by 1.24% respectively.

Air France-KLM partially reversed last week’s 5.72% gain, falling by 3.46%, with Airbus ending the week down by 2.32%.

On the VIX Index

It was a 3^rd consecutive week in the green for the VIX in the week ending 4^th September. Following on from a 1.86% gain from the previous week, the VIX jumped by 33.93% to end the week at 30.75.

A 26.46% surge on Thursday delivered the lion’s share of the gains. The surge coincided with the start of the tech sell-off.

There had been some warning signs in the early part of the week. On Monday, the VIX had rallied by 15.03%. The upside had come in spite of some modest losses across the U.S equity markets on the day.

The weekly gain was only the 4^th in 12-weeks, however.

For the week ending 4^th September, the S&P500 and the NASDAQ ended the week down by 2.31% and by 3.27% respectively. The Dow saw a more modest 1.82% loss.

The Week Ahead

It’s a quieter week ahead on the Eurozone economic calendar.

In the 1^st half of the week, German industrial production and trade data are due out. Finalized 2^nd quarter GDP numbers are also due out for the Eurozone, with the markets looking for any revisions to prelim numbers.

In the 2^nd half of the week, the focus shifts to the ECB monetary policy decision on Thursday. Following the FED’s change to the monetary policy framework, the EUR has been at risk of a breakout.

Some jawboning is likely but that may be about it to tame the EUR near-term. Economic data from last week would support some dovish chatter at least.

On Friday, finalized August inflation figures will likely have a muted impact barring any major deviations from prelims.

From the U.S

It is a quieter week ahead.

Key stats include August inflation figures, July’s JOLTs job openings, and the weekly jobless claims figures.

Expect the stats to influence market risk sentiment in a shortened week for the U.S markets.