European Equities: A Week in Review

The Majors

It was a week in the green for the European majors, with the DAX30 rallying by 2.27% to lead the way. The EuroStoxx600 and CAC40 saw more modest gains of 1.2% and 0.92% respectively.

Geopolitical risk and monetary policy were the key drivers throughout the week.

Geopolitics

A material shift in rhetoric from both China and the U.S on trade provided the majors and the DAX, in particular, with strong support.

News of China removing certain U.S goods from planned retaliatory tariffs provided early support. The U.S then announced a delay in U.S tariffs on Chinese goods from 1^st October to 15^th October. The moves raised hopes of progress on trade talks next month.

On Thursday, the U.S President also spoke of a willingness to form an interim trade agreement with China. It was quite a turnaround from his previous unwillingness to have any agreements with China on trade…

From the UK, British Prime Minister Boris Johnson’s troubles in Parliament was also positive for the majors. While the British PM continued to talk of leaving the EU, with or without a deal, legislation was passed to force the PM to request an extension should no deal be in place by 19^th October.

The extension would give Britain until January of next year to, either renegotiate with the EU or give the electorate a 2^nd referendum.

From a market perspective, a fall in the odds of Britain leaving without a deal was key ahead of Parliament’s suspension.

Monetary Policy

Adding to the upside for the European majors and bourses elsewhere, was an expectation of support from the ECB and the FED.

On Thursday, the ECB delivered with a 10 basis point deposit rate cut -0.5%, while also reintroducing the asset purchasing program.  Whilst the markets had anticipated the rate cut, there had been some uncertainty over the asset purchasing program.

The Stats

It was a relatively busy week on the Eurozone economic calendar. Having seen some quite dire numbers out of Germany of late, better than forecast trade data provided the DAX with support on Monday.

Germany’s trade surplus widened from €18.1bn to €20.2bn in July. The rise led to the Eurozone’s trade surplus widening from €20.6bn to €24.8bn.

From elsewhere, stats were less impressive, however, with Italy reporting a 0.7% fall in industrial production in July. French industrial production rose by 0.3%, following a 2.3% slide in June, but fell short of a forecasted 0.5% increase.

For the Eurozone, industrial production fell by 0.4%, following a 1.6% slide in June. The figures continued to portray weakness in the manufacturing sector going into the 3^rd quarter.

In spite of the weakness, the hope of an end to the U.S – China trade war muted the impact of the numbers on the majors.

From the U.S, a pickup in inflationary pressure and retail and consumer sentiment figures had a muted impact in the week.

The Market Movers

From the DAX, the auto sector saw solid gains throughout the week. Continental and Daimler led the way with gains of 7.79% and 6.82% respectively. BMW and Volkswagen weren’t far behind with the pair ending the week up by 5.07% and 5.26% respectively.

It was also bullish for the banks. Deutsche Bank rose by 7.48%, while Commerzbank surged by 10.53%.

For the DAX, the shift in sentiment towards the U.S – China trade war also supported ThyssenKrupp and Infineon Tech. The pair rose by 7.81% and by 9.4% respectively in the week. Infineon Tech’s rebound contributed to a 17.5% gain for the current month…

From the CAC, it was also a solid week for the banks. BNP Paribas and Credit Agricole rose by 6.86% and by 7.18% respectively. Soc Gen led the way, rallying by 7.62%. French autos also performed. Renault rose by 5.05%, while Peugeot jumped by 8.87%.

On the VIX Index

The VIX Index saw red in 4 of the 5 days to leave the index in the red for a 3^rd consecutive week. The VIX fell by 8.67% to 13.7, following on from a 20.97% slide from the previous week.

Easing tensions between the U.S and China, Brexit and monetary policy stimulus weighed on the VIX throughout the week.

The Week Ahead

It’s a relatively quiet week ahead on the Eurozone economic calendar. Key drivers are limited to German and Eurozone economic sentiment figures due out on Tuesday.

We would expect finalized Italian and Eurozone inflation figures to have a muted impact on the majors.

From outside of the Eurozone, the FED’s Wednesday interest rate decision, rate statement, economic projections, and press conference will have a material impact on Thursday.

While a 25 basis point rate cut is priced in, it will boil down to whether it’s a hawkish or dovish rate cut. A hawkish rate cut could pin back the majors on Thursday.

China’s industrial production figures due out on Monday and U.S manufacturing sector figures on Monday and Thursday will also provide direction.

On the geopolitical front, we can also expect more chatter from the UK on Brexit. British Prime Minister Boris Johnson’s failings will be considered positive for the European majors.