European Equities: A Month in Review – January 2021


The Majors

It was bearish month for the European majors in January, with COVID-19 weighing on riskier assets in the final week of the month.

The DAX30 and CAC40 fell by 2.08% and by 2.74%, with EuroStoxx600 ending the month down by 0.80%.

In the final week, the DAX30 and EuroStoxx600 slid by 3.18% and by 3.11% respectively, with the CAC40 falling by 2.88%.

The sell-off in the final week dragged the European majors into the red for the month and the current year.

For the European majors, vaccine supply shortages, low vaccination rates, and a continued rise in new cases weighed heavily.

The threat from new and more virulent strains of the coronavirus added to the market angst in the month.

With member states in extended lockdown mode, sentiment towards the economic outlook deteriorated as a result.

Economic data from the Eurozone reflected this, with both consumer and business confidence also waning.

The Stats

It was a busier month on the Eurozone economic calendar.

Key stats included prelim January private sector PMIs for France, Germany, and the Eurozone and consumer and business sentiment figures.

4th quarter GDP numbers for France, Germany, and Spain also drew interest late in the month.

Private sector PMI delivered mixed results for January.

The Eurozone’s composite PMI fell from 49.1 to 47.5 in January, according to prelim figures.

While France’s manufacturing sector saw a pickup in activity, Germany’s saw a modest slowdown.

The effect of lockdown measures across France and Germany were felt in the services sector, however.

France’s service PMI fell from 49.1 to 46.5, with Germany’s falling from 47.0 to 46.8.

Business sentiment in Germany weakened in January, with the ifo Business Climate Index falling from 92.2 to 90.1. Economists had forecast a more modest decline to 91.8. After 8 consecutive rises, the manufacturing index fell from 1.4 to -3.0 in January. The decline was attributed to less optimistic expectations amongst manufacturing firms.

Things were not much better amongst German consumers, with the GfK is forecasting a slide in consumer sentiment from a revised -7.5 to -15.6 points.

There was a sharp fall in the propensity to buy indicator, with income expectations also taking a hit. Consumer sentiment towards the economic outlook, however, saw less of a severe fall in the month.

4th quarter GDP numbers affirmed market fears of a slowdown in the economic recovery.

The French economy contracted by 1.3%, with the German and Spanish economies growing by just 0.1% and by 0.4% respectively.

Extended lockdowns through January and into February are likely to lead to contractions in the 2nd quarter.

From the U.S

Economic data also delivered mixed results. Consumer confidence picked up marginally in January, while labor market conditions remained dire.

In spite of this, private sector PMIs from the U.S were upbeat, supporting a more bullish economic outlook.

The Manufacturing PMI increased from 57.1 to 59.1 in January, with the services PMI climbing from 54.8 to 57.5.

Initial jobless claims figures continued to raise concerns over consumption, however. In the week ending 22nd January, initial jobless claims eased back to 847k. While down from a January high 965k in the week ending 8th January, this was still an elevated figure.

The good news for the U.S economic outlook remained the U.S administration’s vaccination drive and access to vaccines, raising hopes of a near-term end to the pandemic.

Monetary Policy

The ECB stood pat on monetary policy, with ECB President Lagarde standing by the ECB’s growth forecast for 2021. Late in the month, however, the ECB President did raise caution over the possible impact of extended lockdown measures.

Inadequate COVID-19 vaccine supply raised economic uncertainty late in the month.

The FED also left monetary policy unchanged, which was in line with market expectations. There were some concerns over possible plans to taper bond purchases. FED Chair Powell failed to comfort the markets in spite of providing assurances that there would be no near-term tapering.

The Market Movers

For the DAX: It was a mixed month for the auto sector in January. Volkswagen and Daimler rose by 3.04% and by 0.38% respectively, while Continental and BMW fell by 4.66% and by 2.99% respectively.

It was also a mixed month for the banks. Deutsche Bank slid by 6.70%, while Commerzbank ended the month up by 3.98%.

From the CAC, it was a bearish month for the banking sector. Credit Agricole and Soc Gen slid by 9.11% and by 9.28% respectively, with BNP Paribas ending the month with a loss of 7.70%.

It was also a bearish month for the auto sector. Renault fell by a relatively modest 1.45%.

Weighed by COVID-19 news, Air France-KLM fell by 4.71%, with Airbus SE sliding by 7.33%.

On the VIX Index

It was a 2nd consecutive month in the green for the VIX in January to mark a 5th monthly gain in 6-months. Following a 10.60% rise in December, the VIX jumped by 45.45% to end the month at 33.09.

Uncertainty over FED monetary policy and the economic outlook stemming from new strains of the coronavirus supported the VIX.

In January, NASDAQ rose by 1.42%, while the Dow and S&P500 ending the month down by 2.04% and by 1.11% respectively.

The Month Ahead

We can expect another busy month ahead on the Eurozone economic calendar. With greater focus on the economic data at the turn of the year, the markets will be looking to digest January and February data.

Lockdown measures remain in place in, which is expected to further delay any meaningful economic recovery.

Key stats through the month will include February private sector PMIs, retail sales, unemployment, and business and consumer confidence.

Any further deterioration in economic conditions will test support for the EUR and the European equity markets.

From the U.S, nonfarm payrolls, service sector activity, and consumer confidence will be key areas of focus.

Out of China, trade data and private sector PMIs will also provide direction.

On the monetary policy front, any gloomier economic outlook would also be a negative.

Away from the economic calendar, expect COVID-19 news and vaccination updates to remain key, however.

Vaccination supply to the EU will need to materially pickup to support a vaccination drive and lift vaccination rates. Failure to achieve this would likely leave containment measures in place, which would weigh more heavily on the Eurozone economy.

This article was originally posted on FX Empire