Europe plunged Thursday on the concern of economic growth, mixed earnings and lingering US-China trade truce suspense

By Asis Ghosh | 08/02/2019 - 11:46

The European market (Stoxx-600) closed around 360.08 Thursday, plunged 1.49% on the concern of Eurozone/global economic growth after the EC sharply cuts GDP forecast. The market was also under renewed stress on subdued earnings and lingering US-China trade truce suspense after the White House CEA Kudlow warned the US-China is far away from a trade deal. Apart from Trump’s China trade/cold war, the European market is also a victim of Brexit politics and uncertainty.

Europe was also affected by mixed earnings on Thursday as a terrible report card from Publicis, GEA and TUI dragged the market, while upbeat earnings from Italy’s Unicredit bank helped. As a result, the European market eased from its 1-month high of 365.92, scaled on 6^th Feb (Wednesday).

Poor earnings and weak data out of Germany ensured Europe’s main market started lower and kept the overall European market under stress. As a result, Stoxx-600 tumbled, dragged down by automakers and banks as sharply lower trading revenue from Societe Generale countered positive results from Unicredit and DNB. European banks reversed earlier gains after the Eurozone GDP downgrade led by Commerzbank and Raiffeisen. Banks were also affected by lower Bund yields after the horrible GDP growth forecast by the EC.

On early Thursday, the European Commission (EC) sharply slashed its growth outlook for the Eurozone for 2019-20 as it expects the EU’s largest economies to be held back by global trade tensions, and domestic challenges including the Brexit uncertainty. The EC cuts the Eurozone GDP growth to 1.3% for 2019 from 1.9% in 2018, before rebounding in 2020 to 1.6%. The BOE also cut its 2019 GDP outlook and sees the UK economy growing at its slowest pace since 2009 at 1.5% against an earlier forecast of 1.8%. Germany’s DIHK Chambers of Industry and Commerce also lowered the 2019 GDP growth forecast for the country to 0.9%, sharply down from 1.7%.

All these doomsday growth outlook projections sparked renewed worries of a synchronized global contraction and affected the “risk-on” trade sentiment Thursday and the European market tumbled despite lower EUR.

Elsewhere, in an interview Thursday, Kudlow, a known China hawk said: “We have got a pretty sizable distance to go here (in US-China trade talks), although Xi and Trump will meet at some point. Trump is optimistic with respect to a potential trade deal”. Earlier Kudlow, told reporters that he expects Xi and Trump to meet, but that when and where it happens is still up in the air. Minutes later, Dow as-well-as Stoxx plunged more after another report pointed out “Trump is highly unlikely to meet China's Xi before March 2 deadline”.

The market was already under stress after cut of Eurozone growth by the EC earlier in the day, again igniting the fear of a synchronized global contraction/slowdown. Oil tumbled, dragging the energy sector on global growth and US-China trade war concern while China trade sensitive industrials, techs also slid. But telecoms and some healthcare names outperformed.

Germany’s China and Brexit (export) savvy DAX-30 plummeted -2.67% and closed around 11022.02, at the session low; earlier it made a session high of 11286.46. The EC has sharply downgraded the German GDP growth to +1.1% in 2019 against an earlier forecast of +1.8%. This coincides with a deluge of horrible German economic data for the last few days/months including industrial production and factory orders.

Automobiles dragged on China trade concern coupled with a disappointing report card from Daimler. Germany was also dragged by construction, industrials (Siemens), techs/software, banks & financials (Deutsche Bank, Commerzbank, and Wirecard), metals (ThyssenKrupp) and foods & beverages, while helped by selected healthcare.

France’s CAC-40 tumbled -1.84% to close around 4985.56, at the session low; earlier it made a session high of 5083.89. The EC has downgraded France’s 2019 GDP growth to +1.3% from an earlier forecast of +1.6%. Publicis, the world’s third-largest advertising company tumbled on weaker-than-expected revenue, while Societe Generale tumbled on guidance warning, dragging banks & financials. France was further dragged by automobiles (after terrible earnings from Daimler-Faurecia and Valeo slid), consumer goods & services and selected healthcare.

Italy’s FTSE MIB-40 stumbled -2.59% to close around 19478.32, at the session low; earlier it made a session high of 20002.03 Italy was downgraded to +0.2% GDP growth for 2019 (y/y), barely above the recession by the EC against the earlier projection of +1.2%. This puts Italy’s fiscal stimulus and budget deficit plan of 2.04% under serious question mark as it was based on an earlier GDP growth assumption (compromise) of 1.0% by the EU-Italy.

Slowing growth in Italy could make it harder for the country to remain within EU fiscal rules with the 2019 projection of higher government capex. As a result of the downgrade, Italian 10Y Bund yields popped higher, rising near 2019 highs, contrary to the earlier optimism on ECB’s TLTRO talks. Italian banks also trimmed their earlier gains.

The UK’s FTSE-100 tumbled -1.11% to close around 7093.58, at the session low; earlier it made a session high of 7187.51. The UK market was affected by the BOE forecast of lower growth to 1.5% from earlier 1.8%. The EC has upped its GDP forecast for 2019 to +1.3% from earlier +1.2%. Banks & financials dragged, led by HSBC and Lloyds, while selected pharmaceuticals helped (Astra Zeneca, Glaxo SmithKline earnings boost). Energies and advertising media dragged.

The UK market was also affected by GDP volatility amid a rollercoaster day of trading on Carney jawboning after a dovish hold by the BOE and hopes of a delayed Brexit amid the never-ending UK-EU political saga. The US-China trade truce suspense is also negative for the UK market along with the never-ending Brexit melodrama. Tour operator TUI tumbled on disappointed report card amid cross currency headwinds and adverse weather.

On mid-Friday, the European market is almost flat on lingering US-China trade/cold war tensions as the US has banned all Chinese 5-G telecom providers in the country. The market was also affected by mixed earnings and ongoing Brexit politics.

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