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European stocks ticked up on China and JPM earnings optimism, while dragged by lower USD and Trump trade tensions

calendar 13/04/2019 - 11:38 UTC

The European market (Stoxx-600) closed around 387.52 Friday, ticked up almost +0.09% on China and earnings optimism, while dragged by lower USD and Trump trade tensions. In the early EU session, the Stoxx-600 briefly dipped into negative territory and made a session low of 385.80 as it was undercut by Banks amid ECB reluctance of tiered negative deposit rates and some uncertainty over the mega-merger between Germany’s Deutsche Bank and Commerzbank coupled with some negative news flow.

But eventually, European banks bounced back and closed in deep green amid upbeat report card from the US bank JPM amid higher NIM and solid fixed-income revenue, boosting the overall sector as JPM has also significant big operation in the EU/London. Subsequently, European banks such as Stan chart, Deutsche Bank, BNP Paribas, HSBC, and Credit Suisse jumped.

Earlier Spanish lender Banco Santander slipped on leveraging as the bank would buy 25% stake in its Mexican unit from another investor in an all-share deal for around EUR 2.6B. But later Banco recovered and closed in deep green.

Italy’s biggest lender Unicredit crumbled on bond trading manipulation allegation by regulator charging the bank as a part of a cartel in EU Bund trading during 2007-2012, the period of great financial and EU debt crisis. But eventually, Unicredit also soared in late trading.

On Friday, the US dollar index (DXY) slumped almost -0.45% and made a low of 96.75 as EURUSD and GBPUSD surged on better than expected Eurozone economic data (industrial production) and talk of 2nd Brexit referendum by the British FM Hammond. A lower USD; i.e. higher local currency (EUR/GBP) is negative for export-heavy European stock markets.

On Friday, the global risk-on sentiment was boosted by better than expected Chinese export data, jumped +14.2% in March from a slump of -20.8% sequentially, higher than the expectations of +7.3%. Although, Chinese import in March slumped -7.6%, indicating slowing domestic economy, the jump in export may be undermining the present narrative of synchronized global contraction, led by China on Trump trade skirmish.

But the sudden jump in March Chinese export may be also a function of Chinese Lunar-New Year distortion and the US-China trade truce optimism, while the slump in import might be a reflection of the plunge in import from the US on seasonal factors. Also, the Chinese money supply and new loans growth were upbeat.

As a result of China optimism, miners, metals, oil, automobiles (BMW, Daimler, Fiat Chrysler) and Asia savvy banks such as HSBC surged. The British bank HSBC was also boosted after the bank said it moved only a negligible (“tiny”) number of staffs to Paris as a contingency measure to deal with Brexit uncertainty. Basic resources such as Rio Tinto and Glencore surged on higher iron ore and copper prices amid renewed China optimism. Energies were also upbeat on higher oil and a huge Chevron M&A deal.

But automobiles were also undercut by the concern of US-EU trade war. The risk-on sentiment was also affected by an early Thursday tweet by Trump regarding the EU-US trade deal and Brexit: “Too bad that the European Union is being so tough on the United Kingdom and Brexit. The E.U. is likewise a brutal trading partner with the United States, which will change. Sometimes in life, you have to let people breathe before it all comes back to bite you!”

As per a report, the EU has agreed to negotiate mandates to start formal trade talks with the US after the bellicose tweet from Trump. But France is objecting the EU to have any trade deal with the US (Trump), as it’s not a signatory of the Paris Climate Agreement. On Friday, as per the report, the EU Commission has drawn up a provisional list of around EUR 20B of U.S. imports for retaliatory tariffs on the Airbus-Boeing subsidy dispute.

On Friday, online trading platform Plus500 plummeted on plunging trading revenue and dragged the overall online broking sector including IG. Volkswagen (VW) slumped after China’s e-car maker AJC Motors denied any talks with the former (VW), contrary to an earlier report that VW is interested in a stake in JAC Motors. Germany’s Software AG jumped on upbeat Q1 report card and guidance.

Swiss train and carriage manufacturer Stadler Rail soared on its IPO listing on the Swiss exchange. France’s Airbus jumped on management rejig and simplification, while Danish Audio-maker Store Nord jumped on upbeat guidance. Germany’s Medical technology supplier Carl Zeiss also jumped on solid guidance.

Overall, the Stoxx-600 edged down -0.18% for the week after consecutive winning streaks in the last two weeks and made a low-high of 384.92-389.10 (9-months high). For the week, the European market was dragged by lower USD (-0.43%), Trump trade war and ECB reluctance of tiered negative deposit rates for banks and IMF downgrade for the Eurozone growth, while helped by Brexit flextension, China and ECB’s TLTRO-3 optimism.

For April, the Stoxx-600 surged +2.22% (till date) after a rally of around +11.86% in Q1-2019 (followed by -12.32% plunges in Q4-2018) primarily on the US-China trade war/truce, Eurozone/synchronized global slowdown and hopes & hypes of a smooth Brexit.

On Friday, DAX-30 surged +0.54% to close around 11999.93, near the session high of 12031.15; earlier it made a low of 11889.99 in a day of moderate volatility. Germany was helped by industrials, automobiles, basic materials/ resources, and techs, while dragged by healthcare (Merck), chemical/consumer goods (BDF). For the week, DAX-30 edged down -0.08% and made a low-high of 11846.60-12031.70 (7-months high).

France’s CAC-40 inched up +0.31% to close around 5502.70, almost at the session high of 5510.99; earlier it made a session low of 5474.36 in a day of moderate volatility. France was helped by industrials, consumer goods and services, and banks & financials, while dragged by healthcare (Sanofi) and utilities (Engine). For the week, CAC-40 surged +0.48% and made a 7-months high of 5510.99; it made a weekly low of 5376.18.

Italy’s FTSE MIB-40 surged +0.80% to close around 21858.31 after making a session low-high of 21633.49-21911.86 in a day of volatile trading tracking banks and automobiles. For the week, MIB-40 surged +0.46% and made a low-high of 21477.91-21911.86 (9-months high).

On Thursday, the EU Commissioner for Economic and Financial Affairs Moscovici warned Italy must deliver on its agreement (commitment) with the EU to keep its structural budget deficit stable this year.

As a pointer, Italy’s populist government, eager for fiscal spending to stimulate the slowing (recession like) economy, has a commitment to keep the budget/fiscal deficit at 2.04% (of the GDP) in 2019 from an earlier projection of 2.40%. On the more vital structural fiscal deficit for Italy, excluding exceptional items and economic cycle swings, the EU agreed on a deal where there would be no structural adjustment in 2019, even though under recommendations from EU finance ministers last July, Italy was supposed to reduce the structural deficit by 0.6% of GDP.

But last Tuesday, the Italian government has cut its GDP forecast drastically for 2019 but kept the earlier fiscal spending plan unchanged. As a result, the fiscal/budget deficit is projected to surge again to 2.40%. As per IMF, Italy is poised to grow at a meager +0.1% in 2019, further plunged from the anemic growth of +0.9% (actual) in 2018. Italy is now in virtual technical recession after a decade as its economy has contracted -0.1% in Q1-2019 after another GDP decline in Q4-2018. For 2020, Italy may have to also hike its fiscal/budget deficit to 2.10% from earlier agreed plan of 1.8%.

Although Italy is eager to spend/borrow more, it’s not so much interested to hike sales tax and also planning to cut income tax for both corporates and individuals with some simplification (tax reform). In other words, the new Italian populist government is now trying to stimulate the fragile economy with some government-sponsored fiscal stimulus without any scope for higher revenue in the short term. This will result in a higher fiscal deficit above the EU red line.

After the 2012 EU debt crisis, the EU is now too much austerity savvy and dependent on only ECB monetary stimulus (Draghi’s Bazooka). This is resulting in slowing domestic Eurozone growth, dependence only on exports to a large economy like China and the US. But Trump trade war is now making the EU economy more fragile amid growing Euroscepticism. The European austerity may be another primary reason for very high levels of unemployment and coupled with that the issue of immigration (negative for local employment) is causing issues like Brexit, Italexit, and Frexit. Britain is also set to open its purse and may launch a big fiscal stimulus after the Brexit.

On Thursday, Moscovici said: “We need to consider the fiscal issue — the deal signed by the government must be respected, especially on the structural deficit. We are watching Italy very closely because we could have again problems with Italy. But the EU the Commission would only re-assess the Italian fiscal position in early June, after European Parliament elections in late May”.

On Friday, Britain’s FTSE-100 inched up +0.26% to close around 7437.06, almost at the mid-point of session low-high of 7415-7454.78 in a day of rangebound trade. British market was helped by banks & financials, miners, energies, while undercutting to some extent by exporters/MNCs on higher and volatile GBP. For the week, FTSE-100 edged down -0.13% and made a low-high of 7383.47-7477.62 (7-months high).

Technical View (DAX-30, CAC-40, MIB-40, and FTSE-100):

Technically whatever may be the narrative, DAX-30 has to sustain over 11850 for a further rally to 11930*/12055-12105/12220 and 12285/12450-12600/12650 in the near term (under bullish case scenario).

On the flip side, sustaining below 11835-11750/11670*, DAX-30 may fall to 11500*/11395-11275/11200 and further 11150/11000-10850/10770 in the near term (under bear case scenario).

Technically whatever may be the narrative, CAC-40 has to sustain over 5475 for a further rally to 5515/5555-5605*/5675 and 5715-5855 in the near term (under bullish case scenario).

On the flip side, sustaining below 5450-5400/5330*, CAC-40 may fall to 5295/5235-5200/5170* and further 5140/5100-5070/4995 in the near term (under bear case scenario).

Technically whatever may be the narrative, MIB-40 has to sustain over 21050 for a further rally to 21315*/21485-21615*/21745 and 21925/22070-22200/22375* in the near term (under bullish case scenario).

On the flip side, sustaining below 21000/20890-20750*/20600, MIB-40 may fall to 20500/20450*-20325/20225 and further 20100/19950-19890*/19800 in the near term (under bear case scenario).

Technically whatever may be the narrative, FTSE-100 has to sustain over 7305 for a further rally to 7350*/7440-7520/7600 and 7715-7885 in the near term (under bullish case scenario).

On the flip side, sustaining below 7285, FTSE-100 may fall to 7170/7110-7025/6995 and further 6950*/6925-6865/67885 in the near term (under bear case scenario).


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