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Eurozone

Eurozone Equity Market Returns        Q3        LTM

DAX 30 (Germany)                                 -0.5%     -4.5%

CAC 40 (France)                                      3.4%     6.4%

FTSE MIB (Italy)                                     -3.8%    -6.4%

IBEX 35 (Spain)                                      -1.8%    -6.0%

MSCI Europe (ex-UK) Index                  2.3%     0.3%

Summary

  • Eurozone business PMI falls to a 2-year low
  • Unemployment hits post-crisis low
  • Eurozone wages accelerate
  • Eurozone inflation hit 2.1%
  • Eurozone equities post solid gain gain in Q3

Eurozone PMI falls to a 2-year low in September, with exports and sentiment weakening driven by the escalating trade tensions. The eurozone composite PMI for September fell to 52.7 from 54.7 in August, however still remains firmly expansionary. There was a weakening in the Eurozone manufacturing new export orders survey driven by a sharp slowdown in exports to China. Domestic demand within Europe remains healthy with retails sales posting a solid c.2.0%, driven by increasing wages and improving employment picture. The eurozone economy hit a soft patch in Q3 however is on track to achieve +2.0% growth in 2018.

Unemployment in the Eurozone hits another post-crisis low of 8.1% - its lowest level since 2008. Unemployment surged during the region’s crisis years to over 12%, but has fallen much more quickly than most economists expected now that growth has resumed. Wages have accelerated with annualised average pay rises of +2.2%, up from +1.7% in previous quarter. The broad employment picture in the Eurozone hides plenty of disparities. For example, in Germany, unemployment is at a decade low of 3.4% while in Spain it remains above 15%.

European headline inflation rose to +2.1% in September driven by stronger food and energy prices. The European Central Bank (ECB) has put particular emphasis of late on wages as guide to the health of the economy and consequently their interest rate policy. Moreover, consumers and businesses expect inflation to gradual rise and appear consistent with core inflation picking up to around 1.5% in 2019, currently 0.9%. Against this inflation backdrop, German bund yields at 0.47% look extremely overvalued. Notably, there was no change in policy from the ECB who reiterated that interest rates would remain on hold at least through to the summer of 2019.

Eurozone equities posted a solid gain in Q3 with the MSCI Europe (ex-UK) index returning +2.3%. Energy and industrials stocks were among the leading gainers. Real estate, telecommunications and consumer staples were the main laggards. Eurozone banks declined sharply amid concerns over their exposure to emerging markets as well as worries over the Italian budget. The auto sector was weak due to trade worries, however Trump and EU President Juncker agreed to work towards zero tariffs on non-auto industrial goods, while new car tariffs would be put on hold. Notably, BMW warned that it would miss its Q3 profit margin target due in part to the trade frictions – companies often use politics as an excuse for earnings disappointments. At a country level, returns were divergent driven by country specific issues. French equities accelerated driven by the energy sector, as crude oil rallied. Total is 12% of the French stock market. Whilst Italian equities were the worst performing as Italian budget concerns escalated – repeat performance of Q2.

"It's not whether you're right or wrong that's important, but how much money you make when you're right and how much you lose when you're wrong." -- George Soros