European Equity Benchmarks Close Mixed; Investors Buy Energy Stocks, Sell Automotives

Broad-based major European indices closed mixed Wednesday as investors favored utilities and energy companies over automotive stocks in the first trading day of 2019.

In economic news, the slowdown of growth in the euro area’s manufacturing economy throughout 2018 continued in December, according to the IHS Markit Eurozone Manufacturing PMI, which recorded a final reading of 51.4 during the month, down from 51.8 in November. Although this extended a current run of expansion to five-and-a-half years, the latest PMI reading was the lowest since February 2016.

IHS Markit said its latest data showed divergent trends by market group as growth in the consumer goods sector accelerated, while there was a deterioration of operating conditions for intermediate goods producers. Meanwhile, marginal growth was recorded in the capital goods category. Italy remained in contraction territory, and was joined by France, where PMI data showed its first deterioration in operating conditions in 27 months.

Manufacturing growth in both Germany and Spain was modest, decelerating to the weakest in around two-and-a-half years for each country, while the rate of expansion improved in the Netherlands to its best in three months.

“A disappointing December rounds off a year in which a manufacturing boom faded away to near stagnation,” said Chris Williamson, chief business economist at IHS Markit. “The weakness of the recent survey data in fact raises the possibility that the goods producing sector could even act as a drag on the overall economy in the fourth quarter, representing a marked contrast to the growth surge seen this time last year.”

Williamson added the last three months of 2018 saw manufacturers report the worst quarterly performance in terms of production since Q213.

However, the end of 2018 saw a modest improvement in business conditions in the UK manufacturing sector as the seasonally adjusted IHS Markit/CIPS Purchasing Managers’ Index (PMI) rose to a six-month high of 54.2 in December, from 53.6 in November. UK Manufacturers linked the increases in both domestic and overseas demand to clients building up safety stocks to mitigate potential Brexit disruption.

“Uncertainties regarding Brexit disruption on supply chains and the exchange rate are also weighing on business confidence,” said Rob Dobson, a director at IHS Markit. “Although manufacturers forecast growth over the coming year, confidence remains at a low ebb. Manufacturing will therefore be entering 2019 on a less than ideal footing with Brexit uncertainty having intensified considerably.”

Meanwhile, December PMI data showed a deterioration in French manufacturing operating conditions for the first time since September 2016. The lackluster performance was underpinned by a second output contraction in three months, and an acceleration in the decline of new orders. Employment and new work from abroad also fell further at the end of Q4 at its fastest pace since April 2016. The headline IHS Markit France Manufacturing PMI fell to 49.7 in December, down from 50.8 in November.

And in Germany, there were roughly 44.8 million persons in employment on an annual average in 2018, which was 562,000, or 1.3%, than a year earlier, according to the Federal Statistical Office (Destatis). Higher labor force participation of the domestic population, and the immigration of foreign workers offset negative demographic effects, as the number of persons in employment in 2018 was the highest since German reunification in 1991.

The service sector contributed most to absolute growth in 2018, recording the highest year-on-year increase, adding 384,000 jobs, or 1.2%, compared with a year earlier. The largest absolute employment gains were recorded for public services, education, health (+190,000 persons in employment or +1.7%), followed by trade, transport, accommodation and food services (+96,000 or +1.0%) and business services (+55,000 or +0.9%).

At the same time the number of unemployed people in Germany declined by 130,000 (-8.0%) to just under 1.5 million on an annual average in 2018, year on year. The active labor force available in the labor market increased by 422,000 (+0.9%) to 46.2 million in the same period. The unemployment rate was down from 3.5% in the previous year to 3.2%.

In equities, retailer Next, and mining company Fresnillo led the FTSE helped nudge the FTSE into positive territory rising 4.7% and 3.3% respectively, followed by bookmaker company Paddy Power Betfair, and energy services firm John Wood Group, which climbed 2.8% and 2.7%. Online supermarket Ocado Group was up 2.6%, while travel company TUI, and oil and gas company BP each closed 2.3% higher.

In Frankfurt, natural gas and electricity suppliers E.ON and RWE helped lead the DAX higher gaining 3.2% and 1.8% respectively, while Deutsche Bank, and health care company Fresenius climbed 2.6% and 1.9%. Internet company Wirecard was up 1.6%, while footwear and apparel maker Adidas, and kidney dialysis company Fresenius Medical Care each closed 1.1% higher. Meanwhile automakers Volkswagen, Daimler, and BMW led the decliners falling 1.9%, 1.4% and 1.4% respectively.

In Paris, automotive stocks led the CAC lower as auto parts supplier Valeo fell 3.9%, while automobile manufacturers Renault and Peugeot lost 3% and 2.8% respectively. It and consulting firm Capgemini, and industrial group Bouygues each dropped 29%, while semiconductor company STMicroelectronics, and steel and mining company ArcelorMittal were off 2.7% and 2.4%. Banks also weighed down the market as Societe Generale, Credit Agricole, and BNP Paribas lost 1.4%, 1.2%, and 1% respectively.