In the weeks prior to the enforcement, on July 5th, of tariffs on several US imports, investors had focused their attention on the risks of an escalation in global trade tensions. However, hopes of possible negotiations eased investors’ fears and enabled European equity markets to post significant gains in July (up 3.5% for the Euro Stoxx TR index). On July 5th, the American ambassador in Germany indicated that cars from the European Union could be exempt from the 20% tax if the EU lifted its duties on imported US vehicles. But it was Jean-Claude Juncker’s visit to the White House and the announcement that a deal had been struck with Donald Trump – which could lead to reduced tax duties between the two regions though the details still need to be clarified – that helped ease the tension.
Against this backdrop, several better than expected macroeconomic indicators (manufacturing PMI at 55.1 in July for the Eurozone vs. 54.9 in June and 54.7 expected) as well as the reassuring statements from Jerome Powell and Mario Draghi helped to put a stop to the correction that had affected markets in the second half of June, with investors finally able to focus their attention on the second quarter earnings season.
As of July 31st, 40% of European companies had released better than expected data and 26% were in line
The current earnings season is likely to be rather robust. As of July 31st, with around half of European companies having published their second quarter earnings, 40% had released better than expected data and 26% were in line. 69% also confirmed their outlook and 17% upgraded their guidance. The consensus slightly downgraded the estimated earnings per share (EPS) for 2018 (by 0.2% for the Stoxx 600 index) with an expected EPS growth of +7.9% this year.
Earnings publications currently constitute the leading catalyst for European equity markets: daily trades on stocks having released their second quarter earnings were 3.5 times higher on publication days than during ordinary trading sessions (to be compared with a historical ratio of 2.4x over the past 15 years). The phenomenon reflects the low market volatility and the magnitude of the price swings on publication days. Furthermore, the correlation of stocks within the Euro Stoxx 600 index is particularly low, reflecting moves that are increasingly idiosyncratic and sometimes excessive.
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