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Europe: The Week Ahead (Sept 23-27) – France’s Economy Resists Euro Area Headwinds


Senior Market Analyst at Interactive Brokers

Market participants will receive a host of salient economic updates from France in the week ahead, as higher oil prices weigh on certain fuel-dependent companies.

Following the recent attacks on Saudi Arabian oil facilities, higher fuel costs have added to the fire already harming much of Europe’s air transport business, as many airlines have been plagued by ongoing Brexit uncertainties, as well as intensified competition from low-cost carriers, among other challenges.

Shares of Franco-Dutch airline Air France–KLM (OTCMKTS: AFLYY), for example, have fallen almost 16.4% since early August and have plunged more than 32.3% since their latest 52-week peak set in late February, according to the IBKR Trader Workstation (TWS).

Apart from damage inflicted by a strike in the second quarter of 2019, higher fuel costs had also cut into Air France–KLM’s operating results, which grew by €54m over the prior three-month period to €400m. The airline said it expects its 2019 fuel bill to rise by €550m year-on-year to €5.5bn, based on the forward curve as of July 26, 2019.

Against this backdrop, Air France–KLM CEO Benjamin Smith said the “slight increase in passenger unit revenue that we had anticipated, together with continued execution in unit cost reduction, enabled us to more than offset rising fuel costs” in Q2’19.

Although market participants’ perceptions of the company’s creditworthiness have generally risen recently, with spreads on its five-year credit default swaps (CDS) roughly 16.6 basis points wider on the day Friday, they have narrowed by nearly 70bps over the past three months, as net debt/EBITDA has been kept below 1.5x.

However, while oil prices have receded from the spike spurred in the wake of the September 14 Saudi Aramco attacks, many in the market suspect the cost of crude could surge in the near-term, amid heightened regional volatility and potential U.S. involvement.

The November contract of West Texas Intermediate (WTI) was last trading at around US$58.85 per barrel, up 14.87% since its recent 52-week low set in early August 2019.

High energy prices are likely to also adversely impact France’s manufacturing sector, which had staged a modest recovery in August from contraction in the prior month.

Economic Calendar

Economic releases in the week ahead shift into gear Monday with updated manufacturing and services Purchasing Managers Indexes (PMIs).

Monday, Sept 23

  • IHS Markit Manufacturing PMI (Flash – Sept)
  • IHS Markit Services PMI (Flash – Sept)

According to IHS Markit, French manufacturing firms staged a marginal improvement in operating conditions in August, driven by rebounds in both output and new orders, with France’s manufacturing PMI having risen to 51.1, up from 49.7 in July.

Producers generally remained confident about an increase in output over the coming year, supported by expectations of an improvement in external demand, but while the degree of optimism was stronger than in July, it remained historically subdued.

Eliot Kerr, IHS Markit economist, said that the latest PMI data “revealed positive results, as French goods producers recorded rebounds in both output and new orders.

“The rise in production was only the second recorded in the past six months, and pointed to a resilient French manufacturing sector at a time when their European counterparts are struggling.”

Kerr added that at the sub-sector level, “output growth was founded on expansions at both consumer and intermediate goods firms, which more than offset a further contraction at investment goods producers.”


Tuesday, Sept 24

  • Business Confidence (Sept)

Improvements in the manufacturing landscape appeared to help fuel a mild improvement in France’s business climate.

France’s National Institute of Statistics and Economic Studies (Insee) highlighted in its business managers survey for August that “industrialists are more optimistic than in the previous month on the general production prospects for the sector as a whole.”

The survey’s composite indicator rose by one point from the previous month to 102 – two points above its average. 

The fresh gauge of business confidence will be followed with an updated reading on consumer confidence for September, as well as jobless claims for August.

Wednesday, Sept 25

  • Consumer Confidence (Sept)
  • Unemployment Benefit Claims (Aug)

Insee noted that households’ confidence in the economic situation had been stable in August, at a level of 102 – remaining slightly above its long-term average of 100.

The institute pointed out that while jitters about the unemployment trend had declined, more consumers fear that prices will rise during the next twelve months, accompanied by an increase in sentiment that it is a suitable time to save.

Consumers’ wariness seems to have bled over into French food and drug store giant Carrefour’s (OTCMKTS: CRRFY) stock, which has been suffering erratic swings this past year. The company’s share prices have fallen roughly 12.6% since reaching a 52-week high in mid-February.

Moody’s Investors Service in mid-March affirmed its low-tier ‘Baa1’ investment-grade credit ratings on the company, while downgrading its outlook to negative from stable, as the company’s restructuring hurdles face broader operating challenges for the French food retailing industry.

Moody’s analyst Vincent Gusdorf also noted that the negative outlook also factors in expectations that leverage will remain high in 2019, since restructuring charges and price investments will “constrain profitability.”

Over the past three months, Carrefour’s five-year CDS spreads have gapped wider by nearly 12.5bps to a level of around 75.7bps.


Rounding out France’s economic calendar for the week ahead, investors ahead of the weekend will also receive updates on producer and consumer prices.

Friday, Sept 27

  • PPI (Sept)
  • CPI (Sept)

France’s Consumer Price Index (CPI) rose 1.1% year-over-year in August, unchanged from the previous month, according to Insee.

The institute noted that this “stability in inflation” was likely due to a more marked fall in the prices of manufactured goods and a “slight slowdown” in those of energy and tobacco. However, food costs rose more quickly.

The relatively low level of inflation in France falls in line with stubbornly weak inclines in euro area consumer prices.

To combat sluggish inflation, the European Central Bank (ECB) at its latest monetary policy meeting on September 12 unleashed a multi-pronged plan, including a 10bp cut in the deposit facility rate to -0.50%, as well as a resurrection of its asset purchase program (APP), starting with €20bn worth of purchases a month at the beginning of November.

ECB president Mario Draghi also called for governments with “fiscal space” to act in an “effective and timely manner” to help improve “the weakening economic outlook” and “continued prominence of downside risks.”

The central bank’s Governing Council now expects its key interest rates to remain at their present or lower levels until inflation reaches a level sufficiently close to, but below, its target of 2%.

The road ahead

Market participants will likely be eyeing France’s economic conditions closely for any signs of further benefits from the ECB’s latest stimulus package, as well as any fiscal policy changes.

Investors will also be watching French corporate sectors such as industrials, logistics and autos for any impacts from potential oil price movements, as well as consumer discretionary and consumer staples amid any swings in the pace of inflation.

In the meantime, select the Event Calendar option in the IBKR Trader Workstation for a full list of U.S. and global corporate events and earnings, dividend schedules, economic data, IPOs and more.

Disclosure: Interactive Brokers

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