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Europe’s Week Ahead (May 18-22): Will France’s Service Sector Strike Back?


Senior Market Analyst at Interactive Brokers

Market participants in the week ahead will receive an updated picture on France’s beleaguered services and manufacturing sectors, as the country commits to less restrictive measures to contain Covid-19 outbreaks.

With French economic growth prospects set to plunge in 2020, uncertainties linger over the recovery of the nation’s consumer spending patterns and business activity.

IHS Markit economist Eliot Kerr recently noted that France’s service sector PMI results in April were more painful than in its manufacturing industry, underscored by the headline number for the Business Activity Index for service providers, which pointed to the sharpest contraction on record.

IHR Markit France PMIs Could Up as restrictions ease

The IHS Markit France Services Business Activity Index – a monthly survey that measures the actual change in business activity – hit at a series low of 10.2 in April, down from a previous record of 27.4 in March.

Kerr continued that while France’s easing of coronavirus-led lockdown restrictions on May 11 “should lead to a partial recovery in the coming months,” it remains to be seen “whether growth can be sustained, with the risk of a second outbreak jeopardizing the chances of a prolonged expansion.”

He added that any return to long-term growth rates may be “gradual, with consumers taking time to overcome hesitancy surrounding public health before they resume their previous spending habits.”

Meanwhile, measures to contain the spread of Covid-19 across the globe have unsurprisingly impacted France’s cross-border exports, hampering foreign demand among its top trading partners, including Germany, the U.S., Italy, Spain and Belgium – all of which have also recently begun to ease lockdown restrictions.

Dismal economic & financial prospects in Major EU countries

Still, with many regions in France lifting restrictions, increased optimism about improved activity in the country’s service sector and manufacturing industry has resurfaced.

Most economists surveyed by Bloomberg foresee an uptick in the May flash readings of the IHS Markit services, manufacturing, and composite PMIs to 28, 36 and 32.4 from 10.2, 31.5 and 11.1, respectively, when the figures are released Thursday.

At Least Two Strikes Against Services

Against this backdrop, the pace of France’s overall economic growth is set to plummet in 2020, due in large part to the Covid-19 outbreak.

The European Commission (EC) thinks the country’s GDP will contract by around 8.25% this year before rebounding and expanding by 7.5% in 2021.

The nation’s economic well-being had already been beset by a series of strikes against pension reforms, and while these protests eased in the early part of the first quarter of 2020, containment measures to stave off the novel coronavirus in March left little time for the country to readjust.

With private consumption (~54%) and exports (~31%) comprising roughly 85% of France’s GDP, the EC sees a staggering downturn in these categories in 2020 of -9.3% and -12%, respectively.

French Service Sector ADRs Struggle to recoup YTD 2020 losses

Several retailers’ stocks have collapsed under the weight of store closures during the lockdowns.

To date in 2020, American depositary receipts (ADRs), for example, of luxury goods producers LVMH Moet Hennessy Louis Vuitton (OTC: LVMUY) and Christian Dior (OTC: CHDRY) have sunk by around 20-30%, while mainstream cosmetics maker L’Oreal (OTC: LRLCY) have shed about 7%, and dairy products producer Danone (OTC: DANOY) and supermarket operator Carrefour (ITC: CRRFY) have each fallen by roughly 17%.

Over the same period, the iShares MSCI France ETF (EWQ), which has among its top holdings oil giant Total (NYSE: TOT) and pharma firm Sanofi (NASDAQ: SNY), has plunged by about 29.5% – about on par with the CAC 40 (-27% year-to-date).

Furthermore, the EC noted that despite fiscal measures supporting household disposable incomes, the anticipated rebound in private consumption is likely to continue to face areas of unemployment – especially in transport and leisure-related activities.

The EC added that the decrease in consumer spending is set to outweigh the fall in purchasing power, resulting in an important increase in the household saving rate in 2020, while investment is set to contract sharply in the first half of 2020 due to workforce unavailability, value chain disruptions, increased uncertainty and liquidity constraints.

oil bounce lifts French energy ADRs; still far from latest 52-week highs

Although France’s economic landscape remains grim, a bounce in the prices of oil, as well as progress on the vaccine front, optimism about reopening parts of Europe and the U.S., and unprecedented central bank support from the ECB and the Federal Reserve, contributed Monday to an upbeat risk-taking mood.

In the intraday trading session, the CAC 40 and DAX indexes were each up well over 5%, while the S&P 500 was up more than 3% at 2951.47.

Investors eyeing Europe and France’s economy will most likely be watching the upcoming PMIs closely for any signs of further growth momentum.

On the Economic Calendar:

Thursday, May 21

  • IHS Markit – France Manufacturing PMI (May – Flash) 36 vs 31.5
  • IHS Markit – France Service PMI (May – Flash) 28 vs 10.2
  • IHS Markit – France Composite PMI (May – Flash) 32.4 vs 11.1

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.

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