Europe chems stock rally despite brutal economic data

LONDON (ICIS)–European chemicals stocks rose modestly on Thursday despite the release of economic data highlighting the extent of demand collapse in the region in April.

RECORD EUROPEAN SLUMP
Purchasing managers’ index (PMI) data released for much of the EU on Thursday for April revealed lows so far this month far below the depths seen during the 2008/9 financial crisis, with analysts at Oxford Economics describing the extent of the falls as “staggering”.

The eurozone composite PMI – encompassing manufacturing and service sector output – fell to 13.5 points, a record low; any figure below 50.0 points indicates contraction.

Even steeper declines were registered in France and the UK, which saw numbers crash to 11.2 and 12.9, less than half of March levels.

Germany, which has been less hard-hit by the coronavirus pandemic than many economies in the region, fared a little better, with a PMI of 17.1, but still lower than any recorded number for the country.

Through much of the milder 2019 downturn, the service sector helped to counterbalance weaker manufacturing performance but, with most stores closed across Europe as part of widespread lockdown measures, the continent’s economy is mostly on standby.

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US PMI performance was also grim, but the slump so far has not been on the order of magnitude of that seen in Europe, with composite index numbers falling to 27.4, in spite of news of an additional 4.4m jobless in the country, bringing the total number of new claimants to over 26m.

Unemployment levels in some states now reportedly stand at over a third.

MARKETS UNMOVED
Markets remained sanguine despite the procession of calamitous economic news, with bourses across Europe and the US up modestly in afternoon Europe time trading, indicating that investors had been expecting the numbers to be as bad as reported and already priced that in.

The Stoxx 600 European chemicals index was trading up 1.06% as of 16:30 BST, compared to gains of 0.91% for the UK’s FTSE 100, 1.08% for France’s CAC 40, and 1.18% for Germany’s DAX index.

Nearly all firms in the chemicals index posted gains, with AkzoNobel trading up 3.19% despite analyst commentary warning of a significantly worse-than-expected second quarter for the Dutch coatings firm.

Fertilizers specialist K+S saw gains of 3.44% from Wednesday’s close, while Germany-based chemicals producer LANXESS’ shares rose 2.57%.

RHINE WOES
Life may be set to become even more complicated for European chemicals producers, distributors and buyers, with water authority data indicating that key logistics artery the River Rhine is becoming low enough to start to affect the volume of freight that can be sent down the waterway.

No rain is expected in the region in the immediate future.

Thursday’s gains came in spite of growing tensions in the Middle East, after US President Donald Trump tweeted that he had instructed US naval forces to sink Iranian gunboats if they harass vessels.

Pentagon authorities later soft-pedalled the statement, but the rhetoric has escalated the war of words between Washington and Tehran afresh, boosting crude oil pricing.

TENTATIVE LOCKDOWN EASING
The gradual loosening of lockdown measures across many eurozone countries next week may also be buoying markets, although the extent that economies are expected to reopen differs drastically.

Within the 19-country currency union, some countries such as Germany plan to reopen small retail stores and schools, while others such as Spain are keeping most restrictions.

Fears remain that lifting restrictions too quickly could result in coronavirus infection numbers rising drastically, resulting in the swift re-imposition of measures.

Many European nations seem set on returning to at least partial normalcy while infection numbers are significantly higher than in Asia when governments there started to ease measures, which is fuelling fears of further outbreaks.

Source: ING

The impact across the eurozone has been asymmetrical, according to analysts at Dutch banking group ING, with southern Europe hit harder economically than in the north, and smaller stimulus packages in some regions may unbalance the rate of recovery further.

“Currently, a pattern seems to be emerging that the eurozone countries which experienced the sharpest impact on public (and economic) life will be the last countries exiting the lockdown measures,” said ING analyst Bert Colijn.

“Add to this significant differences across countries regarding the size of the fiscal reaction and there is a clear risk of an asymmetric recovery in the eurozone.”

COMMISSION MANOEUVRES 
The European Commission – the EU’s executive arm – continues to calibrate its pandemic response strategies.

Meanwhile, the eurozone’s central bank has announced it will now accept bonds with a ‘junk’ rating in its asset-backed securities (ABS) purchase programme in light of widespread creditworthiness downgrades.

Under the terms of the new arrangement, the ECB will “grandfather” in eligible market assets that currently fall below current minimum credit quality requirements, with the bank waiving the usual criteria for some assets through to September 2021 to give time for companies to recover from current issues.

The announcement comes as European Commission member state representatives attend a virtual summit amid ongoing tensions between northern and southern governments about how to fund the recovery.

The focus will likely be on whether Italian policymakers can be persuaded to take loans from the European Stability Mechanism (ESM), a measure it has resisted thus far.

Spanish Prime Minister Pedro Sanchez has proposed a massive war chest of collective eurozone funding that takes the form of transfers rather than loans, a measure that may also be on the docket for the summit.

However, prominent German think-tanks have already come out against the measure, with the influential economic research group Zew arguing on Thursday that a €1,5tr fund would not significantly help “highly indebted euro countries” such as Italy and Spain.

The group also attacked the concept of eurobonds, which Mediterranean member states had been proposing to lower financing costs for bail-out funding, but resisted by Germany, Austria, and the Netherlands.

Funding for the crisis has underlined a schism between the north and south of the bloc, with economies such as Germany rolling out generous domestic stimulus packages and resisting calls for the pain to be spread more evenly among member states.

Front page picture: ‘Please maintain a distance of 1.5 meters’ – health security information at a re-opened store in Frankfurt on 20 April 2020
Source: Ronald Wittek/EPA-EFE/Shutterstock

Focus article by Tom Brown