Stock Market Comment: AEX and CAC 40 pull back from multi-year highs

• AEX (NED25) and CAC 40 (FRA40) pulled back from multi-year highs on trade concerns

• Dutch index is heavily biased towards two stocks

• French index looked past almost double-digit earnings decline in Q3 2019

• Half of AEX rally in the first half of Q4 2019 can be ascribed to a single stock

Trade pessimism returned to the markets this week. Passage of the Hong Kong bill combined with threats from Donald Trump that he may raise tariffs in case trade deal with China is not reached caused stock indices all across the world to pull back. As Sino-US trade deal gets more and more distant, the risk of continued slowdown in the global economy increases.

Dutch and French indices have high exposure to trade and growth

On the chart above we have provided some basic information about 4 European stock market indices as well as weightings for sectors that are especially vulnerable to trade turmoil or slowing economy. As one can see, the German index has the biggest share of such sectors. However, we have covered DAX in our comment last week therefore we will focus on Dutch and French markets. Both indices reached their multi-year highs recently - AEX (NED25) painted fresh 18-year high while CAC40 (FRA40) reached the highest level since mid-2007. However, recent deterioration in trade moods caused both stocks to pull back. Nevertheless, as vulnerable sectors make up a bigger portion of the DAX index, recent declines on the German market outpaced those on Dutch and French stock exchanges.

Basic information and sensitive sector weights of 4 European indices. Source: Euronext, XTB Research

AEX playmakers? Shell and ASML!

Recent outperformance of the Dutch shares in comparison to DAX members is somewhat surprising when we take a look at how index members coped in Q3 2019. While DAX sales grew 6.4% YoY and earnings increased 12% YoY in the third quarter, companies from AEX index reported sales and earnings that were, respectively, 6.3% and 7.7% lower on average. Given that YTD dynamics for DAX and AEX are almost equal, one can rule that market is looking past fundamentals and is mainly sentiment-driven. This is a risk for the Dutch index as Oil and Technology sectors - sectors that are especially vulnerable to trade and economic activity - make up 29.8% of the index weight. To make things worse, those two sectors include only two companies - oil supermajor Shell (RDSA.NL, 13.3% weight) and semiconductor company ASML (ASML.NL, 16.5% weight).

The Dutch AEX index (NED25) almost matched the range of the previous upward impulse (blue lines). The index is pulling back from the 18-year high and support at 582.5 pts is the level to watch in near-term. Just as in the case of CAC 40, the lower limit of the Overbalance structure defines the key support to watch. However, in the case of the Dutch index this level is additionally strengthened by the important price zone ranging around the 570 pts handle. Source: xStation5

Is 60% higher member count enough to diversify?

Situation of the CAC40 index does not look better than AEX. While French blue-chips reported sales that were 2.1% YoY higher, earnings declined 9.7%. However, it should be noted that this data may not be fully comparable as the French companies are not obliged to report quarterly reports. Having said that, these figures do not cover all of the French index members but only those that reported Q3 results. Higher number of stocks included in the French index should make it more diversified than AEX index. Unfortunately, this is not the case. Once again two vulnerable sectors make up a bulk of the index - Oil and Luxury Goods - and unfortunately in those two sectors, two stocks play a major role - Total (FP.FR, 9.5% weight) and LVMH (MC.FR, 8% weight).

CAC 40 (FRA40) pulled back from multi-year high this week as trade pessimism returned to the markets. Recent rally was so steep that the nearest important support (5620 pts) is over 4% lower against current market price. Key support - the lower limit of the Overbalance structure (yellow box, 5455 pts) - can be found 7% below the market price. Indices are supported today by reports that China invited US to another round of trade talks. However, numerous rounds of trade talks failed to show any real progress and given small scale of morning bounce, investors do not seem to think that this one will be any different. Source: xStation5

Rally in the first half of Q4 2019 was fragile

The key takeaway is that while trade concerns and economic slowdown tend to affect the broad market, some indices are more biased towards sensitive stocks. CAC40 and AEX are examples of such indices. During the first half of Q4 2019, CAC40 rallied 4.6% and AEX moved 3.2% higher. Subtracting contributions from Shell, ASML, Total and LVMH those increases fall to 3.4% and 1.6% respectively. However, the share price of Shell barely changed during that period, meaning that half of the recent Dutch index rally can be solely ascribed to ASML. This shows how fragile recent upward impulse was.

Contribution of heavyweight stocks to AEX and CAC 40. Source: Bloomberg, Euronext, XTB Research