Occasional Digest

European stocks fall as PMIs revised lower, ASML hit by UBS downgrade

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European stocks fell on Wednesday after a semiconductor-driven sell-off on Wall Street. Weaker-than-expected economic data, including downgrades to Eurozone PMIs, further weighed on sentiment.

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European markets experienced a risk-off sentiment on Wednesday, following a semiconductor-driven selloff on Wall Street that saw Nvidia shares drop by 9.5%, wiping out approximately $280 billion (€252 billion) in market value.

The Euro Stoxx 50 index fell by 1% at 10:30 a.m. CET, after a 1.2% decline the previous day.

Amsterdam’s AEX index was the worst performer, down 1.4%, primarily due to a sharp 5% drop in ASML Holding NV shares, marking the company’s worst session since early August. Swiss bank UBS downgraded the Dutch chipmaker from Buy to Neutral, cutting the price target to EUR 900 per share, down from EUR 1,050, amid rising concerns for future growth.

The company’s lithography intensity is reaching a plateau in both logic and memory segments, with artificial intelligence demand proving insufficient to offset this trend, analyst Francois-Xavier Bouvignies explains in a research note to investors.

Key equity indices across Spain, France, Germany, and Italy also saw declines, each down by approximately 0.7%.

Luxury giants LVMH and Kering were among the worst performers in France, with shares down 2.6% and 2%, respectively. Eurozone sovereign bond yields eased, as investors adopted a defensive stance amid deteriorating economic data.

Economic data weighs on sentiment

On the macroeconomic front, signs of weakness continued to emerge. The US manufacturing activity contracted more than expected in August, just ahead of critical labour market data to be released later this week.

Meanwhile, private Caixin surveys in China reported a slower-than-expected expansion in the services sector in August, adding to concerns about the health of the world’s second-largest economy.

Arjen van Dijkhuizen, senior economist for China at ABN Amro, commented: “China’s economy remains stuck in low gear, with the property downturn driving down domestic demand and risks on the external front rising.”

In Europe, S&P Global revised down its PMI surveys, showing weaker-than-expected growth in the services sector last month.

The Hamburg Commercial Bank (HCOB) Eurozone Composite PMI for August was adjusted slightly lower to 51, from an initial estimate of 51.2, compared to 50.2 in July.

While this marks the sixth consecutive month of expansion, new orders, employment, and confidence have all shown signs of softening.

Eurozone growth continues to rely on the services sector, which grew at its fastest pace in three months. However, the manufacturing sector remains in recession, with industrial production contracting for the 17th straight month.

France emerged as a bright spot in August, with private-sector activity posting its fastest growth since May 2022, thanks to a boost in services from the Paris Olympics.

Germany, on the other hand, continued to struggle, recording its second consecutive monthly contraction in private-sector activity.

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“If this middling performance in services continues, it could make an overall economic recession more likely for Germany,” warned Dr. Cyrus de la Rubia, chief economist at Hamburg Commercial Bank. He added that while services have driven growth, the manufacturing sector remains stuck in recession, with conditions worsening in several countries, including France and Germany.

‘Bad news is good news’ for ECB policy

For the European Central Bank (ECB), the latest data could provide some relief.

According to de la Rubia, slower price pressures, particularly in wages, could ease inflation concerns, allowing the ECB more flexibility in future policy decisions.

Although the PMI surveys showed a slight uptick in service-sector pricing in August, overall cost pressures have diminished, potentially influencing the ECB’s stance on interest rates.

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With inflation data for August also showing positive trends, Eurostat’s latest figures could lead to a further rate cut in the upcoming September 12 meeting, according to the expert.

Bank of America has forecasted a 25-basis-point rate cut in both September and December, in a recent note.

Furthermore, the European bank’s economist Ruben Segura-Cayuela noted that “if activity turns out even weaker (a clear near-term risk), even a cut in October 2024 could be considered.”

Bank of America also projects 125 basis points of rate cuts in 2025, with the deposit rate returning to 2% by September. If inflation continues to undershoot targets, two additional cuts may be on the horizon in 2026.

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