European stocks haven’t enjoyed a particularly distinguished first few months of 2016. Most of the continent’s biggest share indexes have lost at least some of their value this year, and those that have gained, have done so by small margins.
The FTSE 100, one of the few gainers, is up just 1.1%, while Germany’s DAX and France’s CAC have both dropped more than 4%.
Deutsche Bank has bad news for Europe’s stricken equities: things aren’t going to get any better until the price of oil stops being so weak.
In the bank’s latest European Equity Strategy note, analysts Sebastian Raedler, Wolf von Rotberg, and Andreas Bruckner argue that stocks within Europe are “still at the mercy of the oil price”.
Oil crashed as low as $28 in January down from more than $100 (£70) in the summer of 2014. That’s had a huge impact on oil producers like Saudi Arabia, as well as oil companies, but as Deutsche points out, it also slammed equities across the board.
The world’s most important commodity had started to recover, appreciating by as much as 40% from January’s low, and passing $40, subsequently helping stocks. But its started to weaken once more, falling more than 8% in less than a week. That, Deutsche’s analysts say, means more pain for stocks in Europe. Here’s what they have to say (emphasis ours):
European equities remain vulnerable to weaker oil prices: Euro-area real bond yields have dropped to a four-month low, while US and Chinese manufacturing PMIs rebounded. Despite the favourable combination of better growth and a lower discount rate, European equities have dropped 3.5% from their March 14th peak. The main reason is the 7% drop in the oil price over the past two weeks, which has pushed up US HY credit spreads by 30bps. Oil remains crucial to credit markets because of the fragile state of US energy balance sheets.
A further decline in the oil price would mean more downside for equities.
The bank also points out that there’s been a big spike in speculative positions in oil in the last month or so, which is another bad sign for equities. Deutsche says that a similar spike occurred in mid-2015, and that preceded a big sell-off in stocks across the continent. Here’s the chart:
Investors in Europe’s biggest companies best hope for a recovery in the price of oil.