DE30: Bloody opening across European equity markets

Summary:

• Stocks in Europe kick off the last trading day with massive losses

• Another bearish gap in the German DAX (DE30 on xStation5)

• BASF (BAS.DE) moves down despite encouraging earnings

European investors have entered the last trading day this week in dismal moods as all major indices have opened sharply lower following the red close in China. Looking at the SP500 futures (0.5% down at the time of writing) one may arrive at a conclusion that the yesterday’s increases were probably just short-lived relief rather than a major reversal which could translate into a turnaround. Going back to the ECB’s meeting let us present some conclusions. First of all, Mario Draghi did not torpedo the growth outlook even as he did admit that “the incoming data has been weaker than expected”. At the same time the EBC’s communique did not alter a phrase describing a balance of risks to economic growth seeing it as “broadly balanced”. These remarks suggest that the ECB does not seem to be concerned about the latest slew of disappointments in both soft and hard indicators such as PMIs and industrial production let alone more and more prominent declines in stocks markets in Europe and elsewhere as well. Instead he voiced confidence regarding underlying inflation reiterating that it should continue gradually rising. Asked about reasons behind such thinking Draghi referred to negotiated wage growth in the Euro Area. Let us notice that the annual rate of growth exceeded 2% in the second quarter for the first time since the beginning of 2013. In the EURUSD recommendation yesterday we wrote about rising labour costs in the Eurozone which seems to be consistent with the continued (gradual) increase in negotiated wages.

The second bearish gap drawn in the DAX (DE30) this week does not bode well for bulls. When we look at the weekly interval one needs to focus on 11400 points which the level is the critical line and if breached it could push the index much lower. Source: xStation5

The first minutes of trading in Europe have brought further worsening of indices’ performance. The German DE30 is falling 1.6%, the CAC40 (FRA40) is dropping 1.7% while the UK FTSE100 (UK100) is more than 1.3% down as of 8:40 am BST. The blue chips index in Italy (ITA40) is dropping 1.3% at the same time. In case of the Italian thread it is worthing mentioning the latest comments from Deputy Prime Minister Luigi Di Maio. He said yesterday that the Italy/Germany bond yield spread is widening because of fears about a euro exit, a move the government never intends to do. Market participants seem to be quite sceptical about these remarks and the above-mentioned yield spread keeps hovering around 310 bps this morning, but still off its highs made in mid-October of around 340 bps.

Only two stocks have been able so far to resist the broad-based falls. Source: Bloomberg

Looking into the breakdown of the German index BASF (BAS.DE) deserves more attention today. The stock is trading almost 3% lower in spite of the fact that its earnings beat analysts’ estimates. Third quarter revenue totalled 15.6 billion EUR against the consensus of 15 billion EUR which resulted in adjusted EPS equal 1.51 EUR compared to the median estimate of 1.44 EUR. On top of that the company decided to leave the outlook unchanged compared to this presented in September. The German chemical maker also said that it is exploring sale of 2.4 billion EUR construction products unit.