DE30: Cautious start in Europe as German economy contracts

Summary:

• European markets kick off Wednesday’s trading cautiously after a wave of optimism yesterday
• German economy contracts in Q2 as expected, pressure on Merkel to loosen the purse strings mounts
• German DAX keeps struggling below the important resistance zone

The start to Wednesday's trading has been quite benign despite the upbeat information regarding delaying US tariffs on Chinese products on Tuesday. Sentiment deteriorated after the Chinese economy reported a bag of gloomy data for July showing that industrial production rose at the weakest pace in more than 17 years. Thus, while the news on duties could be encouraging, downward pressure on the world’s second largest economy is unlikely to subside altogether as economic growth keeps normalising. Meanwhile, from a global standpoint there are more factors to worry about and most of them seem to be localized in Europe. We mean Brexit - the UK is expected to leave the block on October 31 (at any price according to Prime Minister Boris Johnson), Italian politics - the current government will face a no-confidence motion on August 20, if there is no longer confidence snap elections could be held by the year-end. 

Last but not least, a downturn in European manufacturing which has already been seen in today’s German GDP data for the second quarter. According to the preliminary reading the German economy contracted 0.1% in quarterly terms (SA), the value matched expectations. Either way, the GDP decline could keep pressure on Angela Merkel to loosen the purse strings in order to boost the economy. There is no doubt that Germany has the best fiscal position to do so in Europe, hence many pundits are calling on the country’s government to increase spending as a marginal effect on the economy coming from monetary policy has diminished. Having this in mind it is worth mentioning a draft budget released by the German federal government yesterday. It showed that the country planned to raise its gross debt issuance next year after years of declining sales. The country will issue 234 billion EUR in bonds and bills compared to 185 billion EUR expected for this year. On the other hand, German Chancellor Merkel said on Tuesday that so far she did not see the necessity for a growth package. She added that the government would react depending on the economic situation signalling that second and third quarter growth figures would be analysed.

The German DE30 keeps struggling below the important resistance placed at 11 840 points. Source: xStation5

Looking at the breakdown of the German DAX one may notice that Thyssenkrup (TKA.DE) is among the worst performing stocks after it was downgraded to sell from reduce by AlphaValue. The group said that reintegration of Thyssenkrup’s steel business caused “considerable deterioration” in balance sheet quality. Analysts also noted that pension provisions “skyrocketed” while net debt widened and that there is “no way Thyssenkrupp can survive if no drastic action is taken”.

Thyssenkrup is leading the losses in the DE30 on Wednesday. Source: Bloomberg