Summary:
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European equities start the day broadly lower despite encouraging results on Wall Street
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Italian stocks remain flat, bond yields nudge subtly down as Di Maio denies a media report that Italy has asked the ECB for a new QE-styled program
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DAX (DE30 on xStation5) tries to move through its crucial support
The opening of Thursday’s trading across European stock markets has not been successful despite encouraging results registered in the United States on Wednesday. Note that all three major indices gained with the NASDAQ (US100) surging virtually 1%. Nevertheless the overnight White House statement concerning tariffs could have contributed to sour moods in Europe as Donald Trump reiterated that he did not intend to back down from duties beyond some exceptions made toward South Korea, Brazil and Argentina. As a result, European stocks are seeing widespread falls with the DE30 decreasing 0.7% as of 8:45 am BST. Before we move to a thread concerning Italy let us wrap up some macroeconomic data from Germany. First of all, the unemployment rate stayed at 5.2% in August while unemployment declined 8k matching economists’ expectations. Notice that Thursday is going to abound with many regional inflation prints for August with a reading for the whole economy being a cherry on top (1:00 pm BST). So far we have known readings from Saxony, Brandenburg and Bavaria. When it comes to the first region the monthly inflation rate slowed down to 0% from 0.4%. The same development was seen in Brandenburg with monthly inflation falling to -0.1% from 0.4% while the rate of price growth in Bavaria held unchanged at 0.2%. Annual inflation rates turned out to be also below expectations putting the consensus for the whole country of 2% at risk.
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DE30 buyers face the crunch time as the 12500 handle seems to be the crucial technical point. Source: xStation5
The technical landscape for the German stocks market does not seem to be bulls supportive. After the price broke through 12500 points three business days earlier, it was unable to continue its rally. Admittedly, buyers would have counted on further gains after the yesterday’s candlestick drew a long wick suggesting sellers’ fatigue, this guesswork has not confirmed thus far. In effect the German index is stumbling this morning coming back again below the 12500 handle. From a technical viewpoint one may conclude that today’s session could be remarkably important as it may set spirits for the end of the week and then for upcoming days. The widening divergence between the German DAX and the US SP500 still deserves attention. In fact, we already wrote about the weak earnings season in Germany compared to the much better results in the US, but today we want to make another point in this respect. According to Credit Suisse’s estimates the second quarter earnings season in the US has a chance to top all previous ones over the past 7 years achieving its earnings growth of 25.5%. However, the point being worth elaborating stands elsewhere. According to these estimates US companies, on average, would have registered this record even as tax cuts had not been implemented. This is the important signal for those who shared the view that better earnings have been buttressed almost solely be the decreased tax burden.
The DE30 breakdown illustrates that an overwhelming majority of stocks are falling this morning. Source: Bloomberg
Moving to Italy it is worth noting that Luigi Di Maio, the country’s Deputy Prime Minister, denied a media report that Italy was looking for help from the European Central Bank. This report was doing the rounds yesterday after denial one could suppose that Italian bonds could catch a bid at least for a while. Indeed, yields are sliding to some extent along the entire curve albeit moves have not been particularly great so far. In terms of the Italian bonds’ future one needs to focus on today’s auction of 5- and 10-year notes. Let us remind that July auctions showed that demand shrank with B/C ratios for both kind of notes declining below their 1-year average. If today’s auctions brings any improvement it would provide investors with another reason to believe in a short-lived uptick in BTPs.
After a rally in the Italy-Germany 10Y yield spread since mid-year, the pace slowed down recently suggesting that a risk premium has stopped increasing. Source: Bloomberg
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