DE30: Debate over fiscal stimulus heats up

Summary:

• Equities start lower despite optimism surrounding US-China trade negotiations
• DAX strikes 12200 points, where to go from there?
• Germany to consider ditching “black zero” policy

Investors in Europe seem to share doubts over upbeat comments we got yesterday from the US-China trade front. Let us recall that US Treasury Secretary Steven Mnuchin signalled that both countries made strides during the latest talks and then US President Donald Trump added that the US would have more talks with Beijing next week before high-level negotiations in Washington at the start of October. On the face of it, these are sanguine headlines, however, investors have understandably remained skeptical as they saw a lot of such comments in the past which resulted in no improvement in the trade dispute. In our view, investors are right in being cautious in involving in riskier assets. Nevertheless, the DE30 broke above 12 200 points on Monday and it could suggest that more gains are achievable. Indeed, from a technical point of view buyers may be optimistic, albeit one needs to notice that we have got quite a sharp rally recently, hence bulls may experience some fatigue before striving to come back to gains anew. If so, today’s session could be crucial and if the daily candlestick closes below the above-mentioned level, it may pressure buyers to exit the market and thereby exerting some downward pressure on the German index. 

The DE30 managed to break above 12 200 points on Monday, but the outlook for bulls seems to be blurry. Source: xStation5

Meanwhile, there are more talks in recent weeks about possible fiscal policy easing in Germany. Let us note that countries having more fiscal space have been highly encouraged by the Europen Central Bank to involve more in supporting economic growth in Europe. The latest foreign trade data from Europe's largest economy showed a higher than expected current account surplus which rose to 7.3% of GDP after July, up from 7.1% of GDP after June and the highest value this year. Such numbers may embolden some German policymakers to keep pressure on the government to loosen the purse strings. Having this in mind it is worth mentioning the latest news that Germany may scrap its balanced budget policy. On Monday, Reuters reported that Berlin is reportedly considering setting up some independent public agencies in order to issue new debt to invest in the stuttering economy. Such a move is to circumvent strict national spending rules allowing the country issuing more bonds without infringing them. Put it simply, new debt issued by those agencies would not be accounted for under the federal budget as it would be only seen in EC calculations. However, so far Germany does not intend to support its economy by more expansionary fiscal policy. On Tuesday morning German finance minister Sholz has presented a solid budget without new debt, though he has added that the next year budget is expansionary, without specifying what he meant. Finally, he reiterated that the German economy is not in a crisis and that appropriate steps will be taken if such a situation occurs.

The DAX is moving down 0.3% this morning after the finance ministry has presented the 2020 budget without new debt. Source: Bloomberg