DE30: ECB’s tiering system remains a toss-up

Summary:

• European equity markets begin a new trading week lower after heavy declines in Asia
• DAX (DE30) breaks below its crucial technical support
• German lenders still not convinced whether the ECB introduces a tiering system

After bloody trading in Asia, the start of the new trading week does not well in Europe too as major equity markets have begun with declines close to 1%. This grim performance is the result of a further trade war escalation between the US and China. Over the weekend, a report released in a China’s newspaper said that Beijing is wondering if further trade negotiations with Washington make sense at a time when Donald Trump has again increased pressure on the world’s second largest economy by announcing a round of new tariffs effective on September 1. On top of that, the Chinese authorities have asked state-owned enterprise to suspend imports of US agricultural products. These revelations do not bode well for the near future, hence this topic could constitute a serious downside risk for the global economy for the second half of 2019.

Looking at the daily chart of the German DE30 one may notice that the price has started the day with a substantial decline and it is currently trading below the important technical support nearby 11850 points. Should the price stay below this line until the end of the day, one may expect that bears could prevail in the upcoming days. That would correspond with gloomy sentiment across markets spurred by Donald Trump last week. The next support levels can be found at 11640 and then 11300 points. Source: xStation5

Along with mounting risks related to the US-Sino trade war, global central banks are getting more reasons to stick to their recent turnaround in monetary policy. As a result, both the Fed and the ECB are expected to loosen monetary conditions further this year. While rates in the US stay quite comfortably above zero, one cannot say the same about rates in the Eurozone. Nevertheless, even so that rates have fallen there below the zero-bound, the ECB still mulls over lowering them. This has increased concerns among banks which suffer from negative rates and are charged for depositing money in the European Central Bank. That is why the ECB has tasked a committee to vet the possibility of introducing a so-called tiering system which is to help banks by excluding some reserves from the negative deposit rate. However, the German banking industry remains sceptical seeing just a 50% probability for the ECB to a tiered deposit rate, according to Hans-Walter Peters, president of the Association of German Banks. His estimates suggest that lowering the deposit rate by 10 bps to -0.5% would cost Eurozone lenders almost 2 billion EUR a year. 

Looking into the DE30 one may notice BMW shares being under selling pressure after the stock was downgraded to sell from reduce by AlphaValue. Moreover, European carmakers could be afraid of possible steps taken by Donald Trump when it comes to tariffs on imports of auto parts and cars. Although Trump did not mention such a possibility on Friday when he talked about a US-EU beef deal, with Trump you never know what he is going to do.

A majority of stocks within the DE30 remains under selling pressure at the beginning of the new week. Source: Bloomberg