DE30: European stocks begin slightly lower, Adidas surges 10%

Summary:

• Major European equity markets kick off Thursday’s trading subtly lower

• DAX (DE30 on xStation5) stays within its well-known range

• Adidas (ADS.DE) surges almost 10% in response to excellent earnings

• German stocks market has underperformed its European peers so far this year

The beginning of Thursday’s trading is bringing moderate declines across major European stock markets even as Chinese indices managed to close well above their yesterday’s close levels. Notice that Chinese investors do not seem to be particularly concerned about the slightly quicker pace of consumer price growth as well as the constantly (relatively) high rate of producer price growth in spite of the fact that oil prices eased in July. Let us make a point that protectionist steps which have been undertaken by both the US and China are clearly inflation-friendly ones as tariffs push up import prices for domestic consumers and companies and might translate into higher price growth across the entire economy if consumers’ expenditure does not ease. However, it has yet to be the case in China even as the inflation rate ticked up in July to 2.1% from 1.9%. Notice that it remained well below the PBoC’s objective pointing to 3% signalling no needs to step in for the central bank to cool it down for the time being. Having said that, should trade war tensions intensify and the US slap China with more duties (as for now we know that the United States is mulling over levies on $200 billion Chinese goods), then one may quite easily imagine that inflation could accelerate. Nevertheless, until it hovers below 3% there is no point in debating about rate hikes, and the central bank has to be cautious with lifting borrowing cost given the high level of debt held by households.

The German stock market keeps moving within the consolidation, hence 12545 and 12750 levels remain the most crucial to watch. Source: xStation5

From a technical standpoint one may notice that volatility on the German stock market has been contained of late as the DE30 has been trading within the range basically since the beginning of August. Therefore, the best strategy that could be implemented as for now is to buy in the vicinity of 12545 points with the target around 12750 points or slightly lower. It’s worth noting that the German stock market has underperformed its major European peers so far this year measured as the total rate of return. Looking at indices from Germany, France, Italy and Spain one may conclude that the French one has been by far the best thus far gaining over 6% (the total return) outstripping the FTSE MIB (ITA40). The Spanish IBEX (SPA35) has been pretty flat while the German DE30 has lost around 2.5% since the start of this year. Where has this divergence come from? The simplest reasons standing behind the DE30 underperformance might be the relatively high exposure of German companies to exports, in other words, German companies’ earnings appear to be more dependent on foreign rather than domestic demand.

Adidas (ADS.DE) is gaining almost 10% this morning as investors are digesting the second quarter earnings. Source: Bloomberg

Looking at the DE30 breakdown one may notice that Adidas (ADS.DE) is decisively the best performing stock this after the company produced really spending earnings for its second fiscal quarter. The company’s operating profit totalled 592 million EUR topping the median estimate of 548.4 million EUR. Revenue amounted to 5.26 billion EUR also easily exceeding the consensus suggesting 5.17 billion EUR. The company said that it sees its fiscal-year operating margin between 10.3% to 10.5% whereas revenue is to increase by 10% comparing with the prior year. It needs to be said that Adidas undoubtedly got a boost from the World Cup as the number of sold jerseys reached its record even as a lot of national teams the firm sponsors lost out to countries supported by Nike. The details showed that Adidas World Cup short sales topped the 8 million sold in connection with the tournament in Brazil in 2014. This number might look particularly encouraging as the two best teams in France - France and Croatia - wore Nike uniforms.