Summary:
- A bloody start to Friday’s trading across European equity markets
- German DAX moves below 12000 points
- Widespread declines within the German index
Donald Trump took market participants off guard on Thursday when he announced fresh tariffs on the remaining $300 billion of Chinese goods. This move had serious implications across financial markets yesterday and his decision is being felt in Europe in early trading too. Investors, being afraid of a further trade war escalation, have poured their money toward bonds pushing core bonds yields in Europe to a new record low in many cases. At the same time, the Japanese yen gained momentum due to its safe haven status while oil prices plummeted. There is no doubt that a 10% tariff is a game changer for the Federal Reserve as it may become more convinced when it comes to a need to cut rates further this year. This notion is shared among market participants as they have already taken a cut in September for granted and have begun pricing in the third cut before the year-end.
For the US economy it is the bad news as it could be harmed by two possible ways. The first one may see consumer spending declining on the back of higher prices of imported goods, which could also lead us to see higher prices in the US economy in general. The second one assumes that US enterprises, which import final and intermediate goods from China, may be forced by a high degree of competition to not increase prices. As a result, they may notice a decline in operating margins which then could reduce their valuation. On top of that, one needs to be cognizant of the fact that any trade restrictions are negative for the economy imposing them in the long-term and they will backfire sooner or later. On the face of it, the only winner is the US government collecting tariffs, and this is what Trump likes to boast about. However, the same government could also see lower tax revenue due to weaker consumer spending and investment activity.
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The German DE30 has already plunged below 12000 points at the beginning of Friday’s trading. The index is currently down more than 2% and similar declines are also seen elsewhere. Technically bulls may hope that the support nearby 11920 points may help them. Nevertheless, sentiment has got sour, hence further price rises could be hard to achieve. Source: xStation5
Looking into the DE30 breakdown one may notice that falls are quite widespread with only two stocks being above the flat line. Outperformance of Vonovia (VNA.DE) has come despite the first-half net profit loss reported by the company. As it wrote in the statement, the loss was due to a large write-down (it booked 1.9 billion EUR in goodwill on past portfolio purchases as part of a revaluation of its assets). The profit fell to 125.3 million EUR, a dramatic fall from 1.2 billion EUR reached at the corresponding period last year. However, overall the revaluation was positive resulting in an increase of rental estate assets’ value by 2.3 billion EUR.
Vonovia has been able to resist the broad-based sell-off seen in Europe. Source: Bloomberg
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