DE30: Grain of hope seen across European markets

Summary:

• Green opening across European markets thanks to hopes regarding a possible US-Mexico trade agreement
• Ugly beginning of the second quarter in the German economy
• DAX (DE30) hovers in a critical place from a technical point of view

The ECB did its job on Thursday, however, its updated forward guidance was taken as hawkish due to the fact that the central bank does not seem to change rates over the next twelve months. This was the prime reason why the euro strengthened in the aftermath of the ECB meeting. It is also worth noting that the ECB did not follow other central banks like RBA or RBNZ which already decided to slash interest rates. Therefore, all a lot will depend on the Federal Reserve in terms of where the EURUSD might go from the current levels. In this regard one may suppose that a release from the US labor market could be outstandingly important from the Fed’s standpoint. So far, we have been offered quite mixed or even disappointing releases from the US, including the ADP publication on Wednesday. Hence, if the brightest spot in the US economy begins flashing red (at least in the eyes of investors), it could give some food for thought for the US central bank. Let us recall that market participants price in 50 bps rate cuts by the year-end and even more in the following year. That’s a huge discount and a scenario which has been barely mirrored in the FX market.

Meanwhile, the data from Germany we got this morning (industrial output and foreign trade) pointed to a disappointing beginning of the second quarter. In April, industrial production (SA, WDA) fell as much as 1.9% in monthly terms, the heaviest monthly decline since 2015. In addition to that, German exports in the same month contracted as much as 3.7% MoM while imports declined 1.3% MoM. There is no doubt that there were disappointing figures suggesting no reprieve in the Eruope’s largest economy at the start of the new quarter. Although one swallow doesn’t make spring, these releases justified ECB’s dovishness.

The state of play in the German DE30 looks quite promising for buyers. After being offered the two doji candlesticks, the price is trying to recover on Friday but it does not mean bulls will have a plain path ahead. That said, the two pivotal technical lines (the 50DMA as well as the broken trend line) need to be broken in order to allow bulls to continue their rally. The key support could be found nearby 11920 points. Nonetheless, bear in mind that stocks’ performance in Europe and elsewhere too could depend heavily on incoming revelations from US-Mexico trade talks which are expected to continue on Friday. Source: xStation5

Meanwhile, Europen equity markets dropped on Thursday on the back of not so dovish ECB albeit the start to Friday’s trading has been much better. This is a result of hopes with regard to a potential trade agreement between the US and Mexico. Although, both sides have been unable to hammer out a deal so far, there have been some speculation that the Trump administration could decide to offer more time to Mexico by postponing a date when tariffs come into effect. It sounds reasonable given that it may be hard to have a binding agreement in such a short time. That is why European stock markets are cheering this morning with the French CAC40 (FRA40) leading the gains and rising as much as 1.2%. In turn, the German DE30 is gaining roughly 0.6% while SP500 futures point to a positive opening across the pond.

Most of stocks being listed in the DE30 are on the rise this morning. Continental (CON.DE) is rising 1.5% as the stock has a notable exposure to NAFTA countries. Source: Bloomberg

Let us notice that Continental is in demand this morning due to the fact that the company has a notable exposure to NAFTA countries - 25% of total revenue comes from these countries. On top of that, the firm has some plants in Mexico, hence understandably tariffs imposed by the US could be harmful.