DE30: Heidelberg Cement plunges after cutting profit forecast

Summary:

• European equity markets start Thursday’s trading little changed

• Bundesbank’s Weidmann joins a chorus criticising the Italian budget draft

• Heidelberg Cement (HEI.DE) tumbles as the company cuts profit forecasts

The beginning of European trading has been unexpectedly calm despite heavy losses incurred by Chinese investors with stocks in Shanghai falling down almost 3% and in Hong Kong moving lower by more than 1%. The declines could be a response to the weakening Chinese yuan as well as higher yields in the US. As far as the former topic is concerned, it needs to be said that the yuan weakened today to the lowest since January 2017. The move could have been yet more intensive if the US Treasury had labelled China as a currency manipulator. Let us remind that Italy has already submitted its next year budget draft to the European Commission, but there are quite high chances that the draft will be needed to be revamped as the European body later said.

In this context it is worth indicating that Bundesbank President Jens Weidmann also shared the EC’s view toward the Italy’s 2019 budget plan criticising the country for failing to reduce its massive debt pile. He said that the “structural balance would deteriorate noticeably, and the very high level of debt would at best decrease only slightly”. Let’s recall that Italy has mapped out the deficit of 2.4% of GDP and even as it looks in line with the EU rules (the deficit below 3% of GDP) at least on the face of it, there is a possibility that Italy will be unable to fulfil its assumption due to slowing economic growth. Therefore, remarks from EU Commissioner Oettinger made on Wednesday, that the plan is “very likely” to be rejected, appears to be right. Note that with the ECB unwinding its monetary stimulus (rate hikes are expected in the third quarter of 2019) it seems to be reasonable to assume that debt servicing costs will be gradually increasing which could be an additional burden for the heavily indebted Italian economy. There is no doubt that the planned deficit hinges on the level of Italian bond yields, hence the higher yields, the higher possibility that the country will miss its assumptions.

After the steep sell-off taking place in the last week the German stock market has wiped off some of its declines ever since. The pullback stopped accurately at 11400 points and then quite the sharp bounce occurred. Bulls are likely to approach 11900 points which seems to be a critical level. Source: xStation5

While the start of trading has been quite mixed then major European indices have turned positive playing down fallins in Asia as well as a rise in US yields. After more than one hour of trading the German DAX (DE30) is rising 0.5%, the French CAC40 (FRA40) is gaining 0.4% while the EuroStoxx50 (EU50) is going up by 0.3%. Gains are also seen in the UK and Italy despite politics-related concerns. Stocks in the UK are up by 0.2% while in Italy we have a 0.5% increase.

Heidelberg Cement (HEI.DE) is by far the worst performing company within the DE30 today. Source: Bloomberg

Underperformance of the above-mentioned company stems from the fact that it cut its profit forecast for 2018 due to bad weather in the US that slowed building work, higher than expected energy costs also played a role. The company said in a statement on Thursday that “operating profit excluding depreciation will decline by a low- to mid-single digit percentage”. Earlier the company had anticipated an increase of the similar scale. The stock is down over 8% at the time of writing this article. On the opposite side of the tally is Linde (LIN.DE) as the company has received green light from the Federal Trade Commission in the US to merge with Praxair. The deal is expected to be completed by October 24.

Heidelberg Cement (HEI.DE) is exceeding its dramatic decline following the news and the first support is not seen until ca. 50 EUR per share implying more pain to come. Source: xStation5