DE30: Modest improvement of European economic activity

Summary:

• European manufacturing PMIs barely changed in April, the details did not offer too much to cheer
• Sentiment among service providers suggest a deterioration in countries other than France and Germany
• German DAX prone to a corrective pullback

We impatiently awaited preliminary PMIs from both Germany and France to see whether Chinese PMIs for March would be something more than just noise. Nonetheless, a series of numbers we were offered this morning did not offer an unequivocal answer to this dilemma. Although we avoided a further deterioration of sentiment among both manufacturers and service providers, hopes to see some green shoots of recovery did not materialize.

A series of numbers for April do not offer an unequivocal answer whether the worst is over for the European industrial sector. Source: Macrobond, XTB Research

First of all, one needs to notice that expectations ahead of April’s PMIs had been placed quite low, and even so we were not offered any beats of note. That does not bode well for the future and the details look even gloomier. Let’s divide today’s analysis into manufacturing and services with the former gathering much more attention due to much worse performance in recent months. So, sentiment among German manufacturers ticked up with the index rising to 44.5 from 44.1, below the consensus of 45 points. While sentiment among French managers ticked down to 49.6 from 49.7, also below the expected value of 50 points.

Zooming in on the German survey one may notice that we got another hefty drop in new export orders falling at the second-quickest clip in the past ten years. With still the dismal outlook in the eyes of German manufacturers one should not be particularly surprised with a steeper fall in backlogs of work this month. In terms of employment, staffing numbers in the German manufacturing were unchanged, the Markit said. Similar patterns were present in France with an exception in employment rising at a faster pace during this month. Overall, the European manufacturing sector remained in a recessionary territory in April defying the upbeat outlook of an improvement mirrored in Chinese PMIs last month. Unlike manufacturing, the services sector looks somewhat healthier in both Germany and France. However, the decline of the index at a European level suggests worse performance in other countries like Italy, Spain. By and large, the European composite PMI dipped to 51.3 from 51.6, below the consensus of 51.8 - this says that we stayed around the trough in April with no huge improvement in sight. Looking broader, readings of Chinese PMIs for April could be pivotal for the global economy as they may confirm or deny a sudden and broad improvement in March. Also, bear in mind that industrial production readings from European economies for February were not as bad as expectations had suggested. Therefore, we suppose that PMIs may somewhat overstate downbeat sentiment.

The German stock market is going slightly down in early European trading hours. Source: Bloomberg

In response to disappointing PMIs, European equities have turned down and as for now all of them are trading below the flat line. Given the outstanding gains seen in the DAX since the beginning of this year, one may arrive at a conclusion that buyers have gone too far, too high. Thus, a more notable pullback could be on the cards, if investors realize that economic activity deteriorated markedly in the first quarter and no green shoots of recovery is seen at the beginning of the second quarter yet.

Technically the German DAX is trapped in the midst of the bullish channel. If bulls have still power to continue climbing, they may want to target at 12570 points. On the other hand, a possible corrective move could go toward 11820 points. A breakdown of this level could augur more pain for bulls here. Source: xStation5