DE30: More weakness in German survey data

Summary

- IFO Business Climate index drops more than expected
- DAX (DE30) painting inverse head and shoulders pattern?
- German residential companies drop on rent-cap idea

The European stock market indices are trading mixed during the first session of the week. Escalation of the Sino-US trade war exerted some pressures on equities from the Old Continent but it looks like investors used it as a buying opportunity and, in fact, a lot of indices from Europe trade higher on Monday. It should be noted that traders from the United Kingdom are taking a day off for the summer banking holiday.

Pace of decline of the German IFO indices accelerated recently hinting that the country may be heading for technical recession. What one may find interesting is that, according to the details of the release, the situation in the auto sector improved against the previous month. Source: Macrobond, XTB Research

IFO Business Climate drops to the lowest level since November 2012

The key macroeconomic reading scheduled for today’s European session was the German IFO index release for August. The headline gauge was expected to decline to 95.2 pts from 95.8 pts in July. However, the reading showed a plunge to as low as 94.3 pts - the lowest level since November 2012. Current assessment subindex declined from 99.6 pts to 97.3 pts while business expectations subindex dropped to 91.3 pts from 92.1 pts. Both subindices came in lower than expected. Details show that climate improved in the automotive sector but deteriorated in, for example, engineering and chemicals. A point to note is that the latest escalation of the Sino-US trade war was not reflected in the data yet. Having said that, one may expect more lacklustre readings in the months to come in case world’s two biggest economies fail to sign an agreement.

The German DE30 index reversed a downward move slightly above the 11470 pts handle marked by low from 6 August. Taking a look at the latest price action of the index, one can see that the inverse head and shoulders pattern may be building. Potential range of this pattern (in case we see a break above the neckline at 11800 pts handle) is more or less the resistance zone ranging above the 12030 pts handle. However, given recent trade war escalation, long positions could be a risky play at the moment. Source: xStation5

Vonovia and Deutsche Wohnen dip on rent-cap idea

Boom on the German property market not only cause real estate prices to rise but also significantly inflated rents in major cities, like Berlin. Rents in the German capital increased over 50% over the past eight years and authorities decided to tackle the problem. A rent cap of €7.97 per square meter was proposed in Berlin and will be applicable to all the buildings built before 2014. Buildings built afterwards would be subject to less strict rules. Imposing a rent cap would be a significant hit for the German residential companies that have outperformed broad market in the past years like Deutsche Wohnen (DWNI.DE) or Vonovia (VNA.DE). Moreover, residential companies warn that imposing a rent-cap would significantly slow or even cease new building projects and, in turn, Berlin residents could soon struggle to find an apartment to rent. Vonovia is the worst performing DAX stocks today after the rent cap idea surfaced over the weekend.

DAX members at 9:39 am BST. Source: Bloomberg