DE30: New TLTRO will help EU banks

Summary:

• A mixed start to Friday’s trading across European equity markets
• Economists surveyed by BBG expect the ECB will pay banks to lend under a new round of TLTRO
• SAP (SAP.DE) falls after being downgraded, a new price target implies a 19% decrease

The last trading day for this week is passing quite calmly with only minor moves in other equities and currencies. Investors seem to be more sceptical with regard to upbeat revelations coming from US-China trade negotiations (being too complacent could backfire afterwards). On the other hand, a Brexit saga is unlikely to end any time soon following a would-be proposal EC President Donald Tusk could put forward to the UK - a so-called 12-month flexible deadline extension. Overall, equity investors seem to be trapped between positive and negative stories and as a result we have not seen any moves of note.

Technically the DE30 is trading above its pivotal resistance placed at the 50% retracement of the latest downward move. Therefore, one may imagine that if bulls are able to stay there until the end of the day, it could help them continue recovering next week. If this is the case, a move toward 13500 points could theoretically be on the cards. Source: xStation5

On Thursday we were offered the ECB minutes which showed that the ECB’s baseline view was solid growth returning later this year. However, there were also some opinions that this scenario could be too optimistic given elevated uncertainty (trade tensions were cited). On the other side, members did see a risk of inflation expectations de-anchoring. Finally, there were also some members arguing for a longer period with stable rates than it had been adopted. Meanwhile, we also got an interesting survey carried out by Bloomberg among economists. The agency asked them by how much the new TLTRO cost would be lower than the MRO rate. A median estimate points to a difference of 20 bps meaning in practice that the ECB could pay banks to lend. As a consequence, European banks might be provided with a source of interest income at a time when they struggle with weak profitability stemming from negative rates. Any specifications with regard to a new TLTRO round are expected to be showed in June.

The German DAX seems to be quite equally divided when it comes to a number of stocks being above and below the flat line. Source: Bloomberg

After the first hour of trading the DE30 is trading mildly below the flat line while the FTSE MIB is the best performing index being up 0.2%. Looking for some information from specific companies it needs to focus on SAP (SAP.DE). The stocks is falling more than 1% following an adverse recommendation. The stock was downgraded to reduce from neutral by Oddo BHF with a new price target at 84 EUR, down from 90 EUR implying a 19% decrease. Deutsche Boerse (DB1.DE) deserves attention too as it was downgraded to hold from buy by Commerzbank with a new price target at 120 EUR, down from 125 EUR implying still almost a 4% increase.