DE30: Red opening across European equity markets

Summary:

• European markets begin the day with losses following declines in the US and Asia
• German DE30 likely to head lower after failing to stay above 11 730 points
• Henkel shares down over 5% as the company cuts its 2019 outlook

European stock markets have opened lower following the noticeable declines seen in the United States as well as Asia. This underperformance could have stemmed, in part, from a Argentina-led risk aversion rise. Let us briefly remind that the country’s currency saw an enormous plunge on Monday in response to an unfavourable presidential elections outcome for the incumbent President Mauricio Macri. Setting this topic aside we are also an array of other risks which need to be taken into account. Investors know it and for that reason they have appropriately allocated their money in recent hours. Among those risks we may single out Brexit, as the UK is set to leave the block on October 31, and Italian politics as the country would see snap elections in two months. However, the jury is still out when it comes to elections in the south European country as the upper chamber is convening this afternoon to set a date when the confidence vote for the government could take place. If there is an agreement to hold snap elections, a result ought to be positive for the League’s Salvini as his party gets just shy of 40% of support. Under these circumstances, the League would even hold an outright majority in both chambers of the parliament. In turn, by adding Forza Italia to the mix Salvini would even get the two-third majority.

What does it mean the Italian economy? Although Matteo Salvini keep reiterating that his party does not plan to leave the European Union, at the same time he sticks to plans regarding reducing taxes despite the risk of breaching the European fiscal rules. Understandably, it poses a serious downside risk for the country’s fiscal position, adding to debt already exceeding 130% of domestic output. It also displays a high degree of differentiation in Europe as far as fiscal capacity is concerned. For example, Germany having abundant space for fiscal loosening remains unwilling to do so, while countries like Italy keeps pursuing such a strategy despite a weak fiscal position. All in all, the European Union as a whole seems to hold much higher fiscal capacity to cope with an economic downturn compared to the United States whose debt hovers above 100% of GDP as opposed to 86% of GDP in case of the Eurozone.

The DE30 failed to break above its important resistance placed in the neighborhood of 11 730 points. As a consequence, the price may head south in the near-term driven by unfavorable risk sentiment seen in other regions in the world. The first more notable support could be found at 11 300 points. Source: xStation5

In terms of information coming from companies listed in the German major index, let us focus on a 5% drop in Henkel shares, the largest decline in almost seven months. This came after the company’s EBIT missed expectations in the second quarter, prompting the firm to cut its full-year forecast, mainly due to a sales slowdown in China. In the past quarter, adjusted earnings fell 9% to 846 million EUR, analysts had expected to value closer to 869 million EUR. Finally, the company maintained its guidance for an EBIT margin of between 16% and 17%.

Henkel leads the losses after cutting its full-year earnings forecast. Source: Bloomberg