DE30: Red opening in Europe, bleak earnings season in Germany

Summary:

• Equity markets in Europe open lower following the Fed decision

• Poor earnings season in Germany could weigh on the DAX going forward

• Thyssenkrupp (TKA.DE) plunges on the lowered full-year profit outlook

The first half of this week has been quite successful but all gains made that time have been pared altogether. The trigger for this is not obvious but it could be related to two aspects, both come from the US. First of all, the US stock market rallied on Wednesday in response to the midterms’ fallout which stripped the Republican Party of control over the House of Representatives. On the face of it, it might be considered as weird behaviour due to the fact that the split Congress will for sure result in less expansionary fiscal policy going forward and thereby less fuel for stocks. On the other hand, political events tend to paint similar schemes - a pullback in risky assets prior to the voting on the back of mounting uncertainty, and then a relief rally regardless of the final result. This was the case this time around as well. However, when the post-election dust settled, market participants turned attention to monetary policy again when the Fed does not plan to take its foot off the pedal. Therefore, a mixture of higher rates and less fiscal stimulus (Trump had promised to implement further tax cuts for the middle class - the idea which has become almost dead right now) translates into more fears about the performance of the stock market. In this regard it is worth mentioning that the return on the US 3-month bill is on track to record its best year since 2009 suggesting that the old proverb is back again - cash is king.

The DAX (DE30) failed to move above 11670 points earlier this week and as a result bears took control. As for now it seems that the index is en route to the support placed around 11350 points, breaking this level could allow sellers to push toward 11000 points. Source: xStation5

Let’s make a quick recap of European indices’ performance so far. After more than 30 minutes of trading the German DE30 is falling 0.7%, the French CAC (FRA40) is moving down 0.8%, the similar losses are seen in the EuroStoxx50 (EU50) and the FTSE100 (UK100) as well. In today’s article we want to present one reason which could not bode well for German stocks going forward making them more vulnerable to any stress. Namely, the earnings season in Germany has been quite ugly as of yet. Having 20 out of 30 financial reports already known one may notice that earnings have surprised negatively by more than 5% on average, this is the worst outcome at least for two years. This could explain relative underperformance of German stocks compared to their US peers. Note that the third quarter might have been distorted by the implementation of new carbon emission standards hence it appears to be reasonable to wait for the last quarter’s earnings to assess whether automotive companies will be able to adjust.

German companies have surprised to the downside in terms of earnings in this season. Source: Bloomberg, XTB Research

Looking into the German DE30 one may focus on Thyssenkrupp in particular as the stock is down almost 8% this morning. It has come after the company lowered its profit guidance for this year due to legal provisions for a probe into steel-price fixing. On Thursday the firm said that EBIT will be 1.6 billion EUR, down from 1.8 billion EUR. It expects net income of 100 million EUR, also down from 271 million reported in 2017. On top of that, the stock was cut to hold from buy by Bankhaus Metzler. The group also lowered the price target to 18.4 EUR per share meaning a substantial cut from 26 EUR seen previously.