In spite of the German manufacturing PMI slumping below 45 points for just the fifth time in the past 20 years, the DAX market has soared by 18% since December lows, following on from even more impressive gains in US indices. But is the market optimism justified and will the report for April show an improvement?
- A much awaited PMI manufacturing report is to be released on Thursday (8:30am BST)
- Investors hope to see better data
- A big yawn between industry data and DE30 (Dax underlying) levels
Which is right – the data or the markets?
One month ago markets were impacted with the release of German flash manufacturing PMI falling below 45 points – a level that could suggest a recession. The index fell and new orders - especially new export orders - dried out, leading to questions about a global slowdown. However, markets have moved past this news very quickly and gained steeply to levels not seen in more than 6 months.
There is a big gap between markets and manufacturing data from Germany. Source: Macrobond, XTB Research
The key question is: “who is right – markets or the PMI data”? Additional data from the German economy has been alarming as well but the PMI is a leading indicator and should be the first to set a direction. The ZEW report for April did not help to solve the problem. The sentiment index rose to 3.1 points – more than expected and to the highest level in a year. At the same time, the current conditions index plummeted to 5.5 points – the lowest level since November 2014 and the seventh straight decline. This shows the current market dilemma: the rally has been built on hopes. Hope that Sino-US trade talks reduce tensions, hopes that dovish Fed will prevent US slowdown, and hopes that China stimulus will help growth recover. This has created a big gap between equity indices and current economic data and it is especially clear in Germany. It seems to be obvious that data – including the key manufacturing PMI - needs to recover quickly (and substantially) if the bull market is to be justified.
DE30 technical situation
DE30 has been surging since the December low of 10267 points and a dreadful PMI last month caused only a short-lived correction. The index is encompassed by a steep upwards channel and emboldened by a reverse head-and-shoulders formation that sets a resistance level at 12358 points. The key support is at 10775 points – a level that served as a resistance before.
DE30 remains in a steep upwards channel. Source: xStation5
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