DE30: German factory orders justify monetary stimulus

Summary:

• European indices begin Friday’s trading with modest declines
• DAX (DE30) likely to make a corrective move
• Factory orders for May came in well below expectations justifying the need to act for the ECB

The start to Friday’s trading has been quite neutral as major indices in Europea have begun with modest declines after a mixed session in Asia as investors are awaiting the US jobs report for May. First and foremost, one may notice that upbeat sentiment, shared among investors right after the announced truce between the US and China, has disappeared to some extent as China seems to contest a possibility of increased purchases of US agricultural products unless the US lifts restrictions placed on Huawei. Meanwhile, sentiment has also been undermined by the factory orders data from Germany for May which dropped 2.2% MoM with the heaviest declines in case of foreign orders which fell 4.3% MoM (non-Euro Area orders dropped 5.7% MoM, the largest fall since February). The report could be another convincing signal for the ECB to take some efforts aimed at reviving economic growth as well as price growth. 

In our view, another round of monetary easing has been already taken for granted by markets, thus the question is not “if” but “when” the ECB decides to roll out quantitative easing possibly enriched by lowering interest rates even as they are already negative. Here, it is worth referring to the latest ECB research addressing the problem if negative interest rates might still stimulate the real economy. We do not want to enter the details of this study, but the conclusion is “yes”. Thus, according to the study the ECB might keep lowering rates deeper into the negative territory and it will still stimulate the real economy successfully.

Technically the DE30 might have reached a so-called inflection point, at least in the short-term. The price has started Friday’s trading lower and it looks as if it would be ready to continue heading down. If so, the first support to watch for bulls is the area nearby 12440 points. This zone could be underpinned by the 60-period MA as well as the lower bound of the bullish channel. Source: xStation5

After the first two hours of trading roughly half of stocks listed in the DE30 is gaining, however, these gains are not notable. Looking for some interesting information from companies one may focus on Osram (OSR.DE), the German lighting company, which has accepted a takeover bid from private equity firms - Bain Capital and Carlyle Group. Bain Capital and Carlyle Group are now expected to offer 35EUR per share, meaning a 21% premium compared to Tuesday’s close. However, one needs to be aware that the deal could be made only if both companies are able to purchase at least 70% shares of Osram by early September. Osram shares are trading almost 2% higher at the time of writing. 

BASF (BAS.DE) is another stock worth looking at after Goldman Sachs has started covering the stock with neutral rating. The US investment bank has a cautious approach to the near-term outlook for BASF seeing “an increased likelihood of a guidance reduction” going in the second quarter.

Roughly half of stocks listed in the DE30 is on the rise on Friday. Source: Bloomberg