DE30: How much can German economy lose on US tariffs?

Summary:

• Trump threatens to impose tariffs on EU cars as soon as next week

• German economy could suffer more or less under various scenarios

• BASF (BAS.DE) downgraded but the new call still implies decent room to grow

The beginning of Thursday’s trading in Europe has been quite successful following a rally seen on Wall Street in response to a dovish stance of Fed’s Chairman Jerome Powell. However, this could not be a factor being able to drive the stock market much higher in the longer term. Instead focusing on the possibility of lower rates in the quarters to come (compared to the previous scenario), investors might soon zoom in on trade tensions - not only between the US and China. Let us recall that Donald Trump suggested earlier this week that he could impose tariffs on imported EU cars as soon as next week after the G20 summit in Buenos Aires. The sources mentioned a 25% rate of customs duty on all cars except those imported from Mexico and Canada. However, the White House has repeatedly pledged not to move forward with tariffs on goods imported from the EU or Japan as long as it is making constructive progress in trade negotiations. Given the fact that the automotive sector matters a lot for the German economy (a change in carbon emission standards have been among prime reasons behind the latest slump in production output and weaker than expected GDP growth in the third quarter), it may be interesting to assess an impact on the economy if the US decides to implement new tariffs.

The German economy is expected to suffer from possible duties imposed by the US on cars. Source: Bloomberg

According to the median estimate of economists’ forecasts compiled by Bloomberg the German economy could shrink between 0.3 and 0.4 percentage points in 2019. Even as the White House does not choose to slap the EU with tariffs as soon as next week, this burden could hang over EU-based carmakers and therefore one may expect that the entire sector could not fare well. The German stock market has been quite calm as of yet, though automotive-related stocks suffered on Wednesday. In turn, technically the DAX (DE30) looks to be poised to see at least a short-term increase toward the upper limit of the channel. Note that the price managed to leave the descending channel some time ago and then it slipped into the new bullish pattern.

The DE30 could see a bounce in the nearest future but the overall outlook does not look well. Source: xStation5

After more than 30 minutes of trading the French CAC40 (FRA40) along with the Spanish IBEX (SPA35) are the best performing European indices - each is rising 0.8%. The German DAX is adding 0.7%, the FTSE MIB (ITA40) is gaining 0.75% while the FTSE 100 (UK100) is going up 0.6% despite the grim outlook for the UK economy outlined by the Bank of England after leaving the EU. It’s worth mentioning that the first inflation readings for October produced rather weak price growth. Namely, CPI growth in Saxony totalled 2.1% YoY compared to 2.5% YoY in October. In Brandenburg price growth was 1.8% YoY (2.3% YoY previously), in Hesse 2.1% YoY (2.2% YoY) and in Bavaria 2.7% YoY (2.8% YoY). On top of that, Spanish HICP increased 1.7% YoY at the same time falling short of the median estimate of 2% YoY. During the day we will be offered subsequent inflation prints from Germany and then for the entire country.
Almost all stocks listed in the German DE30 are on the rise today. Source: Bloomberg

Looking for some news from companies one may focus on two stories. The first one concerns BASF (BAS.DE) as the stock was downgraded by Barclays to equal-weight from overweight with the lowered price target of 80 EUR from 92 EUR. Despite this call the spot price (65.3 EUR) still offers substantial room for growth - ca. 22%. The second story is about BMW (BMW.DE) after the company rolled out its three-row luxury SUV - the X7. It is the largest ever sport utility vehicle and offers space for seven passengers. The new model will be assembled at the company’s factory in South Carolina, US therefore exports of this model will depend on trade relations between the US and China/the EU.