DE30: No-deal Brexit will push German economy to stagnation

Summary:

• European equities have started the day with gains following better exports from Germany for July
• DE30 keeps rising after breaking through the 100DMA
• German economy likely to stagnate this year if no-deal Brexit happens

The start to Monday’s trading has been positive for Europe-based investors as major equity markets have registered noticeable gains, however, optimism has lowered to some extent since then. As a result, after the first hour of trading we may notice that major indices in Europe are trading roughly 0.1-0.2% higher. Looking elsewhere, investors may be still afraid of dismal foreign trade data from China we got over the weekend showing exports slumping by 1% in annual terms. This result came for all tariffs coming into effect on September 1, which should have boosted purchases. Moreover, some skeptics may even ponder if China front-loaded exports in August and despite it we got a disappointing result for the month. If so, it would be really a gloomy picture ahead for global trade activity. On the other hand, better sentiment in Europe at the start of trading could have something to do with German foreign trade data for July producing a 0.7% MoM increase (seasonally and calendar adjusted), well above the median estimate of a 0.5% decline. However, it did not concern imports as they declined as much as 1.5%, worse than an expected 0.3% decrease. It seems to suggest that domestic demand in Europe's largest economy has yet to recover even as exports for July could be considered by some as a silver lining.

A technical landscape has not changed substantially from the last month and the bull market seems to be still prevalent despite an array of risks lurking both in German and elsewhere. Thus, after breaking through the 100DMA buyers may hope to head even toward 12600 points where demand may run into some hurdles. Source: xStation5

Having in mind that Brexit developments should be on top of investors’ interest another week on the trot, it is important to look at the latest report from the Federation of German Industries. The institution expects the German economy to grow by a mere 0.5% this year, down half a percentage point compared to the industry group’s forecast released in June. Moreover, it estimates that this result could be even worse if the United Kingdom crashes out of the European Union without a deal at the end of October. Should it happen, economic growth could fall to zero. In its report it also wrote that economic uncertainty remains high, because of global trade tensions and Brexit. Finally, the institution has urged the German government to change its fiscal policy to buttress stuttering growth. Meanwhile, a German current account surplus widened in July to 22.1 billion EUR compared to upwardly revised 20.9 billion EUR in June. As a result, after July the surplus increased to 7.3% from 7.1% of GDP, the highest value this year. In our view, if this trend keeps unfolding, it could heat up a debate regarding a need to loosen the purse strings in the German economy at a time when Europe needs it.

Thyssenkrupp (TKA.DE) is the worst performing stock in the German DAX after CEO has informed that he prefers selling only a minority stake in its elevator division to raise cash, thereby retaining control of its crown jewel. Source: Bloomberg