DE30: Stocks bounce back as risks subside along with TRY’s rally

Summary:

• European stock markets start the day with upbeat moods following a rally seen in the Turkish lira

• DAX (DE30) strives to erase its prior losses, where to look for a resistance?

• RWE (RWE.DE) gains as the company reduces its net borrowing preparing for a deal with EON

Tuesday’s trading is bringing long-awaited respite to equity investors which is driven by lowered risks related to Turkey, on balance, we do not think that a rally seen in the Turkish currency could last for longer. Therefore, we reckon that today’s relief could be rather temporary, and new declines may occur once TRY traders realize that basically nothing has changed thus far. Anyway, so far so good as credit-risk gauges concerning Turkey are turning lower today. For instance, the 10Y yield is falling 128 basis points while the 5Y USD CDS is declining more than 45 basis points to below 540 basis points this morning. Finally, the lira is soaring against the greenback being up more than 4.5% at the time of writing but off its highs. Let us also notice that Turkey’s finance minister Albayrak informed earlier that it would hold a teleconference with investors from the US, Europe and the Middle East on Thursday - up to 1000 investors are to take part in the event. According to Reuters some big banks including Citi, Deutsche Bank and HSBC are said to be involved.

The German index has failed to make a more sustained move thus far as any gains have been quickly faded. Source: xStation5

From a technical angle the German stock market has failed to recover for longer and after the lively start to Tuesday’s trading it has moved lower again. We may determine a major supply zone localized in the vicinity of 12500 points where bulls might find it hard to push higher should they get there. Thus, a purely technical approach seems to favour bears who might try to re-enter the market once the price nears 12500 points. Moreover, risks surrounding to the Turkey’s economy have yet to recede and therefore it is hard to imagine that European stock markets might bounce back more permanently. Note that Spanish, French and Italian banks have the largest exposure to the Turkish banking sector (Spanish entities could be particularly vulnerable as their claims on Turkey account for over 35% of total foreign claims).

RWE (RWE.DE) is rising decently this morning after the company reported a meaningful decrease in net borrowing. Source: Bloomberg

Compared to the beginning of trading European equities have reversed some of their gains and as of 9:44 am BST the DE30 is rising 0.3%, the French CAC40 (FRA40) is adding 0.2%, the Spanish IBEX (SPA35) is climbing 0.1% while the British FTSE100 (UK100) is sliding 0.05%. Where does RWE’s overperformance come from? The company informed that its net borrowing declined around 18% in the first half of the year. The reduction of berrowings is part of an asset-swap deal with EON, the RWE’s domestic rival. Notice that EON acquired the Innogy SE subsidiary from RWE, and now the two companies are preparing to integrate the subsidiary. The deal is to make RWE more focused on power generation while EON will run a consumer-facing business. Finally, let’s notice that the RWE’s full-year dividend is going to increase to 70c per share from 50c even as the company’s adjusted net income fell to 683 million EUR from 883 million EUR during the first half of this year.