This website uses cookies to collect usage information in order to offer a better browsing experience. By browsing this site or by clicking on the "ACCEPT COOKIES" button you accept our Cookie Policy.

Can ECB and Fiscal Spending Make Germany’s Craft Work?

By:

Senior Market Analyst at Interactive Brokers

Europe: The Week Ahead (Sept 16-20)

Updates on German consumer confidence and producer prices are on tap for the week ahead, after the European Central Bank’s (ECB) latest stimulus package helped bolster the country’s financial sector.

The ECB Thursday unleashed a multi-pronged plan to aid in the revival of stubbornly low levels of euro area inflation, while president Mario Draghi called for governments with “fiscal space” to act in an “effective and timely manner” to help combat the “the weakening economic outlook” and “continued prominence of downside risks.”

Among the actions undertaken by the ECB:

  • The interest rate on the deposit facility was cut by 10 basis points to -0.50%;
  • The asset purchase program (APP) was resurrected, starting with €20bn worth of purchases a month at the beginning of November;
  • A two-tier system for reserve remuneration was introduced, in which part of banks’ holdings of excess liquidity will be exempt from the negative deposit facility rate; and
  • A new series of quarterly targeted longer-term refinancing operations (TLTRO III) were rolled-out, with maturities extended to three years from two, and with lower rates under certain conditions.

In response to the news, the German DAX Index rose around 0.4% and remained up around 0.5% ahead of the weekend, with the financials sector (+0.66%) contributing to the gains. ADRs of Deutsche Bank (NYSE: DB), for example, soared close to 2% intraday Friday to US$8.48.

Indeed, it seems the financial markets have recently become more positive towards taking risk, with certain German stocks on the upswing, amid an easing of trade-related tensions between the U.S. and China.

The iShares MSCI Germany ETF (NYSEARCA: EWG), for example, which includes among its top holdings software producer SAP (NYSE: SAP), financial sector firm Allianz (OTCMKTS: AZSEY) and industrial manufacturer Siemens (OTCMKTS: SIEGY), has risen roughly 8.4% since August 14.

The ETF had erased nearly 16.95% of its value from its latest 52-week peak set in late September 2018.

Blue Line Futures president Bill Baruch noted that, overall, the ECB delivered what markets and gold bulls had hoped for, “more stimulus.” He said that this is “what markets were hoping to see and the immediate reaction” had sent stocks and gold higher.

Baruch also observed that after the central bank’s announcement, gold had “quickly spiked” through 1520.4. The current contract was last at around 1512.5, intraday Friday, while the yield on 10-year German bonds was roughly -0.49%.

The EUR/USD pair was last trading at around 1.1067, a drop of a little over 6% since its last 52-week high set September 20, 2018, according to the IBKR Trader Workstation.

However, Marc Chandler, chief market strategist at Bannockburn Global Forex, noted that there was follow-through buying Friday that lifted the euro above 1.1100 for the first time since August 27. He added that the euro “posted an outside up day by trading on both sides of the previous day’s range and closing above the previous session high.”  

Meanwhile, Draghi emphasized that risks to euro area growth “remain tilted to the downside,” and mainly concern ongoing geopolitical uncertainties, the rising threat of protectionism and emerging markets vulnerabilities.

Within this context, euro area GDP was revised lower to 1.1% in 2019, 1.2% in 2020 and 1.4% in 2021, compared to expectations made in June for 1.2%, 1.4% and 1.4%, respectively.

Inflation expectations, as reflected in the Harmonized Index of Consumer Prices (HICP), were also downwardly revised to 1.2% in 2019, 1.0% in 2020 and 1.5% in 2021 from June’s outlook of 1.3%, 1.4% and 1.6%, respectively.

According to Eurostat, euro area annual inflation is expected to be 1.0 % in August 2019, stable compared to the prior month, driven largely by costs of food, alcohol and tobacco, and dragged down by energy prices.

Economic Calendar

Against this backdrop, Germany, Europe’s main growth engine, has been struggling to lift the continent’s dampened spirits.

Fitch Ratings, which recently affirmed Germany’s sovereign credit rating at its topmost triple-‘A’ status, noted that the “soft patch” in the nation’s economy “has proved to be more persistent” than it expected.

Fitch analysts further noted that the underlying trend in Germany’s growth trajectory has remained weak — especially in the manufacturing sector – a reflection, they said, of stubbornly weak external demand.

Sentiment

Meanwhile, the week shifts into gear Tuesday, with the release of Germany’s ZEW Indicator of Economic Sentiment, after attitudes soured further in August – hitting their lowest level since December 2011.

Tuesday, Sept 17

  • ZEW Economic Sentiment Indicator (Sept)
  • ZEW Current Conditions (Sept)

ZEW president Achim Wambach attributed the dour mood to the recent escalation in the trade dispute between the U.S. and China, as well as “the risk of competitive devaluations, and the increased likelihood of a no-deal Brexit,” which have placed additional pressure on “already weak economic growth.”

Wambach added this will “most likely put a further strain on the development of German exports and industrial production.”

Expectations in August plummeted 19.6 points to -44.1, well-below the indicator’s long-term average of 21.6. Also, the assessment of Germany’s economic situation plunged 12.4 points, to a considerably worse level of -13.5.

ZEW further highlighted that the financial market experts’ sentiment concerning the economic development of the eurozone also witnessed “a significant drop,” bringing the indicator in August to -43.6, 23.3 points lower than in the previous month, while the reading on current conditions fell 3.9 points to -14.5 over the same period.

PPI

Investors will also receive an update on Germany’s producer prices ahead of the weekend, after costs for industrial products rose by 1.1% year-over-year in August – their lowest level since December 2016.

Friday, Sept 20

  • Producer Price Index (Aug)

Destatis, Germany’s Federal Statistical Office, noted that electricity prices posed the greatest impact on the growth of the overall index compared to July 2018, with an uptick of 8.4%, while total energy prices rose by 2.1%.

On an annual basis, the cost of natural gas distribution fell by 1.5% and prices of petroleum

products declined by 2.0%. 

The overall index, ex-energy, was 0.7% up on July 2018 and fell by 0.1% compared to June 2019.

Also, prices of non-durable consumer goods increased by 1.7% compared to July 2018, with food costs up 2.2% — notably pork (+18.1%) and processed and preserved potatoes (+15.8%).

The road ahead

Market participants will likely be eyeing Germany’s economic conditions closely for any signs of further benefits from the ECB’s latest stimulus package, as well as any fiscal policy changes.

Investors will also be widely anticipating monetary policy decisions from other central banks in the week ahead – in the wake of the ECB’s decision – including the Federal Reserve’s Federal Open Market Committee (September 17-18); the Swiss National Bank (September 19); and the Norges Bank (September 19).

In the meantime, select the Event Calendar option in the IBKR Trader Workstation for a full list of U.S. and global corporate events and earnings, dividend schedules, economic data, IPOs and more.

Disclosure: Interactive Brokers

The analysis in this material is provided for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IBKR to buy, sell or hold such investments. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

Disclosure: Author Security Holding: No Positions

The author does not hold any positions in the financial instruments referenced in the materials provided.

Disclosure: Forex

There is a substantial risk of loss in foreign exchange trading. The settlement date of foreign exchange trades can vary due to time zone differences and bank holidays. When trading across foreign exchange markets, this may necessitate borrowing funds to settle foreign exchange trades. The interest rate on borrowed funds must be considered when computing the cost of trades across multiple markets.

trading top