DE30: German utilities push higher after earnings

Summary:

• German may recommend no cuts to Greek pensions

• DAX (DE30 on xStation5) fails to paint higher high

• Merck (MRK.DE) underperforms after cutting profit forecast

Following declines on Wall Street and in Asia the major European stock indices opened lower today. The biggest declines were seen on the Italian and Belgian stock exchanges in the first minutes of trade while benchmarks from Poland and Russia opened with the smallest downward price gaps. Travel companies and car makers were the only sector groups from the Euro Stoxx 600 to open higher today. Miners and refiners took the biggest step back at the beginning of today’s trading.

Bulls’ dreams seem to distance away as DE30 (DAX futures underlying) failed to paint a higher high. The index may be now on its way to break below previous low around 11050 pts to maintain the downtrend structure. If such scenario materializes investors may want to stay on guard when prices reaches the vicinity of the 78.6% Fibo level (10800 pts area) where the price zone marking the upper bound of the consolidation from second half of 2016 can be found. Source: xStation5

A pleasing report for the European and global auto industry was published by Bloomberg. The news agency reported that the US is mulling whether to move on with the car import duties or not. Namely, the US is said to stay on hold with tariffs for now as some top officials are reviewing national security issues that were foundation for the planned tariffs. Wilbur Ross, the US Secretary of Commerce, has time until February to present his findings on the matter to the US President Donald Trump. Once he has done that, Trump will have 90 days to decide whether to move on and levy tariffs or resign from the idea. While the idea behind tariffs was to boost domestic car industry it should be noted that the US car makers have supply chains spread throughout the World and levying duties would distort this chains significantly. Having said that, not only foreign but also the US cars will be more expensive ultimately harming the customer the most.

While the European Union is having a tough time with Italy, another troubled country looks to recover properly. Namely, the Greek government proposed 2 versions of the 2019 budget draft to the European Commision - with and without pension cuts. As in both versions the country forecasts a significant budget surplus the German authorities announced they will recommend not cutting the pension payouts if only the Commission confirms estimates included in the draft proposal. Such an outcome (avoiding pension cuts) would be more than desired for the Greek ruling party Syriza as it would provide it with a major boost ahead of the next year’s general elections. Let us note that Syriza, party of the PM Tsipras, is losing in polls to New Democracy, the biggest opposition party.

Major European indices after the first hour of trade:

• DAX (DE30): -1.36%

• FTSE 100 (UK100): -1.04%

• CAC 40 (FRA40): -1.44%

• IBEX (SPA35): -1.16%

• FTSE MIB (ITA40): -1.89%

Wirecard (WDI.DE) slumps despite upbeat earnings report and increased profit forecast. Source: Bloomberg

Company News

Deutsche Lufthansa (LHA.DE) is the best performing DAX stock on Wednesday morning. The company was upgraded from “reduce” to “hold” at Kepler Cheuvreux. The 12-month price target was set at €19.30, 5.4% below Tuesday’s close.

Merck KGaA (MRK.DE) is one of the worst performing German blue chips this morning. The company trimmed its profit estimate for the year. Merck now sees the 2018 EBITDA at €3.7 billion. The main reason behind reduced forecast are depreciating South American currencies. The company sells its medicines and chemicals to pharmaceutical companies in the region and therefore faces significant FX risk.

EO.N (EOAN.DE) and RWE (RWE.DE), the two major German utility companies, can be found among DAX leaders today. However, the reason behind this is not industry-specific but company-specific. Namely, both companies published their earnings reports today. In both cases investors were offered a decent beat in revenue metrics. E.ON also managed to beat EPS estimate of €0.03 by showing earnings of €0.072. RWE experienced a loss of €0.062 per share.

Another company that reported earnings today is Wirecard (WDI.DE). The company’s earnings met market expectations with small beats offered in most profit metrics. Additionally, Wirecard raised its full-year profit forecast citing strong growth in digital payments as a reason. Nevertheless, investors rushed to sell shares of the company today and in turn we are observing a sharp decline in share price.

After rallying from €93.07 to €198.80 during the first eight months of the year Wirecard (WDI.DE) share price began to underperform. With today’s steep decline the stock broke below its latest relevant support level marked by the 78.6% Fibo level of the upward impulse started at the end of June. 200-session moving average (purple line) may be the next support to watch. Source: xStation5