Should markets fear a global recession?

The German manufacturing PMI sunk below 45 points in March for just the 5^th time in nearly 20 years of history for the indicator. In this analysis, we take a look at what it meant for DE30 in the past and how this could affect the German benchmark in the present context. 

Summary:

German manufacturing PMI sunk in March
New export orders suffer, signaling that the problem has global roots
DE30 tanked on Friday; what’s next?

Why did markets panic last Friday?

A surge in risk aversion on Friday was a clear signal that investors have been scarred by the report from Germany that saw the PMI drop to just 44.7 points. In the PMI index any reading below 50 means that a business contracts. Although the larger services sector had a still very robust reading of 54.9 points, markets panicked. This happened because the industry is still seen as a heartbeat of the global economy and the fact that export orders declined again suggested that roots of this deterioration are global in nature.

German manufacturing PMI dipped below 45 points just for the 5th time since 2000. Source: Macrobond, XTB Research

What happened in the past?

For investors, the key question is: is this bad report a sign of more troubles to come or should we look at it as an opportunity? We decided to check the data history spanning back to the beginning of 2000. We've had only four situations during this period when the manufacturing PMI dipped below 50 points. In the three subsequent months after the report, the DE30 performed: -8% in 2001, +19.3% in 2003, -23.6% in 2008 and +19% in 2012. Confusing? The only common denominator is that there was always a big move, but are these swings really random? Do notice that the first two situations were part of the same global slowdown. Investors first realized it was coming in 2001 and in 2003, and although the economy was still weak, a recovery was on the way. Situations 3 and 4 are a bit tougher to link but there’s some common ground as well. 2008 was a deep slowdown which culminated with the Lehman Brothers collapse and the global economy choked again in 2011 after a brisk recovery, a slowdown that extended in 2012 (especially in Europe where it was magnified by the euro crisis). We can conclude that the first sign of economic trouble was a negative sign as markets were unprepared and the second dip was actually a good omen as bad news were already priced in.

What now?

These are only few observations so any conclusions should be treated with caution. There is still a lot of discussion regarding the extent to which the slowdown has been driven by temporary factors. One thing looks clear to us: a lack of improvement soon could spell troubles for the markets. For now the DE30 reversed sharply lower from the key resistance zone at 11775 points and sees the key support at 10800.

DE30 has reversed from the key resistance. Source: XTB Research