DE30: Equities begin lower, Merkel faces migration hurdle

Summary:

• European stock markets kick off the new week a bit lower following trade tensions between the two world’s largest economies
• Bundesbank cuts German economic growth, economists surveyed by Bloomberg do the same
• Angela Merkel’s political future looks uncertain as migration crisis enters a critical phase
• DAX (DE30) falls back toward its closest demand zone after failing to break above 13200 points

Renewed trade tensions between China and the US led to moderate losses across equities on Friday, and Asian indices did not begin a new week in upbeat moods at all. European investors seem to share this quite downbeat spirits as well as major stock markets have opened lower. Let us recall that the US administration imposed levies on $50 billion Chinese goods warning that more tariffs are on the pipeline should China retaliate. As we already know the Chinese authorities decided to do so sparking fresh risks that the US will respond before long creating a kind of spiral. If so, it would fuel inflation globally pushing up borrowing costs and being a substantial drag on economic growth being quite heavily reliant on net exports. Before we move to charts let’s get through the latest news regarding the German economy.

First of all, according to the newest economic forecasts provided by Bundesbank economic growth is likely to be 2% this year instead of 2.5% estimated previously. At the same time inflation projection for the same period of time was revised upwardly to 1.8% from 1.6%. What’s more, economists surveyed by Bloomberg seem to accord with these estimates as the median 2018 GDP growth stands currently at 2.1% (2.3% in the last survey). The median estimate for 2019 GDP was lowered to 1.9% from 2%. These reductions seem to match overall economic slowdown seen across the board, and it’s been already reflected in updated ECB staff economic projections.

The German DE30 is slumping toward a support at 12900 points in early trading after the price refused to break through 13200 points. Source: xStation5

A technical landscape has little changed since the US slapped China with new levies, and the price keeps moving above its crucial support. Let us remind that the tremendous bullish candlestick came after the ECB meeting which saw the euro plummeting receding odds for a deposit rate hike in a 1-year horizon. Right now the base scenario seems to suggest that bulls may take a stab at staying above 12900 points being supported by a 61.8% retracement. Should they manage to do so, another attempt to breach a resistance at 13200 might take place again.

In turn, when it comes to German internal politics one needs to mention about a major political hurdle Angela Merkel faced over the weekend. Namely, she is likely to be handed a two-week deadline to hammer out a deal facilitating migrants to come back to countries in which they were first registered. The idea came out from German interior minister Horst Seehofer, and the demand is to be endorsed at a meeting of the CSU’s executive on Monday. There are some conjectures Merkel could consider firing Seehofer for insubordination, albeit if she does so, it would make a rift with her Bavarian sister party.

Italy has been the most often chosen place by migrants and asylum seekers so far this year making a deal harder to achieve from an Italian standpoint. Source: Bloomberg

Notice that migration is one of the most important issues in Germany, and Merkel is blamed for it. German Chancellor said on Saturday "I see it [migration] as one of the most decisive issues in holding Europe together". She also insured that the run-up to a June 28/29 summit of EU leaders will be used to try to forge an agreement. However, reaching a deal will not be easy as Italy has already signalled that it intends to defy international convention by refusing harbour to refugee vessels. Earlier Italian interior minister Matteo Salvini said the country will not allow two ships allegedly carrying migrants and asylum seekers from Libya to reach its shores.

A majority of stocks being listed on the DE30 is falling today on trade tension, internal risks. Source: Bloomberg

Summing up the Asian session one may spot that the stock market in Japan suffered quite noticeably losing almost 0.8% while stocks in China were not traded today due to Dragon Boat Festival. US SP500 futures are trading clearly below its flat line indicating that Wall Street is likely to open lower. In Europe, declines have extended since the opening, the Italian FTSE MIB (ITA40) is the worst index sliding 0.8%. The French CAC40 (FRA40) and the DE30 are losing 0.7% each, while the EuroStoxx50 (EU50) is falling 0.5% - all results as of 8:58 am BST.