DE30: German factory orders fail to pour cold water on equities

Summary:

• European stock markets have kicked off the day with gains following as a phone call held between US and Chinese officials
• German factory orders fall short of expectations in July
• DAX struggles with the key technical resistance

Equity markets in Europe have kicked off the day on the front foot in response to improved sentiment following a phone call held between Chinese and US officials on Wednesday. Both sides agreed to meet in the coming weeks to resume face-to-face trade negotiations. This information was also confirmed by the US Treasury Department, however, it did not offer a date when such a meeting might take place (there are some indications that the beginning of October is the most possible time). China's Commerce Ministry confirmed that the trade call with the US had gone very well, but it had no plans to withdraw a WTO lawsuit on a tariffs complaint. On top of this, the ministry added that it hoped that the US would stop putting pressure on Chinese companies. Although these revelations might be reassuring for investors as they may hope the US will ditch its idea to ratchet up tariffs on October 1, caution seems to be warranted this time round too given a lot of rises and falls we saw in the past in terms of risk sentiment.

Technically the DE30 is trying to break through its crucial resistance in the form of the 100SMA, this line is also underpinned by the 23.6% retracement of the latest leg higher. Taking into account that the price managed to move above the important trend line (blue) it appears that today’s session could be critical. Hence, if bulls are able to stay at the current levels, it may bode well for them in the near future, however, a comeback below the above-mentioned levels might foreshadow a return to falls. Source: xStation5

On the one hand, revelations regarding the US-China trade war could be considered as positive. On the other one, we were offered another gloomy release from the German economy which seems to be on track to experience a technical recession this quarter (two back-to-back quarterly GDP contractions). German factory orders sank 2.7% in July compared to June, falling short of the Bloomberg median estimate of a 1.4% monthly decline. The details show that foreign orders dwindled in particular as they saw a 4.2% decline. At the same time, non-Euro area orders were muted on the month suggesting that foreign demand outside the block does not look so bad. This discrepancy was especially seen in the past two months (we mean June and July), as evidenced by the chart below.

German factory orders shrank more than expected in July providing the ECB with another reason to ease policy next week. Source: Macrobond, XTB

What does another gloomy release out of Germany mean for markets? It suggests the European economy stays on a slowing growth track and any tipping point is yet to be seen. In theory, it should be clearly stocks negative, however, we live in weird times, where bad data is good data as it steps up pressure on central banks to make policy yet more accommodative. That could be why equities are cheering this morning in anticipation of a bold decision announced by the ECB next Thursday.

Infineon (IFX.DE) is leading the gains this morning being up more than 5%. This performance has been spurred by a sudden increase in demand for calls expiring on September 20 with a strike of 16.8 EUR (the sport is currently at 16.85 EUR). Source: Bloomberg