After shrugging off the threat posed by Italian politics in late May, a new set of challenges have recently confronted investors in the German share market. The most severe is the escalation of global trade tensions which prompted German car making giant Daimler, to last week become the first German car maker to cut its profit outlook. Investors were quick to mark down the share price of Daimler, now trading down -25% from the high of January 2018. (chart below)
In a strange twist, which highlights the global nature of supply chains and the futility of tariffs, Daimler issued a profit warning. Many of the SUVs that Daimler sells into China are assembled in the U.S. State of Alabama! Daimlers SUV’s would be caught up in the retaliatory tariffs announced by China in response to President Donald Trump’s tariffs on Chinese goods.
Rival German car maker BMW also exports vehicles into China from its U.S. base in Southern Carolina. At this stage, BMW’s management is taking a wait and see approach before deciding whether to downgrade its earnings. However, the market appears to have already pre-empted a downgrade with BMW’s share price now trading almost -20% below its high from earlier this year.
Adding to woes for the German index is the prospect of a “German Brexit”. German Chancellor Angela Merkel is under pressure from her conservative allies Christian Social Union (CSU) over the subject of immigration. The Chairman of the CSU has threatened to withdraw his party’s support which would, in turn, threaten Angela Merkel’s ability to stay in power, if a European wide migration policy is not agreed upon with other members of the EU.
Perhaps, unsurprisingly given the factors above, the much-watched German Business Confidence number IFO, released on Monday night, eased further after reaching cycle highs in late 2017. The IFO headline number fell to 101.8 points in June from 102.3 (seasonally adjusted) points in May. To quote the IFO Institute for Economic research who publish the series “The tailwind enjoyed by the German economy is calming down.”
For anyone needing further convincing as to why the DAX has struggled, look no further than the share price of Deutsche Bank AG which sits below €10.00 per share and below the lows it traded at during the Global Financial Crisis in 2008. Highlighting its woes, Deutsche Bank AG was recently added to the U.S. Deposit Insurance Regulator’s list of troubled banks.
Back in late May, in an article titled “Italian Politics and the Dax” https://www.cityindex.com.au/market-analysis/italian-politics-and-the-dax/ we discussed the potential for the 13200 level to become a medium-term top.
A month later the DAX has fallen accordingly and, in the environment, outlined above, appears likely to test trendline support at 12100/12000 (drawn from the February 2016 low of 8690.5). A daily close below 12000, should then open up a test of the 11706 low from March 2018, before the next layer of medium term support 11300 area, which comes from a wave equality projection.
Source Tradingview. The figures stated are as of the 27th of June 2018. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation
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