Germany’s Bumpy Road May Be Getting a Bit Smoother

(Bloomberg) -- After a difficult summer, it’s starting to look as if German equities are getting out of the heat. As recently as August, the country’s stocks were plagued with profit warnings and fears about a recession in Europe’s biggest economy. Now, the DAX trades near a 16-month high and macroeconomic data are showing tentative signs of stabilization.

While the benchmark’s rebound this month has mostly been sparked by receding risks from a no-deal Brexit and the U.S.-China trade tensions, the rally is now getting broader support, with the index up 23% for the year.

Macroeconomic data for Germany this month gave cautious signs of stabilization at the start of the fourth quarter. Previous reports have been so dire that the small improvement has been enough to prompt investors to buy stocks. If the DAX holds its gains into the year-end, it will mark its best annual performance since 2013.

Ifo business expectations in October improved for the first time in seven months after falling to the lowest level since the depths of the global financial crisis a decade ago. “The Ifo survey also showed that the export-driven industrial weakness continues, but a bottoming out could be in the making,” Berenberg analyst Florian Hense wrote in a recent note.

For Bankhaus Metzler analysts, however, “there are many indications that the economic slowdown will continue.” They say investors may be either ignoring the macro warnings or else expecting some stimulus programs.

The earnings season is still young, with less than a quarter of Germany’s biggest companies having reported. So far, the picture is encouraging as results beat already low expectations.

The DAX’s recent sharp gains has sent its relative strength index (RSI) just over the overbought threshold of 70, showing some overheating. More data, earnings releases and updates on trade talks will be the key catalysts for further moves.

While the index struggled to extend its rally on Tuesday, the fact that it was mostly the defensive sectors being sold shows there is no fundamental selling pressure at the moment, Comdirect strategist Andreas Lipkow says. “The index could rally further toward the year end, if we get no distractions from geopolitics,” he says.

Looking at the chart with the index breaking toward the upside, there could be another rally in the making. LCM technical analyst Andy Dodd notes the possibility of the index climbing toward 15,120 points -- a 17% gain from current levels.

--With assistance from Michael Msika.

To contact the reporter on this story: Jan-Patrick Barnert in Frankfurt at jbarnert3@bloomberg.net

To contact the editors responsible for this story: Blaise Robinson at brobinson58@bloomberg.net, Namitha Jagadeesh

©2019 Bloomberg L.P.