DAX: Fiscal Spending as a Fuel for Growth

Trading Tips

One of the key leading indicators for the German economy – investors’ assessment of business climate slumped to a fresh all-time low in April. The Ifo index fell from 92.9 in March to 79.5 in April while the business climate index fell from 85.9 to 74.3 points. Business expectations went below 70 points stressing on the widening gap between stock valuations and harsh reality for firms. All three indicators missed estimates:

The data is bad, but it is surely not the last negative surprise we’ve seen. It will take time for incoming data to outline the economic ordeal caused by the rare twin supply-demand shock. If try to gauge the impact from the past relationship between IFO and respective GDP changes, we can expect GDP to drop at least 5% QoQ in the first quarter of 2020. The magnitude is similar to what we’ve seen in 2009.

These and other weak data may puzzle some investors why the market valuations basically ignore traditional fundamentals. In my opinion the key explanatory variable is now the growth of German government spending which is expected to rise to 30% of GDP. The measures are strong, possibly disproportionate, but quite effective in the early stages of a downturn and do a good job in dampening development of negative expectations. Yesterday morning, the government announced additional support of 10 billion euros, including the expansion of short-term employment measures, unemployment benefits, and a reduction in VAT for restaurants. If before the crisis the government saved more than it spent, now the paradigm has obviously changed, and the government spares no ammo combatting the downturn.

The technical picture on the German blue-chip DAX index is as follows:

The previous two-week range (March 25 – April 6) was replaced by the current one by breaking through the previous resistance zone (10100-10200 points), after which this area converted to a support zone. Further gains are expected on more stimulus measures taken with bullish entry points seen at the current support levels.

Like this article or find it helpful? Help to spread the word about it by sharing this post in your social networks.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 73% and 70% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

Share this post:

Let’s block ads! (Why?)

Tickmill

Leave a Reply

Your email address will not be published. Required fields are marked *