German Exports at Risk

Daily Analysis - 07/07/2015

Global Trade Downturn Leaves No Stone Unturned Including German Industrial Production


A cheaper Euro is no match for the deceleration in global trade flows as the exchange rate fails to bolster important German manufacturing metrics. Key benchmarks point to continued weakness in the industrial sector despite the improved competitiveness and pricing benefits.

German Industrial Production Flat Lines

Despite the pervasive weakness in the Euro keeping German exports competitive, industrial production failed to grow in May as concerns about the downturn in global trade continue to spread. Even though Greece has proven a looming risk factor, this is not the first sign that the German manufacturing machine is slowing. Factory orders released yesterday morning showed that orders contracted -0.20% in May after climbing 2.20% in the prior month. Aside from the growing softness in German exports, eyes are still trained on Greece as capital controls and the holiday are extended. Yesterday marked the installation of newly ordained Greek Finance Minister Euclid Tsakalotos following the departure of Yanis Varoufakis. While unlikely to make a substantial difference in creditor negotiations, it marks a new leg of the crisis. Indices were most impacted yesterday as the EURUSD pair filled in the gap lower before resuming the trend lower overnight.


Australia Leave Rates Unchanged

Policymakers from the Reserve Bank of Australia left the benchmark interest rate unchanged in an overnight decision, leaving the key rate at 2.00% while maintaining the accommodative stance. According to the Central Bank, the Australian economy continues to grow, albeit at a moderate pace as spare capacity continues to grow. Below trend growth is forecast to persist while inflation is expected to remain at or near the target over the next 1-2 years. Meanwhile, lending to homeowners and business continues to expand at a stronger pace while the RBA tries to keep the appreciation in real estate prices under control. While the AUDUSD pair has reached comfortable levels for the RBA, they still anticipate and desire further depreciation in the exchange rate to offset the steep declines in commodity prices felt over the last year. The Australian dollar has strengthened versus the US dollar slightly since the announcement.


China Bans Funds from Selling Stocks

In the latest move designed to offset the wave of instability hitting Chinese stocks, policymakers have added tools to combat the sharp volatility that has become a daily phenomenon. After yesterday’s inaugural experiment in stock buying early at the open in the Shanghai Composite, the resulting downside was not what policymakers had anticipated. Fast forward to today’s price action and regulators and the People’s Bank of China were unable to keep stocks bid with the Shanghai Composite currently trading -1.51% lower and the Hong Kong Hang Seng down -0.72%. This comes amid continued deleveraging with margin debt shrinking for 11-straight sessions as policymakers attempt to add more structure to the market to ensure less rapid swings in momentum. So far efforts have fallen short with the technology heavy ChiNext index down over 40% from highs experienced the other month as regulators place a ban on pension funds from selling stocks.


FTSE 100 Descending Triangle Technical Pattern

European equity benchmarks managed to rebound from opening lows before resuming weakness as fears of a protracted conflict with Greece causes financial markets to grow wary of the potential impact. Meanwhile, the UK is gearing up for its own new austerity budget as the new Tory government preaches fiscal discipline to avoid encountering similar problems to those experienced in Greece. The combination of these factors has seen the UK equity benchmark trade near levels last seen in January despite optimism surrounding stronger than estimated growth. The near-term downtrend in conjunction with support at 6448 has created a consolidation in the FTSE 100 index helping to form a descending triangle pattern. The pattern has a bearish bias with any move below support considered a triangle-based breakout trade. Should prices move above the trendline, this could indicate a breakdown in the pattern and potential reversal higher.


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