Market alert: Is stock market optimism justified?

The German DE30 market soared by 18% since December lows following even more impressive gains on US indices. This happened in spite of manufacturing PMI slumping below 45 points only the 5th time in the past 20 years. Is the market optimism justified? Will the report for April show an improvement?

Summary:

  • A much awaited PMI manufacturing report is to be released on Thursday (8:30am BST)
  • Investors hope to see better data
  • A big yawn between industry data and DE30 levels


Who is right – data or the markets?

One month ago markets were scarred with a release of the German flash manufacturing PMI that fell below 45 points – a level that could suggest a recession. The index fell and new orders, especially new export orders dried out, leading to questions about a global slowdown. However, markets have moved past this news very quickly and gained steeply to levels not seen in more than 6 months.

There is a big gap between markets and manufacturing data from Germany. Source: Macrobond, XTB Research

The key question is: “who is right – markets or the PMI data”? To be sure other data from the German economy has been alarming as well but the PMI is a leading indicator and should be the first to set a direction. The ZEW report for April did not help solve the problem. The sentiment index rose to 3.1 points – more than expected and to the highest level in a year. At the same time, the current conditions index plummeted to 5.5 points – the lowest level since November 2014 and the 7th straight decline. This shows the current market dilemma: the rally has been built on hopes. Hope that Sino-US trade talks reduce tensions, hopes that dovish Fed will prevent US slowdown, hopes that China stimulus help growth recover. This has created a big gap between equity indices and current economic data and it is especially clear in Germany. It seems to be obvious that data – including the key manufacturing PMI  - needs to recover quickly (and substantially) if the bull market is to be justified.   

DE30 technical situation

DE30 has been literally soaring since the December low of 10267 points and a dreadful PMI last month caused only a short-lived correction. The index is encompassed by a steep upwards channel and emboldened by a reverse head-and-shoulders formation that sets a resistance level at 12358 points. The key support is at 10775 points – a level that served as a resistance before.

DE30 remains in a steep upwards channel. Source: xStation5

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