This is before and after from
Refinitiv. I am your host, Jamie
McDonald.
Today, we explore possible positions
and plays in the German and in the
US markets as we look at the
upcoming German Ifo Business Climate
Index and the US Markit
Manufacturing PMI.
Let's get right into our before
segments.
Produced by the Ifo Institute
of Economic Research in Munich,
the Ifo Business Index is
a closely followed indicator of
economic activity in Germany.
Over the last two years this
indicator has plummeted from a 20
year high to a 10 year low,
last seen during the euro crisis
of 2012.
Long viewed as continental Europe's
key economy, Germany has been
reeling in the face of the global
manufacturing slowdown and decline
in auto sales.
With their economic fortunes tied
directly to global trade and
with particular exposure to China's
growth, we've already seen many
key German economic metrics
collapse.
The PMI, which we've highlighted in
previous episodes, is treading
in recessionary territory.
Even having bounced off their summer
lows of minus seventy four basis
points, German bund yields remain
deeply entrenched in negative
territory.
Stocks in Germany, however, have
been pricing a reflation trade,
outperforming other key indices
like the S&P and the FTSE 100.
But with the DAX's scorching
second half performance in 2019.
An uptick in the Ifo business
expectations number is needed
to keep this momentum and show that
the global manufacturing slump
is beginning to turn.
Our Refinitiv chart shows us that
the DAX had been tracking Ifo
business expectations until late
2019, when the index
suddenly raced to the upside while
expectations continued to plummet.
Equity investors may have gotten
ahead of themselves or maybe they
are pricing for an imminent bounce
in the data.
Consider that an in-line reading
will not move the needle because
global equity markets are still
in end of the year rally mode.
Fear of missing out will continue to
climb as the year grows short.
A big miss and DAX investors maybe
have a moment of clarity and profit
taking begins.
But if all the other global
markets are still in their own risk
on mode, profit taking on a
poor figure will not last long.
If investors are holding their
breath awaiting the German business
climate numbers, they will not be
getting any relief waiting on the US
manufacturing numbers.
We spend a significant amount of
time looking at manufacturing data
from across the globe because it's
the canary in the coal mine in every
place that recession has taken hold
and the US Markit manufacturing PMI
is upcoming and worthy of investor
focus.
Unlike the more closely followed
manufacturing ISM, the
US Markit manufacturing, while
having weakened, has held above the
expansion contraction line of 50,
recently bouncing off a low of
50.3.
Investor fixation on manufacturing
is justified because of the global
slowdown across data points.
It has even sparked a debate about
which of the ISM and PMI
is more valid.
This data point will really matter
if it confirms the ISM's drop
below 50.
Despite last month's firm
51.5 reading, the indicator is
still flirting with danger and only
implying 1.5% GDP
growth at this level.
To reiterate, 50 is
the magic number with PMI.
Above 50 and the economy is
expanding below 50...
not so good.
400 key private sector companies
are surveyed on changes in business
volumes such as output.
There are no sentiment based
questions or backward revisions.
The number is the number.
Last month's report of
51.5 put in a bottom on the US
two year yield.
That announcement on November the
1st saw a pop of 7 basis
points, which is a significant move
for the two year.
The scenarios look like this
a miss below 50 and most
likely the entire month's yield
rise evaporates in an instant
and challenges the
1.5% level on the two year.
A strong in-line number or higher
would be well-received by a market
concerned with damage to the real
economy that trade tensions have
set in motion.
Reuters and other estimates are
calling for a 51.4
to a 51.5 and
this should see two year yields back
above 1.6% building
off the near-term rise.
Future Fed actions are in the
balance. So expect the bond market
to react the most on this number as
they try to guess the Fed's next
move.
A decent setup going into this
number would be to go long the US
banking sector via the XLF
ETF.
A miss would kill yields, especially
short duration, potentially only
steepening the yield curve, very
bullish for banks and should have a
limited effect on the stock market
as a whole.
While a strong number would be
bullish for the broader market and
those passive flows should mitigate
any sector negativity.
In Tuesdays before segments we
outlined the difficulties that
ThyssenKrupp was facing.
The company had been underperforming
the German DAX year to date.
Even after the H2 rally, the stock
is still 50 percent below its five
year highs and its results won't do
much to change that outlook.
It is going to be a bumpy ride for
CEO Martina Mertz, who only
took the helm in October.
The third CEO in the last two years,
Mertz, announced that the company
would suspend its dividend payment
from next year and the share price
promptly plummeted over 10 percent
in the first few minutes of trading.
Well, they are going to need to hold
onto all the capital they can
because Ms. Mertz also announced
that the fiscal year losses to the
end of September had widened
to 304 million euros
from 62 million euros the year
before. These losses are only
expected to worsen as the company
will have to soak up yet another
round of restructuring costs.
Remember, they are already planning
to sell off one of their crown
jewels, the 16 billion a year
elevator business, one of their few
profitable arms in order to cover
cash losses and their pension
deficit.
And the outlook is not good.
Next year's free cash flow will
probably drop below this year's
already abysmal levels.
We should expect this stock to
underperform the broader DAX index.
It may feel like we've missed a
decent chunk of underperformance
with the initial drop, but there's
plenty more juice in this one given
that the shares are still 30 percent
above the 2019 lows.
There have been nascent signs of a
rebound within the broader German
manufacturing base, hence the focus
on the German Ifo earlier in the
show. But this is a company that
may not be able to benefit until
a full restructuring or breakup
has been completed.
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