Investors will be watching incoming economic data out of Germany in the week ahead, as global headwinds have generally slowed the gears of Europe’s growth engine.

Germany has been caught up in a maelstrom of geopolitical uncertainties, including ongoing and escalating trade-related risks between the U.S. and China.

In the latest skirmish, China had retaliated Monday against U.S. President Donald Trump’s recent threat to impose 10% tariffs on US$300bn worth of Chinese imports by lowering the value of its currency versus the U.S. dollar (below CNY7.00) and ceasing purchases of U.S. agricultural products.

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Marc Chandler, the chief market strategist at Bannockburn Global Forex, noted that the “prospects of a full-blown currency and trade war” are seeing yields tumble. He also observed China’s actions send “ripple effects through the global equities, which were already on the defensive at the end of last week.”

Meanwhile, the intensifying conflict between the world’s two largest economies has cast a large shadow over the capital markets – driving risk aversion higher and spurring the yield on the 10-year German Bund to a new low of around -0.535%. Also, the Swiss, German, and Dutch 30-year bond yields are all below zero.

In fact, Germany’s entire yield curve has turned negative, with recent quotes ranging from -0.823% on the 2-year to -0.0.34% on the 30-year bond. 

The yield on the 10-year U.S. Treasury note was last bid at about 1.74% — a 30bp-wide inversion from the 3-month bill, which is at roughly 2.04%. 

Chandler added that the dollar sold off “not just because of the aggressive easing the market now judges will be necessary, but many fear that the next step in the escalation ladder could be U.S. intervention.”

U.S. Secretary of the Treasury Steven Mnuchin has already determined and labeled China as a “Currency Manipulator.” The U.S. Department of the Treasury noted that Mnuchin will engage with the International Monetary Fund (IMF) “to eliminate the unfair competitive advantage created by China’s latest actions.”  

Economic Calendar

Against this backdrop, investors will be paying close attention to Germany’s incoming data for further insights into the country’s economic health and stability.

Among the releases, market participants can expect to receive updates on German consumer prices, ZEW economic sentiment, as well as the rate of gross domestic product (GDP) growth for the second quarter of 2019.

Consumer Prices Inch Up

The week gets underway Tuesday with a final reading on Germany’s consumer price index (CPI) for July after an earlier gauge showed a 1.7% year-on-year increase.

The Federal Statistical Office (Destatis) also noted that consumer prices are expected to rise by 0.5% from the prior month, while the harmonized index – which is calculated for European purposes – is likely to notch up by 1.1% year-on-year and by 0.4% over June 2019.

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Consumer prices had risen 1.6% over the prior year in June 2019, mainly due to a resurgence in package holiday prices (+6.1%). Destatis attributed the effect largely to the Whitsun holiday, which fell on a later calendar date compared to 2018.

Tuesday, August 13

• Consumer Price Index (July – Final)
• ZEW Economic Sentiment Index (Aug)

Sour Sentiment

Meanwhile, a host of global uncertainties, including the ongoing and escalating trade conflicts between the U.S. and China, Brexit, as well as rising tensions in the Middle East appears to have dented confidence in Germany’s economy.

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According to ZEW president Achim Wambach, a “lasting containment of the factors that are causing uncertainty in the export-oriented sectors of the German economy is currently not in sight. The Iran conflict seems to be intensifying and the ongoing trade dispute between the USA and China is a burden not only to Chinese economic development. Furthermore, no discernible progress has been made in the negotiations as to what Brexit will look like.”

Wambach added that the continued negative trend in incoming orders in the German industry, in particular, “is likely to have reinforced the financial market experts’ pessimistic sentiment.”

Indeed, it seems the financial markets have recently become quite risk-averse, with certain German stocks on the downswing, amid heightened trade-related fears and currency war maneuvers between the U.S. and China.

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The iShares MSCI Germany ETF (NYSEARCA: EWG), for example, which includes among its top holdings software producer SAP (NYSE: SAP), financial sector firm Allianz (OTCMKTS: AZSEY) and industrial manufacturer Siemens (OTCMKTS: SIEGY), has fallen roughly 8.4% since July 3.

The ETF has erased nearly 16.15% of its value from its latest 52-week peak set in late August 2018.

The downbeat sentiment had been mirrored in July’s ZEW Indicator of Economic Sentiment for Germany, which hit a level of -24.5, a drop of 3.4 points compared to the previous month, and well-below the indicator’s long-term average of 21.8. 

In the same month, the assessment of the economic situation in Germany worsened by 8.9 points to -1.1.

GDP: Stubborn Soft Patch

By mid-week, investors will receive an update on the pace of Germany’s GDP growth after domestic demand helped lift the rate to 0.4% in Q1 2019 from stagnation in Q4 2018 and decline (-0.2%) in Q3 2018.

Wednesday, August 14

• GDP (Q2)

Among other positive contributions to Q1 2019’s pace, Destatis observed that gross fixed capital formation in machinery and equipment rose by 1.2% from the prior quarter, gross fixed capital formation in construction was up by as much as 1.9%, and household final consumption expenditure rose by 1.2 – strength not seen since 2011.

German GDP also rose 0.6% in Q1 2019 over the same year-ago quarter on a price-adjusted basis and was up 0.7% over the same period on a price and calendar-adjusted basis.

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Fitch Ratings, which affirmed Germany’s sovereign credit rating at its pristine ‘AAA’ status, recently noted that the “soft patch” in the nation’s economy “has proved to be more persistent than we expected.”

Fitch had cut its 2019 GDP growth outlook to 0.9%, with expectations for 2020 and 2021 to come in at 1.4%, broadly in line with its assessment of medium-term growth potential.

Fitch analysts Gergely Kiss and Douglas Winslow noted that the “relatively strong growth” of 0.4% quarter-over-quarter in Q1 2019 was “boosted by one-off factors, but the underlying trend has remained weak, in particular in the manufacturing sector, reflecting persistent weakness in external demand.”

The contribution of net exports to GDP growth was -0.4pp in 2018, and while Kiss and Winslow anticipate this component to remain negative over their outlook horizon, more positive factors remain in place such as “sound” domestic fundamentals – underpinned by “a record low unemployment rate and resilient service and construction sectors.”

Fitch added that general “eurozone weakness and an escalation of trade tensions, including the risk of a no-deal Brexit, represent key downside risks” to its outlook.

Investors will likely be watching global trade-related developments unfold, along with any further dovish shifts in global central bank policies, incoming economic data, and news of geopolitical risks, for further insights into Germany’s economic health and financial well-being.

In the meantime, select the Event Calendar option in the IBKR Trader Workstation for a full list of the U.S. and global corporate events and earnings, dividend schedules, economic data, IPOs and more.