The European market (Stoxx-600) closed around 382.10 Monday, inched up almost +0.26% on the boost of merger talks between Deutsche Bank (DE:DBKGn) and Commerzbank (DE:CBKG). European stock markets were broadly in the green, led by miners, energies, and banks. European banks & financials were helped by a jump in German lenders Deutsche Bank (DB) and Commerzbank (CB) after they confirmed over the weekend their lingering merger talks, a process which is far from over. The market is expecting both DB and CB will end with a merger as the German government is backing despite the proposed merger could cost almost 30K jobs and local unions are opposing seriously. The German Government assured that it will examine the issue of any probable job cuts.
As per reports, the German government’s concern about job losses seems to be more than outweighed by its desire to have a reform policy to create a bigger domestic bank. The German government, CB’s largest stakeholder (after rescuing it in 2009 during the GFC), has been pressing the two troubled banks to explore a merger (to consolidate its public/private lenders). A merger would create Europe’s third or fourth largest bank, with a combined market value of around EUR 25B. On Monday, both DB and CB jumped.
In any way, talks of a merger between Deutsche Bank (DB) and Commerzbank was already in the market for the last few months and the overall impact was quite limited, but it triggered some optimism in the financial sector, which jumped almost +1%. Other high potential bank merger candidates such as Italy’s Banco BPM and UBI Banca soared. German insurer Allianz (DE:ALVG) may be also eyeing to merge its wealth management business with DB’s subsidiary DWS, which also zoomed. European payments companies Worldline, Ingenico and Wirecard jumped after a US Fintech group Fidelity National Information agreed to buy Worldpay for about $35B.
Apart from financials, the European market was also helped by miners/basic resource materials after a report that Brazils’ flood affected Vale, the world’s top iron ore miner has cut its production further. But techs were under stress on pressure as European Apple (NASDAQ:AAPL) suppliers (Infineon, AMS, and STMicroelectronics) slips after a US Apple Supplier Synaptic tumbled on guidance warning due to China slowdown. But Apple surged on the launch of a new iPad model. Adidas (DE:ADSGN) also plunged, affecting the consumer discretionary sector.
The German automotive cable and wiring system specialist Leoni plummeted to a near nine-year low on guidance warning after it withdrew its 2019 profit target. Dutch lender ING slid on regulatory problem/headwinds after Italy's central bank identified some shortcomings (deficiencies) in its Anti-Money Laundering (AML) processes at its Italian unit.
Overall, the European market was also undercut by sudden Brexit chaos. There was a report (in the US session) that planned deal talks between the British PM Theresa May and the DUP has broken. And it’s now almost 100% certain that there will be no deal between the DUP and the government this week, and Theresa May will not risk 3rdmeaningless meaningful vote this week.
Meanwhile, the UK Speaker also ruled out the Government bringing back meaningful vote 3 unless the deal has changed. The Speaker said the British Government cannot bring same motion twice as per convention dates back to 1604. This is a big setback for the UK Government and also the EU. Subsequently, GBPUSD as-well-as EURUSD slips, USD recovered and there is a global risk-off sentiment. But later the risk-on sentiment recovered as the UK will evolve some alternative strategy to by-pass such Speaker ruling in the “national interest” for an orderly Brexit.
The risk-on sentiment was already under stress on reports that the planned trade deal summit between the US President Trump and Chinese President Xi may be further pushed back to June, as the two countries will not be able to finalize an agreement by April. Although officials from both nations have been stepping up negotiations on the text of the trade agreement, the report suggested there was a divergence within the Trump admin regarding the deal with China.
But the risk-on sentiment was also boosted on hopes of a dovish Fed amid mixed US economic data and after a new economist’ survey, published Friday, most of the economists have projected only 1-rate hike in 2019 (Q3) against a prior forecast of 2-rate hikes (Q2/Q4-2019). Still, this is far more hawkish than the current market projections (FFR) of no rate hikes in 2019 and an increasing probability of rate cuts (26%) in Q4-2019 or by Q1-2020.
The market will focus on the Fed on the day after tomorrow (Wednesday, 20th March), whether it will be a dovish or hawkish hike. The market will look into the Fed’s official dot-plots (rate action projections), whether there is any modification from the January dot-plots of 2-rate hikes in 2019 and on the overall FOMC statement, Powell presser/Q&A and any definitive planning to close the QT (B/S tapering).
As the Fed is equivalent to the “central bank of the world”, all other global/G3 central banks such as ECB, BOJ follows the Fed’s forward guidance, although not actual actions. Thus a dovish Fed will also help the ECB to talk more dovish and vice-versa. The ECB is already considering another TLTRO-3 with easy terms & conditions for refinancing of fragile Eurozone banks.
On mid-Tuesday, European market (Stoxx-600) is now trading around 384.90, jumped by +0.75%, at new 5-months high as metals/miners are helping along with energies (higher oil). The risk-on sentiment was also boosted by hopes of a dovish Fed. Banks and financials are also helping.
Meanwhile, Britain has been plunged into “crisis,” declared Brexit Secretary Barclay after controversial House of Commons speaker Bercow demanded substantial changes to Theresa May’s deal before considering it for a new vote. The government is now set to seek a long 1-year Brexit extension with the “Meaningful” vote on Wednesday, just a day before the EU summit. As per the report, the EU may convene an extraordinary Brexit summit to consider Britain’s request for an extension of Article-50 on 28th March, just a day before the “Brexit moment of truth”.
Overall, the risk-on sentiment was also boosted by renewed China-US trade deal optimism and SPX-500 (US stock future) also surged by almost +0.40%. There was a report that China has offered the US some “very attractive numbers” for purchases of farm goods as part of “dynamic” trade talks. But there are still concerns over areas such as biotech and details still need to be ironed out. The US is concerned about setting up a framework that would allow agriculture biotech innovations to flow into China in the future without being curbed by non-tariff barriers.
For technical view and trading ideas of EU indices, please refer to our weekly analysis:
Germany 30 France 40 Italy 40 UK 100