Dax fortunes depend on the East

WITH data for German GDP growth of 2.2 per cent smashing expectations of 0.6 per cent on Friday, traders are wondering whether any of this second quarter growth spurt can be retained – and what it means for equities indices. Despite this good news, the Dax actually fell from over 6,160 to under 6,080 after trading opened, reflecting fears that such momentum will be impossible to maintain in light of shrinking US demand and a slowdown in Asia.

The jump in Germany’s GDP was largely driven by exports and construction – the latter because of a rush on projects that had been delayed in the first quarter by awful weather. Germany’s main trade partners outside the Eurozone were responsible for the rise in exports, however, with the US and China stocking up on manufactured goods, it is questionable how much more heavy machinery and cars they will want going forward.

Equity markets could be buoyed up in the near-term by strong figures from some of the major exporters. Already this has been borne out by earnings releases – BMW stocks rose to over €44 after its earning report showed a huge jump from €151m in pre-tax profit in 2009 to €1.3bn in this year’s second quarter. Traders looking to take advantage of this short-term strength should keep an eye on auto manufacturers going forwards.

But even BMW’s strong profits didn’t exclude it from the Dax’s downwards trend in the last week, as the market reflected widespread anxiety about global demand. Germany’s dependence on exports means that it is highly vulnerable to an Asian or US slowdown. Societe Generale’s James Nixon says: “The Dax is very sensitive to feelings about global growth and goods exports...It will take its cue from what happens in the US.” Nonetheless, Nixon defies the consensus in being optimistic that better-than-expected employment figures in Germany could generate some domestic demand that might take over if exports falter.

Most others remain gloomier. Lombard Street Research’s Michael Taylor says that much of the Dax’s strength in recent times has been on the back of the weak euro that has helped the attractiveness of German goods: “But if the euro is steady against he dollar that is a negative for German equities, as is what we see in Asia. The Dax has over-extended itself.”

With the government’s insistence on fiscal consolidation in 2011 and little wage growth in recent years, it would take a big surprise to spark a domestic consumption-driven comeback in the near-term. This leaves Germany at the mercy of external factors, with a lot dependent on the extent of the Chinese slowdown. If Chinese growth shrinks below 8 per cent, even the likes of BMW and Volkswagen will start to feel the pinch. Which means that traders looking to bet on major German stocks and the Dax need to keep their eye on numbers very far from Berlin.