Economy Begins To Bounce Back

Eurozone recovery hopes continue to blossom this week. Following last week’s release of better than expected flash manufacturing data for the both the Eurozone and Germany, the German Ifo index released this morning also came in above expectations.

The reading, which is the country’s primary leading indicator saw a firm pickup over the last month rising to 79.5 from the 74.3 in April. However, while the pickup is encouraging, as with manufacturing data, the index remains at subdued levels and further endorses the shift in view we have seen among central banks over the last month; that the recovery will be more gradual and less of a “V” shaped one.

The pickup in the Ifo index was fuelled predominantly by the strong rally in the expectations component, reflecting much better optimism in the outlook. However, the data was not all positive and the current assessment component was actually seen lower, holding just above the lows recorded during the global financial crisis.

Indeed, despite the slightly better tone to recent data sets, reflecting the gradual increase in activity as social and economic restrictions ease, there are still grave problems, such as the heavily reduced level of capacity utilisation within industry which has now fallen to its lowest level since the GFC. So while the data continues to suggest that the worst of the crisis is behind Germany and the Eurozone, the real question is how long it will take the economy to recover properly. Much of this will depend on the level of consumer demand as services as re-open, as well as on the path of the pandemic and whether a second wave of the virus is seen.

ECB To Ease Further in June?

The ECB meeting minutes releases last week show that the central bank is fully prepared to ease further. On particularly noteworthy is the discussion seen around risk to the stability of the eurozone from the crisis. The minutes said:  “undue risks of fragmentation could re-emerge with a further worsening of the economic outlook. It was underlined that past experience showed that a loss of confidence in financial markets had to be avoided and pre-emptive action was preferable.”

In consideration of this, it seems likely that the ECB will look to take further measures in June, to enhance the recovery over the summer, rather than to simply be encouraged by these first signs of recovery and wait until September. In terms of action, however, it seems most likely to be a case of the bank adding to its PEPP program rather any adjustment of rates which already sit firmly in negative territory.

Technical Views

DAX (Bullish above 1128.5)

From a technical viewpoint. The recovery in the DAX is now at a crucial point with price testing an area of strong, confluent resistance at 1128.5 (current recovery highs, yearly S1, VWAP 11289.5). if price can sustain above here the top of the channel and structural highs at 11861.85 will be the next objective or bulls.

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