German GDP Outlook Cut
The German Bundesbank admitted to a decelerating economy, and reported real GDP growth would slow in 2013. The admission of weakness in Europe’s key economy lends to concern of the contagious nature of the euro region’s financial and economic crisis. As a result, stocks across the euro region were lower, as the news also weighed on U.S. futures in the early morning. The SPDR S&P 500 (NYSE: SPY), SPDR Dow Jones Industrials (NYSE: DIA) and Powershares QQQ (Nasdaq: QQQ) are pressured by the report, though the day’s jobs report will ultimately dictate direction.
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The German DAX Index was down 0.2% just after 7:00 AM ET, and the EURO STOXX 50 Price Index was off 0.3%. Key German securities like the iShares MSCI Germany Index (NYSE: EWG) were likely to open lower as well. Deutsche Bank (NYSE: DB) shares were trading lower in Germany to start the day, and my expectations are low for a short list of important German shares.
| German Based Stock | Premarket Trading (7:30) |
| Volkswagen AG (OTC: VLKAY) | NA |
| Deutsche Bank (NYSE: DB) | -1.3% |
| SAP AG (NYSE: SAP) | -0.1% |
| Siemens AG (NYSE: SI) | NA |
| BASF (OTC: BASFY) | NA |
| Bayer (OTC: BAYRY) | NA |
The German central bank said that soft euro region economies combined with global economic slowdown are weighing on Germany’s economic production. The Bundesbank reported real GDP would likely slow to a growth pace of 0.4% in 2013, down from its June forecast for 1.6% growth. The bank also reduced its 2012 expectations to 0.7% GDP growth, which was down from its previous estimate for 1.0% growth. The bank colored its gray forecast with a note that: if all should go well with the euro region bank and sovereign debt crisis, then growth could revive to a pace of 1.9% in 2014.
Investors will and should have little faith in hopeful long-term forecasts during a period of declining current estimates, as in my experience, cuts to forecasts in such periods are more likely than the realization of them. The same goes for stocks in periods of declining EPS estimates, based on my personal experience and study as an analyst.
Thus, investors might reconsider early bets on recovery. Ahead of the ECB In early September, I noted European stocks likely marked near-term bottom, and I said they should experience a short-term recovery. If you think that was something, see my June article discussing a super relief rally for Greek and European shares, and look at the charts.
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| Chart by Yahoo Finance |
At this point, I see that recovery tested and would lighten or exit positions even as European central banks discuss adding more support. The shares of relative securities are much higher since our articles authored in September and June. However, if recovery is pushed forward now, then investors could reconsider the securities, especially if estimates and operating results are hampered near-term. Depending on the importance of tax considerations, sales of such securities could begin today or in earnest in January.
| European ETF | Change Since August |
| iShares Europe (NYSE: IEV) | +8.4% |
| iShares Germany (NYSE: EWG) | +12.4% |
| iShares France (NYSE: EWQ) | +10.2% |
| iShares U.K. (NYSE: EWU) | +5.1% |
| iShares Spain (NYSE: EWP) | +11.4% |
| iShares Italy (NYSE: EWI) | +8.7% |
| Global X FTSE Greece (NYSE: GREK) | +32.6% |
I conclude and reiterate that pressure remains on American shares as well, due to the apparent deterioration in the important German economy. However, the U.S. market will be completely dependent today on the data from the Labor Department. The news regarding employment is not expected to be healthy, but pundits have Hurricane Sandy to place the blame upon for now. On net, at this hour, I would take risk off.
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