Bear trap and Elliott waves speak for rising prices

The stock exchanges recently had to digest various negative news. Let’s take a look at China first. Since 1990, the government there has given a target for gross domestic product (GDP) growth every year. But the chaos caused by the corona virus seems so great that for the first time in decades, the government has not issued a growth target for the economy.

The stock exchanges interpreted this very negatively. Share prices fell significantly, as did oil prices. For example, US oil temporarily fell by almost 10% yesterday. For Brent North Sea oil, it was more than 7%. The possible consideration of investors: Of course, without a growth target, the government is not obliged to take measures to drive growth to its destination. For example, government investment could be significantly lower, as could growth, which means less raw material hunger – oil prices are falling.

China’s government announces high government spending

However, Prime Minister Li Keqiang promised high government spending at the opening of the annual People’s Congress to get the economy back on its feet. As a result, the government expects the government deficit to rise to 3.6% of GDP in 2020 from 2.8% last year. The measures listed in Li’s report add up to around 4.1% of GDP, according to Reuters calculations. According to analysts’ estimates, the total is more than half a trillion euros.

Actually, this could have appeased investors. But they may still expect a significantly slower pace of growth, which of course would also affect the entire global economy given the size of the Chinese economy. – Therefore shares also gave way.

Increasing tensions between the United States and China

Perhaps, however, it is also the increasing tensions between the USA and China that are causing the trade war to flare up again. China is planning a new security law for Hong Kong. US President Donald Trump criticized this and announced a “very strong“Responding to every move that leads to greater control by the Chinese government over the former British Crown Colony. China reacted immediately. The country is ready for dialogue with the government in Washington, but will fight back if the US tries to suppress China. Against this backdrop, it is hardly surprising that Hong Kong stocks in particular fell. The Hang Seng fell by up to 5.7%.

The day before yesterday we had already written to our readers in the “Premium Trader” that Donald Trump China on Wednesday via “massive disinformation campaign“Accused of reducing his chances of reelection,”so that they can continue to withdraw the United States“. The Beijing government has since criticized US plans to sell arms to Taiwan. China regards the democratically governed island of Taiwan as part of the People’s Republic.

The United States and China have several topics on which the tones are currently becoming rougher. And so the countries could rock each other, which could lead to a further escalation of the (trade) conflict.

US economy is shrinking more slowly

Let us now take a concrete look towards the USA. The day before yesterday, IHS Markt’s purchasing manager data for May was released. The index for the entire US economy recovered from the April low of 27.0 to 36.4 points.

IHS Markit United States Procurement Manager Index

At first glance, this significant increase looks as if the country’s economy is recovering. But you have to keep in mind that values ​​below 50 mean a shrinking economy. And the current status marks the second sharpest decline in business activity since data collection began in late 2009. The weakness of the US economy is still significant. “We assume that GDP will fall at an annual rate of around 37% in the second quarter and it will take two years before the pre-crisis level is reached again“Says IHS Markit.

CBO: US GDP still not at pre-crisis level in 2021

The Congress’ bipartisan budget office (CBO) had already spoken up earlier. It joins the ranks of institutions that believe that the US economy will not have fully recovered from the Corona crisis in the coming year. The CBO expects a year-over-year GDP slump of 37.7% in the current second quarter of 2020, which is close to the expectations of IHS Markit, followed by an increase of 21.5% from July to September. Although a strong increase can be expected in the third quarter of this year, GDP will not reach the level of early 2020 in 2021 either, according to the CBO.

One reason for this may also be that the situation on the US labor market will remain significantly tense for months to come. The president of the central bank of Boston, Eric Rosengren, is now predicting this. “Unfortunately, I expect the unemployment rate to remain in double digits even at the end of the year“Said the currency keeper, who thereby confirms statements by his boss Jerome Powell.

Eurozone and German economy similar to the US economy

It won’t look much better in the eurozone, so I would now like to focus on domestic data. Here, IHS Markit’s purchasing manager data signal that GDP will decrease by around 10% in the current second quarter of 2020 compared to the previous quarter and thus to an unprecedented extent. However, the rise in the leading indicator also encourages hope, similar to the US counterpart, that the downward slide in the economy will slow down significantly in parallel with the relaxation of the restrictions. The index for the entire euro zone economy (industry and services) rose to 30.5 points in May, from the record low of the previous month at 13.6 points. But for comparison: During the global financial crisis, the index dropped to 36.2 points in February 2009.

IHS Markit Total Purchasing Managers' Index, Eurozone

Economic output is expected to drop by almost 9% in 2020 as a whole. And here too, the full return to the pre-crisis level will take several years, at least if it is up to the Markit chief economist.

The purchasing manager index for industry and service providers in the German economy rose from the historical low reached in April from 17.4 to now 31.4 points.

IHS Markit Total Purchasing Managers' Index Germany

Just like the US index, however, this is the second lowest value since the start of data collection (1998). And just like in the USA, the recovery will continue on the European continent, for which the labor market is an indicator. The local companies reported again in May that there were no new orders and a weakening export business. For this reason, jobs were cut for the third month in a row. And jobs will only be cut if it is expected that demand will remain below the “normal” level for a while, that production will be correspondingly lower and therefore fewer staff will be required. IHS Markit can be heard that the companies “worrisome jobs” dismantle. So these are not rosy prospects, but they have apparently ruled the stock market so far.

Profit expectations for European companies are catastrophic

Especially since analysts are not only very pessimistic about the earnings prospects in the USA (see, among others, Börse-Intern from Tuesday). According to figures from the data provider Refinitiv, the experts expect earnings in the companies listed in the European Stoxx600 index to drop by an average of 48.4% in the second quarter of 2020. The decline is expected to be 35.3% in the third quarter. At the beginning of 2021 at the earliest, rising surpluses are expected. The figures are even worse than those for the companies from the S&P 500.

Resets on the stock market are far from being bearish

In light of this news and the recent setbacks on the stock markets, one could now assume that we are seeing a change in sentiment among investors that would be completely understandable to me. But you should be very careful with short positions. The DAX broke yesterday from the consolidation of the previous days (see yellow rectangle in the following chart), but it was able to quickly turn up again, so that a bear trap remained (green arc).

DAX - short-term chart analysis

And such erroneous outbreaks usually result in price movements in the opposite direction. In this case, the DAX could continue to rise and soon overcome the trend high of 11,235.57 points at the end of April.

The Elliott wave scenario in the DAX speaks for strongly rising prices

The index is still fighting for cross resistance at the rectangular border at 11,170 points (see red arrow in the following chart), but the bear trap also suggests that after wave 1 we have now seen wave 2 of a new 5-link upward cycle and Wave 3 can push the DAX up significantly.

DAX - target trend analysis

You only have to doubt this scenario if the leading German index falls below yesterday’s low.

I wish you much success with your investment
Sven Weisenhaus


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