Germany's Slumping DAX Needs More Than a Deutsche Bank Rebound

What's the Heart of the Problem in European Banks?
  • Traders turn bearish on market that was among 2015's favorites
  • DAX now trades at its lowest level since October 2014

A one-day rebound in German shares is doing little to extinguish concerns in what has become one of the world’s worst-performing stock markets.

The DAX Index has tumbled 16 percent this year through Wednesday, posting a loss that exceeds declines in France, the U.K. and Switzerland by as much as seven percentage points. It plunged another 2.9 percent on Thursday. Investors are taking money out of an exchange-traded fund tracking German shares at the fastest pace since August.

Fears about Deutsche Bank AG’s creditworthiness this week added to growing worries over a slowing global economy. Because of Germany’s close ties to China, its biggest trade partner outside of Europe, the nation stands to lose more than others in the region. Carmakers such as BMW AG, Volkswagen AG and Daimler AG have already tumbled more than 23 percent this year on weakening demand there.

“Oil and China are still on fire and a cause for concern, but we’ve got other, more broad-based fires to be watching now, and Deutsche Bank is just one of them,” said Alex Neil, EFG Bank’s head of equity and derivatives trading in Geneva. “Whichever way you look at the global economy in the next few months, there are more attractive markets than Germany.”

While only about a dozen out of 93 equity gauges tracked by Bloomberg have risen this year, Germany stands out for the extent of its losses. After being some of investor’s favorites in 2015, none of the 30 DAX shares rose this year. The gauge closed 27 percent below its April peak on Wednesday.

Deutsche Bank declined as much as 41 percent after concern grew that it would struggle to meet debt obligations. Even after its biggest surge since 2011 on Wednesday, the stock remains the worst performer in the DAX this year.

Also creating pressure is the euro, which fueled last year’s rally to a record and which investors counted on for more gains in 2016. It has rebounded, making exporters less attractive. And even as the nation’s economy is forecast to expand 1.8 percent this year -- more than the euro area -- slowing factory orders and industrial production are adding to skepticism over the efficacy of the European Central Bank’s stimulus program.

The result: investors have been withdrawing money from the biggest funds tracking German shares this month, including $360 million from the iShares MSCI Germany ETF, now set for its biggest outflows since August.

The selloff is making DAX companies more attractive, according to UniCredit Bank AG’s Christian Stocker. The German index trades at 11.2 times estimated profits, almost 20 percent lower than the Stoxx Europe 600 Index.

“We are at levels where strategic investors have a good opportunity,” said Stocker, a strategist at UniCredit in Munich. “Markets are really nervous, and bad news from the banking sector is based more on negative sentiment than on negative facts. The economy is just not as bad as people currently fear. The German market is still one of the best markets in Europe.”

Still, long-term investors have lost trust in the market, according to Valerie Gastaldy, a technical strategist and partner at Day by Day SAS in Paris. She points to the fact that the DAX has fallen below its 200-day moving average on a weekly basis.

“The 200-day moving average is the average price paid by long-term investors -- they handle a lot of money and don’t trade in and out at once,” said Gastaldy. “Breaking the level adds bearish pressure. We’re having a short-term rebound that may last a few days, but we have medium-term sell signals everywhere in Europe. It’s not looking very good.”

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