Exuberance and fear
Comment of the Day

November 19 2013

Commentary by Eoin Treacy

Exuberance and fear

This report from Deutsche Bank focusing on economic statistics for Germany may be of interest to subscribers. The full report is posted in the Subscriber's Area but here is a section

Recently, the labour market has been marked by rising unemployment alongside a sustained increase in overall employment. The surprisingly strong increase in unemployment in September was reported by some newspapers as a "stalling German jobs miracle". However, the rise in unemployment was due to a one-off effect. Additionally, in our opinion, employment is the more meaningful indicator in this case since it reflects the direct demand for labour. The labour market upswing is therefore still intact. Leading indicators suggest that the increase in employment is likely to accelerate again towards year-end. We expect the number of persons in employment to rise by 230,000 to a record high of 42.3 million in 2014. The labour market has also improved in structural terms. The scale of atypical employment has decreased, and the reduction in full-time jobs subject to social security contributions has come to a standstill. Moreover, the numbers of fixed-term jobs and of low-paid jobs as primary occupation are also falling. The number of temporary (work) agency employees has been climbing since January but is still shy of its pre-year level.

Eoin Treacy's view

As Europe's largest economy by a considerable margin, how well Germany does has a knock-on effect for the EU more generally not least in terms of ECB policy. It is reasonable to argue that no country has benefitted more from the comparatively weak Euro, following the credit crisis, not least because it had not experienced wage inflation before the crash and so did not need to institute crushing reforms. This has been of benefit to Germany's large export sector; with the country due to export more than the USA this year.

Rising employment and the possible introduction of a countrywide minimum wage as well as rising home prices suggest that the while the Eurozone periphery is still combating deflation, inflation is potentially a medium-term concern in Germany.

The DAX Index encountered resistance in the region of 8000 in 2000 and again in 2007 but has held a progression of higher major reaction lows since 2011 and broke successfully above that level in May. It has now rallied for seven consecutive weeks as it continues to extend the breakout from what had been a generational long range. A break in the short-term progression of higher reaction lows is likely to suggest a process of mean reversion is unfolding which could be potentially lengthy. However in the meantime a clear downward dynamic would be required to check momentum.

The Euro Stoxx Index of 292 European blue chips bears a closer resemblance to France's CAC Index. It has been forming a base at the lower side of a more than decade long range since 2009 and broke successfully above the psychological 300 in October. A sustained move below the 200-day MA, currently near 283, would be required to begin to question the medium-term bullish hypothesis.
Interestingly, following a click through of European indices the only markets testing or exceeding historic peaks other than Germany are those outside the Eurozone. The FTSE-100 is testing the upper side of its range while the FTSE All Share has already broken out. Switzerland and Sweden are trading in the upper quarter of their respective ranges while Denmark and Norway have broken out.

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