Markets

Breakdown of the latest developments on the global exchanges
Aug 25, 2020, 12:34 PM GMT
#Economics

The German Economy Contracted Nearly Tenfold Due to the Coronavirus Crisis

The German economy has contracted by 9.7 per cent in Q2, as reported by Destatis. The major dropdown is unsurprisingly resulting from the coronavirus fallout, as well as from the restriction policies the German government had to implement early on to combat the pandemic.

Despite this still being the deepest GDP slump on record, a gloomier preliminary reading of – 10.1 per cent for the three months leading to June was revised down, which is welcoming news for the biggest economy in the Eurozone.

This means that the impact of the coronavirus crisis has been smaller than initially feared, which means that the German economy now faces better odds for a quicker and more robust recovery.

Investors would be hoping for a seesaw rebound of aggregate output in the third quarter owing to the gradual easing of containment restrictions, despite a recent uptick in COVID-19 cases.

That is why the Ifo Business Climate index edged higher in August to 92.6 points, which exceeded the initial market forecasts. Those projected a smaller appreciation to 92.5 points from the recorded 90.4 points in July.

These better-than-expected results underscore the gradually improving sentiments of manufacturers, business owners, builders, retailers, and others, in Germany. This positive development is likely to be reflected on during the upcoming Jackson Hole symposium.

Meanwhile, the upwardly revision of Germany's quarterly GDP contraction supported the recuperating DAX index. The latter appears to have concluded establishing an ABC correction, as we pointed out in our last examination of the index.

As can be seen on the 4H chart below, the underlying price action broke out above the minor resistance level at 13100.00, which illustrated the previous peak at point B. This represents a significant indication that the ABC correction is now terminated.

Another crucially important development is encapsulated by the beginning of this latest upswing. It was initiated with a snap rebound from the 50-day MA (in blue), and also from the lower edge of the descending channel.

As can be seen, this rebound took the shape of a hammer candlestick, which typically entails rising bullish sentiment in the market and a new trend reversal from the prior downswing.

All of these factors seem to suggest that the DAX is now ready to test breaking out above the major peak at point 5, which would mean that the index would get back to its pre-crash levels.