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DAX and EUR/GBP likely to underperform as manufacturing headwinds grow


MongiIG

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Manufacturing under pressure, with the DAX and EUR/GBP looking likely to underperform going forward.

bg%20dax%2030%20germany%208664953.jpgSource: Bloomberg
 Joshua Mahony | Senior Market Analyst, London | Publication date: Tuesday 05 October 2021. IG

Euro at risk as manufacturing squeeze centres on the West

Manufacturers managed to traverse much of the pandemic in relative health, with elevated demand coupled with a ramp-up in online shopping.

Predictably, the Chinese have been at the forefront of that boom, although their current energy struggles have sparked outages across much of the country.

Chinese economic difficulties are just one of many issues hitting the manufacturing sector of late, with fears growing of how businesses will manage to keep up as demand grows in the months ahead.

The chart below highlights the numerous fronts of this growing crisis, with weakening demand growth, longer delivery times, and surging input prices.

 

MARKIT_MANUFACTURING_OVERVIEW.PNG.pngSource: IHS Markit; JPMorgan

 

While there will be plenty of nations impacted by these factors, the bulk of it appears to be felt in the Western world.

Regarding input prices, the German economy has been hit the hardest according to the latest data. Out of the top ten affected nations, eight of those are part of the eurozone.

 

Manufacturing_input_pricing_sept.jpeg

 

Meanwhile, the growing issues surrounding lengthening delivery times appears to be more of an international affair, with Canada and Australia squeezing into the top 10 alongside the UK and US.

Nonetheless, it is largely similar names being affected.

 

dELIVERY_TIMES.jpeg

 

With the potential for an extended period of difficulty in the manufacturing sector, we are looking at a potential driver of weakening growth for some businesses and economies.

Looking at the world’s largest producers, we can see that China, the US and Germany stand out from the pack.

 

Leading_Exporters.png

UK stocks look attractive thanks to lower reliance on manufacturing

The German economy looks particularly at risk here, with 26% of the country’s GDP coming from industry. That compares with 17% in the UK. As a result, we could see weakness for German and eurozone assets relative to the UK.

Looking at the relationship between the FTSE 100 and the DAX, we can see a divergence growing. The ratio between the two stands at the lowest level since early March, after finally breaking below the 2.2 mark for the first time in four months.

With fears of a manufacturing slowdown, there is a good chance people avoid German stocks in favour of undervalued UK-listed businesses.

 

DAX_vs_FTSE.pngSource: TradingView

EUR/GBP breaks support, but can it exit long-term range?

EUR/GBP has similarly seen weakness for the eurozone asset, with the pair falling back below 0.8525 support today.

Coming in the midst of a seven-month consolidation phase for the pair, there is a distinct chance we see the pair finally break out before long. For that to happen, we would need to see 0.8500 and 0.8450 taken out.

EURGBP-Daily51021.pngSource: ProRealTime

 

With price having slipped back below the 0.8525 support level, we can see that further downside looks likely before long.

A break up through the 0.8573 level would be required to bring about a more positive short-term outlook.

EURGBP-4-hours51021.pngSource: ProRealTime

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