(07 MAY 2019)DAILY MARKET BRIEF 2:German economy faces toughest consequences of trade war

German manufacturing sector remains in recession territory since January 2019. The release of April manufacturing PMI of 44.4 is part of a downward trend that began last July and which is expected to last, as German factory orders signal a drop in industrial production for the coming quarter. Although the month-to-month metric in factory orders is pointing to a rebound of 0.60% (prior: -4%), the price-adjusted metric that removes major orders fell at -1.90%. The expansive monetary policy from the ECB is of good help for both the construction and service sectors by supporting domestic demand, albeit Germany’s heavy dependence of external trade means that further escalation in current Sino-American trade conflict would put the economy in a recession across all sectors. Trade duties of 25% on USD 200 billion Chinese products are expected to be imposed on Friday while a Chinese delegation accompanied by Chinese Vice Premier Liu He arriving in Washington on Thursday could reverse the situation. At current, we see little upside for the single currency. The dependence over Asian demand makes the euro even more sensitive to potential US – China discord intensification. Today’s EU Commission economic forecast could become less relevant if the situation on Friday worsens.

Currently trading at 1.1200, EUR/USD is heading along 1.1170 short-term.