⏬DE40 Plunges 1.5% Despite Better Data

European indices are experiencing a downturn following the release of disappointing earnings from European companies, including Volkswagen, despite better economic data

European indices are experiencing a downturn following the release of disappointing earnings from European companies, including Volkswagen. European equity markets, particularly the Euro Stoxx 50 and the German DAX, are grappling with significant challenges mid-week. The situation is exacerbated by the troubles of major European companies such as Volkswagen, which is struggling with declining profits and potential factory closures.

Volkswagen's Drastic Profit Decline and Restructuring Plans

Volkswagen's latest financial results are disappointing. Operating profit has plummeted by 42% in the third quarter, leading to a significant decline in the company's operating margin. The situation demands drastic action from the company's management.

To address these issues, Volkswagen is considering closing several German factories and implementing significant job cuts. These plans have sparked controversy and potential labor disputes, further complicating the company's situation. A closer look at the data reveals that Volkswagen's namesake brand posted an operating margin of just 2.1%. Interestingly, the company's shares are currently gaining after the negative loss, which could be attributed to investors anticipating even weaker data than what was presented.

The company showed the lowest operating margin in many years. Source: Bloomberg Finance LP

Impact on the European Economy

Volkswagen's problems are symptomatic of broader economic challenges in Europe. The region is grappling with low economic growth, high inflation, and rising energy costs. The potential impact of Volkswagen's restructuring on the German economy, the largest in Europe, could exacerbate these challenges.

The combination of Volkswagen's troubles and broader economic issues is weighing heavily on European equity markets. Investors are becoming increasingly cautious about investing in European stocks as the region faces a difficult outlook.

In contrast, U.S. stocks continue to perform well, benefiting from a stronger economic recovery and positive corporate earnings. This divergence in performance between European and U.S. markets is likely to persist in the near future.

DAX stocks performance

It's worth noting that a significant majority of companies in the German DAX are losing value today. The exception and top performer is Volkswagen, which is gaining today, but from a year-to-date perspective, the stock has declined by 20% and has a weak influence on the outlook for other German companies.

Source: Bloomberg Finance LP

Economics data

It's also worth mentioning a number of data releases today. Germany's GDP has exceeded market expectations. GDP grew by 0.2% year-on-year, compared to the expected 0.1%. However, the previous data was revised from 0.3% to 0.1%. Quarter-on-quarter, we don't see the expected decline of 0.1% but instead have a growth of 0.2%. Nevertheless, this is related to a lower base: the previous reading was revised from -0.1% to -0.3%. Moreover, inflation numbers came out higher than expected with CPI at 2.0% compared to 1.8% expected and 1.6% previously. 

Source: Bloomberg Finance LP, XTB

Technical perspective

Technically, the DAX40 is experiencing a significant pullback today, which is also linked to the recent sharp decline in Volkswagen's share price. The DAX40 has fallen to its lowest level since October 11th, marking the strongest pullback since September 6th. Interestingly, seasonality suggests a rebound in the DAX40 in the near future. It's also worth mentioning the so-called "Trump trade," which is associated with protectionist policies. The tariffs imposed during Trump's previous presidency had a very negative impact on German companies, especially those producing cars. As a result, the growing chances of Trump winning again are also weakening the situation on European indices. Key support levels for the German DAX are at 19,200 at the 23.6 Fibonacci retracement and at 19,000 points.