The manufacturing sector of Germany has turned lower yet again

We have got used to seeing the economy of Germany stuttering recently. Although we only discovered it via later revisions it began in early 2018 which at the time we thought was still part of the “Euro boom”. Then 2019 became a difficult year and this morning has brought news that at the end of the year the pressure seems to have got even worse for manufacturing.

WIESBADEN – Based on provisional data, the Federal Statistical Office (Destatis) reports that price-adjusted new orders in manufacturing decreased by a seasonally and calendar adjusted 2.1% in December 2019 on the previous month.

If we look at the break-down we find out more.

Domestic orders increased by 1.4% and foreign orders fell by 4.5% in December 2019 on the previous month. New orders from the euro area were down 13.9%, and new orders from other countries increased by 2.1% compared with November 2019.

So we have at the beginning a by now conventional trade war theme but then we note something worrying for the Euro area as a whole as there seems to be some economic contagion here. This will concern the new holder of the Grand Prix de l’Économie 2019 from Les Echos which is the President of the ECB Christine Lagarde.

There is a sectoral break-down too but I caution reading too much into it. This is because in the early part of 2018 various analysts told us that the break-down meant things would soon around and we know what happened next.

In December 2019 the manufacturers of intermediate goods saw new orders increase by 1.4% compared with November 2019. The manufacturers of capital goods saw a fall of 3.9% on the previous month. Regarding consumer goods, new orders fell 3.8%.

Indeed if we stick to economists expectations they seem to have been at it again according to the Financial Times.

 Economists polled by Reuters had expected an increase of 0.6 per cent.

Only 2.7% out….

There is a small amount of relief in finding out that the December drop was exacerbated by November being revised higher.

 For November 2019, revision of the preliminary outcome resulted in a decrease of 0.8% compared with October 2019 (provisional: -1.3%, because major orders from machinery and equipment that were reported later were not yet included).

However even so we see that the annual comparison is simply dreadful.

-8.7% on the same month a year earlier (price and calendar adjusted)

That compares to November which was 6% lower than a year before.

We get some perspective from the overall index which on a seasonally adjusted basis was 98.7 so for the first time we have a reading below the 100 average of 2015. In terms of a trend we see that things have been slip-sliding away since the 113.1 of December 2017. So that is quite a fall over two years. There has been a flicker of hope from domestic orders in the last couple of months but this has been swamped by the fall in foreign orders.

Turnover and Volume

The size of the fall is lower but we see a similar trend.

According to provisional results, price-adjusted turnover in manufacturing in December 2019 was down a seasonally and calendar adjusted 1.3% on the previous month. In November 2019, the corrected figure showed a decrease of 0.4%, compared to October 2019 (provisional: -0.5%).

We also see that the situation got worse in December.

Again we can see the overall picture because what is effectively a volume index  peaked at 108.9 in November 2017. Whereas in December it was 100.7 so not quite yet back to the average for 2015. However looking at the orders data above suggests we may see a fall below it this year.

Looking Ahead

On Monday we got the latest Markit PMI business survey and they opened with a hopeful sign.

Slower fall in new orders lifts PMI to 11-month
high in January.

This was based on a different picture to the official data we have looked at earlier as that was based on an improvement in export orders.

Principal upward pressure on the PMI in January came from a slower rate of decline in new orders, which in turn partly reflected the near stabilisation of export sales.

If we switch to actual production though we see this.

Output fell at the slowest rate for five months in January.
That said, the pace of decline remained notably faster than
that of new orders, with all three main industrial groupings .(consumer, intermediate and capital goods) recording lower production.

Again there is some potential for improvement as the rate of decline has slowed. Even so the overall situation is impacting an area which has been a strength of the German economy.

Employment continued fall sharply at the start of the year.
The rate of job shedding seen in January was unchanged
from the month before and has been exceeded only once (in
October 2019) since January 2010.

The summary tried to be upbeat for 2020.

Germany’s manufacturing sector showed more signs
of being on the way to recovery in January, with the PMI
climbing further from last September’s nadir to its highest for 11 months.

There was however quite a catch.

However, the picture has change somewhat in the short space of time since the survey was conducted [13-24 January], with the disruption to business in China from the coronavirus found to have an impact on German manufacturers’ exports and sentiment in the coming months.

The catch arrives with even the more optimistic tone for January leaving us with a spot reading of 45.3 which us well below the benchmark of 50.

The Service Sector

The business survey here was much more upbeat.

Germany’s service sector made a strong start to 2020,
recording faster growth in business activity, inflows of new
work and employment, latest PMI® data from IHS Markit
showed. Expectations towards output over the next 12
months also improved

So the German economy is to borrow a football analogy a story of two halves or as the survey puts it.

The result reflected the combination of a stronger increase in service sector business activity and a slower rate of decline in manufacturing production.

According to Markit the combination has gone from stagnation to slow growth.

Climbing from December’s 50.2 to 51.2, the Germany Composite* Output Index signalled a slightly faster, albeit modest rate of expansion.

Comment

The story here was summed up by Avril Lavigne.

Why’d you have to go and make things so complicated?

Much of this is the way that we have regularly been promised a turnaround by the media and analysts when in fact the manufacturing sector has been heading south for a couple of years now. Today’s official data may be revised a little higher ( that seems to be a developing pattern ) but 2019 was a very poor year for German manufacturing. Now another reported improvement looks likely to have been knocked on the head by the impact of the Corona Virus in what is looking ever more like a perfect storm.

If we switch to the ECB we see that for once its monetary policy seems appropriate for Germany. It has slowed down and the ECB has cut its interest-rate and although if you read this from Bundesbank President Jens Weidmann on Tuesday it seems he does not think it will help much.

Recent years have demonstrated that traditional interest rate policy may reach its limits.

Also does this count as an emergency again?

Mr Weidmann continues to take a critical view of the large-scale purchases of government bonds in the euro area. “In my opinion, they should be used only in emergencies.”

The undercut is whether the easy monetary policy makes much difference to a manufacturing slow down driven by a trade war and now a viral outbreak? I do not.Also we need to remind ourselves that the exchange rate policy where the Euro is much lower than where a Deurschemark would be continues to benefit Germany.

So Germany is on a recession tightrope where services are pulling it up but manufacturing pulling it down. So just as the UK departs the European Union the Germans are behaving like us. Also spare a thought for Eurostat which produced a 0.1% GDP growth reading for the Euro area at the end off 2019 but did not known this about Germany.

The Investing Channel

 

Bitcoin futures trading indicates plenty of problems ahead

Last night saw a change in the Bitcoin world. This is because a Bitcoin futures contract started trading on the Chicago Board Options Exchange or CBOE. It would appear that plenty were watching as this took all of 30 minutes.

Due to heavy traffic on our website, visitors to may find that it is performing slower than usual and may at times be temporarily unavailable. All trading systems are operating normally.

The system trouble was accompanied by yet another surge in the price. From Bloomberg.

Bitcoin futures expiring in January were priced at $17,780 as of 12:57 p.m. Hong Kong time, up from an opening level of $15,000. About 2,300 contracts changed hands.

So not an enormous amount of contracts but the interest and price swings did have an impact.

Futures on the world’s most popular cryptocurrency surged as much as 25 percent during their debut session on Cboe Global Markets Inc.’s exchange, triggering two temporary trading halts meant to cool volatility. Dealers said initial volumes exceeded expectations, while traffic on Cboe’s website was so strong that it caused delays and outages. The exchange said all its trading systems were normal.

Who could possibly have forecast that lots of people would be watching? Anyway as I type this the price for the January 2018 contract is US $17640 ( up 14%)  with the volume being 2695 and the high having been US $18850.

What is the point of a futures contract?

The purpose of a futures contract is to bring trading on a particular instrument into one place. Why? Well even what are considered to be active markets may have bursts of activity followed by quiet periods which are awkward to say the least if you wish to trade in them. The impact can be boosted by the contract covering a concept rather than a particular asset as for example in bond futures where a generic is traded rather than an individual bond. So the ultimate end product of a successful futures contract is liquidity or the ability to trade consistently which benefits investors and traders as well as the exchange itself which charges fees on the trades.

It also brings into play the ability to “short” an instrument as you can sell as your opening trade whereas with ordinary trading you have to buy something before you sell it. This is much simpler than what you have to do in equity markets which is borrowing the stock so you can sell it which you have to plan and work at rather than just contacting an exchange and selling.

Obviously the exchange is at risk as prices move so you have to put up cash or margin to cover your position. When people refer to gearing on a futures contract this is one way of measuring it as if you have to put up 10% margin then if you wished you could buy  ten times as much of the instrument concerned for the same outlay. Some care is needed though as there is also variable daily margin to cover losses ( as well as lower margin if profits arise)

Success or failure comes essentially from volume and liquidity and from that flows the other factors.

How does it work?

The basis is that you have a point in time when everything has to be settled hence the concept of a January contract in the case of Bitcoin ( there are also February and March).  At that point anything outstanding is delivered for example I had a colleague some years back who had 2 potato futures contracts delivered on him and was in danger of getting more spuds than he could handle even with his barn.

Also there is a clearing house who organises and guarantees settlement. In the UK the main clearing banks back the London clearing house which back in my main trading times was seen as a big strength. Well we all make mistakes don’t we? Also the exchange is regulated.

The point for Bitcoin

In a way futures trading is a sort of coming in from the cold for Bitcoin. It gives the potential for there being one price rather than the multitude of them we currently see. That would be a clear gain and if we add in the regulated and clearing issue another potential gain is that institutional investors join the party. This would have positive impacts on volume and liquidity which would be likely to settle the price down and make it more stable.

Problems

Something has troubled me from the beginning and it is this. From the CBOE.

XBT futures are cash-settled contracts based on the Gemini’s auction price for bitcoin, denominated in U.S. dollars.

This needs to turn out to be both stable and reliable as for example the market would be damaged if there were even suspicions that there were ways of manipulating the settlement price. I do not know Gemini but their price will have to be 100% reliable and what if the overall Bitcoin price is squeezed?

Next is that one of the benefits of futures trading may not actually apply and h/t to @chigrl for raising the issue. Remember I said that allowing short selling was one of the key points of a futures contract? Well here are the rules of Interactive Brokers and the emphasis is mine.

Due to the extreme volatility of cryptocurrencies, clients will be unable to assume a short position including as part of a spread. The only time a short order will be allowed will be in the case of a roll trade that results in a long position. In addition, market orders will not be accepted.

If this is in any way widespread the whole concept of a futures contract on Bitcoin may be holed below the waterline. As I pointed out earlier the ability to sell short is if not the modus operandi a big point of having a futures market. Added to that is that there are of course plenty of risks in being long Bitcoin at current levels. Are market prices supposed to bring a balance between the risk of buying and selling?

Comment

Actually although the media seems to have mostly overlooked it there was a clear signal of the inability for at least some to short Bitcoin futures.

No wonder sellers want a premium if it is difficult or even not possible to sell unless you have already bought.  On such a road then the price may well keep singing along with Jackie Wilson.

Higher (lifting me)
Higher and higher (higher)

As someone who has spent plenty of years in such markets the apparent inability to do spreads ( trading January versus March for example) is another issue. Say there is a large buyer for January futures and a seller in March, what used to be called locals would arbitrage that out adding to liquidity. You see these markets need someone to trade with otherwise they curl up and die. Another sign of trouble can be higher fees like this from the FT earlier.

The Singapore Exchange is to increase fees as much as 10-fold for derivative trading members next year, following a recent large technology upgrade. As of January, annual fees for proprietary trading members such as big global banks with direct market access will jump from S$2,000 to as much as S$25,000 in some cases, SGX said on Monday.

Also there is the underlying issue of what is a Bitcoin and if it is suitable for a futures contract in the first place?

Some of the issues I have raised today could be fixed if not at a stroke quite easily. But they need to be done as you see once a contract gets a reputation for being illiquid then it tends to die a death. So far 2768 is not all that brilliant especially if we allow for this.

CFE is waiving all of its transaction fees for XBT futures in December 2017.>

All that is before the Merc ( CME) starts trading them too.

Oh and some are suggesting option contracts ( my old stomping ground). How would that work unless you had the ability to hedge via selling futures?