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German stocks, in correction mode, could bounce on Greece deal

German stocks, in correction mode, could bounce on Greece deal

Germany’s DAX stock index finally succumbed to worries about Greece’s debt woes, slipping into official correction mode. But one Wall Street firm says the DAX could jump 5% if a deal gets done. The DAX, a blue-chip stock index that was up more than 25% in 2015 when it closed at its high for the year of 12,374.73 on April 10, finished 10% below its peak Monday and suffered another 0.6% drop today. It closed at 11,oo1.29, which leaves it down 12.5% from its high from just two months ago.AFP 541485116 I MAX DEU HE

German stocks, which had gotten a lift earlier in the year from the European Central Bank’s aggressive stimulus and government bond-buying program, have more recently been weighed down by a sharp jump in German government bond yields and rising uncertainty surrounding the negotiations between debt-strapped Greece and its eurozone creditors. Fears of a Greece default or exit from the euro has put investors in a risk-off, protect-my-capital mode. But the selling may be overdone, argues Bank of America Merrill Lynch. And there’s a good chance German shares will rocket higher — BofA says a 5% jump is possible — if Greece is able to get a deal done with its creditors.

Even though BofA’s European equity strategist James Barty says the “risks of a Greek ‘accident’ have increased,” following last week’s standoff between the two parties, his firm’s base case is that a “deal is done.” If a deal is sealed, the “oversold” German stock market could enjoy a “sharp rally on the deal,” Barty told clients in a report.

“In April we said that markets were vulnerable because of the strong rally from October of last year,” Barty told clients. But “with the DAX now 10% off its April high, we believe markets offer a better risk-reward profile. Should an agreement be reached on Greece, we would expect a sharp rally of the order of 5%.” Even in the event of a Greek “accident,” Barty says “downside risks” are “limited,” as the ECB has the tools to intervene to “limit the risk of contagion.”


December 2017
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