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LIVE MARKETS-Fiscal stimulus in Germany: how likely, how big?

* European shares fall as weak German and Chinese data weigh * German economy contracts as export engine stutters * Euro zone Q2 growth slows inline with expectations * STOXX 600 falls 0.5%; DAX hits fresh day low, down 0.8% * Euphoria over tariff relief ebbs * Balfour Beatty on track for best day in 17 years after results Welcome to the home for real-time coverage of European equity markets brought to you by Reuters stocks reporters and anchored today by Danilo Masoni. Reach him on Messenger to share your thoughts on market moves: rm:// FISCAL STIMULUS IN GERMANY: HOW LIKELY, HOW BIG? (0925 GMT) The flash Q2 GDP data out of Germany adds to a long string of poor economic reading from Europe's economic powerhouse and while that's surely igniting debate about fiscal stimulus, the big question is how is that likely and how big could it be? Andreas Rees, chief German economist at UniCredit, believes the latest data increases the likelihood of a "limited" stimulus package and notes that while Chancellor Merkel repeated only yesterday the mantra that no fiscal stimulus is needed, she signalled some flexibility. "The likelihood of fiscal easing next year has increased significantly. Yesterday, the draft 2020 budget proposal was released which, of course, did not include any surprising measure. But it is still early days," Rees said. But in any case, the Frankfurt-based economist says it is likely to be limited in size, for two reasons: * The debt brake enshrined in German constitution stipulates a maximum structural fiscal deficit of 0.35% of GDP.... An abrogation of the debt brake is unlikely, since it would need a two-thirds majority in the Bundestag and Bundesrat * Some fiscal easing is already likely to come in 2021, in the form of cutting the solidarity surcharge. The fiscal stimulus amounts to about 0.3% of GDP. One possibility could be the frontloading of this tax relief into 2020. Another possibility would be higher spending for climate protection measures In terms of impact on stocks, do you remember how the DAX shot up when Reuters reported on Aug. 8 that Germany is considering ditching its long-cherished balanced budget policy to help finance a climate protection programme with new debt?. If you don't, here's a chart as a reminder, which could be a first taste of more to come. For more on fiscal stimulus in Europe check out our earlier posts this year. "Large-scale fiscal expansion in euro area looks unlikely" Euro zone eyes biggest fiscal easing in a decade Fiscal fizz in Germany? (Danilo Masoni) ***** TRUMP SAVES CHRISTMAS, BUT MARKETS SEE GRINCH (0840 GMT) The knee-jerk reaction yesterday in stock markets after Washington delayed tariffs on some Chinese imports showed the level of sensitivity in the market around any trade-related news. "We're doing this for the Christmas season" to avoid any adverse impact on U.S. shoppers, Trump says. But it might be too early to call a Christmas stock market rally, folks! Europe is off to a subdued start this morning with the STOXX 600 down 0.2%, while U.S. stock futures point to a weak open after yesterday's rally. "The delay to tariffs looks more like a temporary reprieve for domestic reasons rather than a genuine signal of willingness to talk with China. The president didn't like what he saw in the markets and decided to intervene," says Neil Wilson, chief market analyst at "Hong Kong remains a trouble spot – the situation remains tense and we see further escalation as a real risk." The delay reduces the pace in trade tensions escalation, but extends its potential length, Citi analysts warn. "The window of opportunity for a deal without further escalation is already closed, with current US economic and financial conditions providing room for an aggressive stance on trade," they say. But this half U-turn in Washington's stance on trade comes amid immense pressure stock markets have seen over the last few days. Goldman Sachs reckons the disruption in financial markets over the last several days could have led to a softening of the White House position. (Thyagaraju Adinarayan) ***** CHINA'S DISMAL DATA CASTS PALL OVER EUROPE (0816 GMT) To understand the dismal German GDP data that's casting a pall over Europe this morning ahead of euro-zone numbers in less than an hour, it's worth taking a glance at China where the government released a slew of dismal data overnight. Industrial output slowed markedly to 4.8% in July from a year earlier, lower than the most bearish forecast in a Reuters poll and the weakest pace since February 2002. (See chart below) The data has pushed metal prices, miners and the auto index firmly into the red, underscoring concerns that the U.S. trade war is taking a major toll on manufacturing. The DAX, whose constituents make about 6% of their revenue from the world's No. 2 economy, China, is down 0.2%. The euphoria from the overnight partial reprieve by Washington on the latest tariffs has ebbed pretty quickly as reality of the existing tariffs sinks in. "The implementation is now delayed, but the damage from the threat has been partly done, given the increased uncertainties for both corporates and consumers," says Xiangrong Yu, senior China economist at Citi. There are a few silver linings - it may spur spending on infrastructure, rural consumption and urban regeneration. "We believe the government will probably move more decisively to implement the spending programs. Monetary policy will likely become more accommodative, although the curb on property-related financing may continue," says the Citi economist. It may also encourage talks between Washington and Beijing to restart sooner rather than later. As Deutsche Bank strategists ask this morning: the slew of weak data begs the question how long is China willing to tolerate weaker growth and higher joblessness. (Josephine Mason) ***** OPENING SNAPSHOT: EUROPE DIPS AS INVESTORS TURN DEFENSIVE (0731 GMT) Europe is off to a subdued start as tariff relief runs out of steam and the poor GDP reading out of Germany doesn't look to be enough to boost hopes of any fiscal stimulus in Europe's largest economy, while disappointing Chinese data also adds to the economic gloom. The STOXX 600 regional benchmark is down 0.2% and the DAX, which is heavily geared towards trade sensitive industrials, is down 0.3%. Sectoral leadership in early morning shows that investors are buying into sectors that do better in times of economic uncertainty at the expense of cyclical plays which yesterday were strongly lifted by news that Washington had delayed tariff hike on some Chinese goods. The Basic Resources index, where big miners are listed, is leading losers, down 1.1%, while the defensive healthcare, utilities, food and beverage and telecom sectors were posting slight gains, outperforming the broader weaker trend. Those gains were not enough to turn European indexes positive. Here's your opening snapshot: In single stocks, a strong update lifted British infrastructure company Balfour Beatty's stock 10.1% to the top of the STOXX, and Admiral rose 5.3% after profits beat estimates. Among fallers, Lundbeck and Schindler both fell more than 3% after poor numbers. (Danilo Masoni) ***** WHAT YOU NEED TO KNOW AT THE OPEN (0650 GMT) European shares are expected to open little changed after preliminary data showed that the German economy shrank in Q2 in what could heat up the discussion about fiscal stimulus in the continent's largest economy, as the ECB runs out of ammunition and corporate Europe suffers from an earnings recession. Futures on the DAX pared some gains after the release to trade flat on the day, suggesting investors don't believe the reading will convince Chancellor Angela Merkel, who only yesterday said she saw no need for fiscal stimulus, to boost spending. Futures on other European benchmarks are trading between a rise of 0.1% and a fall of 0.3% as the relief over Washington's decision to delay tariff hikes on some Chinese goods looks to be running out of steam. We have euro-zone GDP at 0900 GMT. Turning to the corporate front, there are some more earnings to digest, although the outlook for growth is dimming. The latest data from Refinitiv I/B/E/S has shown that Europe Inc is suffering a recession with market consensus forecasting a drop in earnings in Q2 and Q3. Shares in Schindler are seen opening down 2.5% after the elevator and escalator manufacturer said Q2 net profit dived 22.4% from the previous year, dented by wage inflation, higher material costs, foreign exchange, and planned increase in expenditure on projects. Its results illustrate a broader trend of margin pressure in Europe. In more good-looking updates, power producer RWE said core profit rose by a fifth in H1, boosted by a stronger-than-expected performance at its trading unit (RWE shares seen opening up 1.5%), while Nordex kept its margin target even though profits more than halved in the first six months, saying it expects business to pick up considerably in the remainder of the year. Its shares are up 5% in early trade. Among smaller companies, Evotec and Cancom were up sharply in early trade after results. Both lifted their guidance. In the UK, eyes are on Standard Chartered after a senior executive said the bank is targeting growing its private banking assets by 50% to about $100 billion in three to five years and hire dozens of bankers in Hong Kong and Singapore towards that goal, although BAML has removed the stock from its Europe 1 list. Its Hong Kong-listed shares are up 0.8%. Other stock movers: Axel Springer revenue, profits fall in Q2 as weaker economy weighs; Germany's Stada 'very selective' on acquisitions - CEO Goldschmidt; Balfour Beatty reports higher first-half profit, raises cash forecast UK headlines: StanChart eyes $100 bln private bank assets in growth push, to hire bankers Car dealership Lookers sees higher costs to fix issues related to sales practices Balfour Beatty reports higher first-half profit, raises cash forecast Insurer Admiral posts 4% rise in H1 operating profit Glencore loses bid to stop Australian tax office using 'Paradise Papers' Ryanair's Irish pilots agree to talks as strike looms (Danilo Masoni) ***** FUTURES FLAT AFTER GERMAN GDP DATA, SOME MORE EARNINGS TO DIGEST (0623 GMT) European stock futures have slightly reduced gains after preliminary data showed that the German economy shrank in Q2, dragged down by a slump in exports, as manufacturers in Europe's largest economy are hit by weaker foreign demand and trade disputes. Gross domestic product (GDP) fell 0.1% from Q1, in line with a Reuters poll of analysts. Futures on the DAX and the Euro STOXX 50 are both trading just a touch below parity while CAC and FTSE futures are both up around 0.1%. Meanwhile in Italy, it looks that far-right League party leader Salvini's push for new elections has been slowed after the Italian Senate late yesterday postponed till next week further debate on an ongoing government crisis. That may help ease immediate worries over Italian political risk. Turning to the corporate front, there are some mixed earnings to digest, even though the overall picture emerging from the Q2 season isn't great. The latest data from Refinitiv I/B/E/S has shown that Europe Inc is suffering a recession with market consensus forecasting a drop in earnings in Q2 and Q3. Back to this morning's corporate news, elevator and escalator manufacturer Schindler said Q2 net profit dived 22.4% from the previous year, dented by wage inflation, higher material costs, foreign exchange, and planned increase in expenditure on projects. In more good-looking updates, power producer RWE said core profit rose by a fifth in H1, boosted by a stronger-than-expected performance at its trading unit, while dental implant maker Straumann raised its FY revenue target after reporting a better-than-expected Q2, citing the launch of its BLX implant in Europe, and double-digit growth in all regions. Here's your headlines roundup: RWE posts 20% core profit rise on energy trading boost Schindler Q2 profit dives 22% on wage inflation, higher material costs Dental supplier Straumann ups revenue targets after Q2 beat Glencore loses bid to stop Australian tax office using 'Paradise Papers' Allianz Australia slapped with tougher capital requirement Norwegian to stop flying from Ireland to U.S. and Canada BRIEF-Ascom Holding Says Will Not Achieve 2019 Targets BRIEF-Bell Food Group Says HY Gross Profit Dropped By CHF 3.4 Mln To CHF 768.2 Mln BRIEF-Cancom SE Q2 EBITDA Rose 29 Percent To 28.5 Million EUR (Danilo Masoni) ***** EUROPE SEEN OPENING HIGHER, EYES ON GERMAN GDP (0530 GMT) European shares are expected to open slightly higher in a second day of gains in relief to Washington's decision to delay tariffs on some Chinese imports, with the release of the Q2 GDP flash data for Germany, which is expected to fall 0.1% from Q1, squarely in focus. Spreadbetters at IG expect London's FTSE to open 21 points higher at 7,272, Frankfurt's DAX to open 20 points higher at 11,770, and Paris' CAC to open 14 points higher at 5,377 Over in Asia, stocks joined a global equities surge as the tariff relief offset a raft of disappointing China data for July. (Danilo Masoni) ***** (Reporting by Danilo Masoni, Josephine Mason and Thyagaraju Adinarayan)