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Positions in Europe: Long Germany (EWG); Short Spain (EWP)

We’ve been closely following the high frequency data from Europe and have warned in our research in recent weeks that PMI surveys, for both Manufacturing and Services, have come in “toppy” for many of the major economies, including Germany. Today the ZEW reported a month-over-month decline in its German Economic Sentiment survey, a 6-month forward-looking assessment, registering 14.1 in March versus 15.7 in February.

While we’ll need far more than one data point from one survey to make an investment call in the country (we’re currently long Germany via the etf EWG in the Hedgeye Virtual Portfolio), the data presents an inflection point worth calling out and is in line with our call that German PMI should mean revert over the coming months as it flirts with near all-time highs.

Although we continue to like the country longer term, we’re likely to trim our current 6% asset allocation to Germany over the near term. Currently the etf EWG is getting hammered, however not unlike most global country ETFS as investor concerns are focused on Japan.  

The big news from Germany today is Chancellor Angela Merkel’s decision to shut-down 7 of the country’s aging nuclear reactors for 3 months pending a safety review in light of the events in Japan. The Swiss followed the Germans saying they will suspend the regulatory process for 3 nuclear power stations because safety remained the first priority. [For reference, Switzerland has 4 nuclear plants with 5 functioning reactors].

In opposition, France, Spain, and Italy all announced today that:

 

(1) They need nuclear and don’t see their stance changing in the foreseeable future, and 

(2) Won’t reconsider building new nuclear plants

Germany’s 17 nuclear reactors account for ~23% of the power generated in the country last year, while atomic energy accounts for ~28% of Europe’s power generation. In 2010, Chancellor Merkel repealed a 2002 law passed by her predecessor Gerhard Schroeder and his coalition of the SPD and Green parties that would have shut down all German nuclear plants by 2022.

German leading power generators such as E.ON AG (EOAN) and RWE AG (RWE), both members of the DAX, are helping to drive the downward thrust in the DAX, both falling 6-9% over the last two days, while Q-Cells (QCE), a solar company (and not a member of the DAX), has been one strong gainer. 

Matthew Hedrick

Analyst

German Economic Sentiment Dips and Merkel Halts Nuclear - zew