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Takeaway: Germany may be leading the political cart in the Eurozone, however its economy is not immune to the region’s downturn.

Positions in Europe: Long German Bunds (BUNL)


Today we received German PMI data and German IFO confidence figures – both missed!  Our quantitative levels also show that the German DAX recently broke through its immediate term TRADE support level, which is a bearish indication.

From the Preliminary October figures for PMI Manufacturing and Services for the largest economies of the Eurozone, including the regional aggregate, it’s noteworthy that Germany’s PMIs fell month-over-month and missed versus expectations to remain under the 50 line indicating contraction (see chart directly below).

German Data Misses! - aa. PMI

While we’ve identified the German economy as the strongest versus its peers for many months, it is certainly not immune to the economic slowdown facing the entire region. The slide in PMIs (which began in January 2012) is therefore not a huge surprise.  Nor is the lack of confidence as measured by consumer and business surveys. 

Today IFO reported its German Business Confidence survey and Current and Forward-Looking Economic surveys.  All slid month-over-month, marking a move down since April 2012.  

German Data Misses! - aa. IFO

While the Eurozone’s political positioning on its debt, deficit and banking issues evolves on a daily if not hourly basis, we’re of the position that Germany wants to play ball in maintaining the fabric of the current Eurozone members.

Out of self interest, the Germans may not be the first to show their political cards simply because as the fiscally and economically strongest nation, it’s not to their advantage to sign off on paying for the entire region’s bills until it gets some support from other member nations. While this tactic could be view as delaying the process and leading to much of the inaction in policy over the last months and years, there’s plenty of evidence to suggest Germany’s support for the region, including most recently that Germany’s Finance Ministry is considering a debt buyback as a way to help reduce Greece’ debt burden.

News today also appears to suggest that Troika will give Greece a two year extension to meet its fiscal consolidation target and will receive its next 31.5B tranche of bailout funding. While we don’t think this will be the last concession/compromise concerning Greece or other peripherals from Troika, implicit in the Troika’s decision making is a sign-off from Merkel too.

So it’s under a scenario of a concerted commitment from Merkel and Draghi to save and/or maintain stability in the region versus the reality of an extended period of weak underlying fundamentals that would allow for mispricing across asset classes as the development of an evolving Eurozone are misunderstood. And to repeat, we believe that a fiscal union is a huge step for the region, one we think will be challenging to form given the inability of countries to give up their fiscal sovereignty to Brussels—so clearly there’s much runway for investors to manage around.

Our Real-Time Position in BUNL on the long side has worked against us as the last weeks have seen peripheral yields come in and push core yields higher. We are however, worried about the German equities given that the DAX just broke its immediate term TRADE line of 7,331.

German Data Misses! - aa. DAX

For now we have no other current Real-Time position in Europe besides BUNL.

Matthew Hedrick

Senior Analyst