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Research Edge Position: Long Germany (EWG)

 

The ZEW Center for European Economic Research reported today that its August index of Investor and Analyst Expectations rose to 56.1 from a pullback in July to 39.5. This increase for the index, which aims to predict economic health six months ahead, is bolstered by ZEW’s gauge of the Current Economic Situation, which rose to -77.2 from -89.3 in July. (See Chart Below)

The data supports our bullish fundamental outlook on Germany. We believe that Germany’s recent CPI and PPI figures represent a healthy (short term) deflationary environment that benefits both consumers and producers due to the purchasing power associated with imported commodity price declines (bolstered by a strengthening Euro); particularly  cheaper energy costs.  Interestingly, today’s CPI data from the UK for July registered unchanged at  +1.8% Y/Y  -a sequential divergence from Germany’s consumer deflation, which, along with the Eurozone average, stands at -0.7% annually. Our bearish outlook on the UK remains as we believe inflation is getting ahead of growth.

The recent German Q2 GDP release at 0.3% Q/Q has certainly helped to improve sentiment, as the public begins to believe that the recession is passing (or at least that the worst is behind them). Although all economic data is ultimately rear-view, with both Germany and France exiting recession from a technical level, look for countries across the EU to benefit from increased demand and confidence from consumers in the Eurozone’s largest economies. 

Matthew Hedrick

Analyst

Pop, Pop, Bang! German Sentiment Popping - a1