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With the German equity market (DAX) pulling back just under -1% today, we reiterate that we remain bullish on German equities and recommend buying the market on down days.


We are well aware that the DAX is already up 20.5% YTD (vs SPX ~ 2%), yet we think it will pay to obey the commands of the central planners, in particular Mario Draghi’s “whatever it takes” ECB policy position.

To reiterate our thesis:

  • QE is only just beginning; the euro should continue to weaken; Germany is likely to disproportionately benefit due to exports; and asset classes like equities are likely to inflate due to money creation
  • The German economy sits in the sweet spot to benefit from a weaker euro as its exports account for a monster 47% of German GDP
  • Since the ECB announced QE on 1/22/15 the correlation between the DAX and EUR/USD is -0.84, a strong negative correlation that we expect to persist as the ECB keeps its foot on the QE pedal for longer than its intended target (late 2016)
  • Recommending long the DAX (HEWG or EWG) and short EUR/USD (FXE)

If you missed our call “Germany: Still Bullish” on 4/14, CLICK HERE for a 30 minute video replay that walks through 40 slides of supporting material.

Already this week there have been a number of “fundamental” data points that we think will grind the EUR/USD lower and the German equity market higher:

  • There appears to be no resolve on Greece’s debt issues, with Friday’s Eurogroup meeting expected to pass without formal loan/concession agreements. The next catalyst is an IMF loan repayment due May 12th.
  • Everyone from Draghi, Junker, and the German leadership was out this week confirming that a “Grexit” is off the table. Ultimately we think debt restructuring is the likely outcome, and we expect a long timetable and political consternation to get the Greeks to better meet Eurozone demands & conditions.
  • German ZEW economic survey for APR showed an improvement for the 6th straight month in Current Expectations (70.2 vs 55.1), however the forward looking Expectations survey dipped slightly to 53.3 vs 54.8, the first tick down after 5 straight months of improvement.
  • The German Economy Ministry revised up its outlook on German growth, with 2015 GDP forecast at 1.8% vs prior 1.5% and 2016 GDP at 1.8% vs prior 1.6%.
  • From a quantitative perspective the DAX remains in a bullish formation, trading above its TRADE, TREND, and TAIL levels of support, whereas the EUR/USD remains in a bearish formation, trading below its TRADE, TREND, and TAIL levels of resistance. (see charts below)

Buy Germany On A Pullback - vv. dax

Buy Germany On A Pullback - vv. eur