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Research Edge Position: Long Germany (EWG)


With our pulse on the European patient we’ve still yet to see any dramatic moves in fundamentals across the Eurozone. That said, European markets traded down significantly over the last week and a half—particularly on missed European Q3 earnings and bearish US-centric data—before popping back up yesterday and closing back down today, suggesting that yesterday’s expansionary US Q3 GDP report was the key positive catalyst.  From a macro set-up across the region, unemployment and inflation could tip the balance, but have remained steady:  a mild deflationary environment in the Eurozone (-0.3% in September year-over-year) has aided purchasing power of households, and unemployment has crawled up to 9.6% over the last months, but is far from any freak-out levels.  (For more on unemployment see “Jobless Recovery in Europe” on 10/08).

This week brought a few bullish and bearish data points to call out:


Yesterday’s employment data from Germany (although rear-view) actually showed a decline in the unemployment rate, a surprise to us as we forecasted a slow ramp in joblessness beginning in Q4 as government incentivized part-time work and stimulus spending wane.  In fact, September saw an increase of 269K jobs, or 0.7%, over the previous month, a bullish data point, yet one we’ve taken with caution due to the seasonality reflected in the end of summer break and the beginning of the new training year in Germany.  

German retail sales fell 0.5% in September month-over-month (adjusted for inflation and seasonal swings) , the second straight down month, or fell 3.9% year-over-year, said the Federal Statistical Office today.

Finally, the European Commission reported that Eurozone confidence improved—albeit on small sequential rises—across multiple subsectors, including Economic, Consumer, Services, Industrial, and Construction, while retail confidence remained unchanged. The improvement in consumer confidence across the region runs counter to separate country-level consumer confidence surveys out earlier this week from Germany (Gfk) and Italy (Isae) that turned down.

We see darker clouds ahead in 2010 when unemployment picks up, which should dampen consumer and business confidence and could erode gains in production and consumption. We continue to see uneven performance across the region and will look to limit our exposure by positioning ourselves on the long and short sides.  Within the Eurozone we continue to like Germany (although the DAX recently broke its TRADE line), on the long side. Other headwinds that we’ll have on our screens include a strengthening Euro and the impact of the ECB withdrawing stimulus measures, which ECB council member Axel Weber said this week. Stay tuned.  

Matthew Hedrick