Research Edge Position: Short the UK (EWU)
The ZEW Center for European Economic Research said its index of investor and analyst expectations, which aims to predict economic conditions six months ahead, fell to 51.1 from 56 in October, underperforming a forecast for a decline to 55.
While we have some reservations on the accuracy of the ZEW survey, we have cautioned over the last weeks that we expect to see a sequential deceleration in improvement in German and European fundamentals with headwinds including the rate of improvement itself, a strong Euro, and rising unemployment as we move into 2010.
The chart below of the investor and analyst expectations shows evidence of a top, with the last two months in decline. ZEW’s gauge of the current economic situation however rose to -65.6 from -72.2 in October.
Today’s announcement from the survey sent the DAX in retreated. Yesterday morning we sold our position in Germany (via the etf EWG) into a strong open to book a modest gain in our model portfolio. The DAX recently broke its TRADE line, but the TREND and TAIL durations remain bullish, so we’ll look to buy EWG back on weakness.
Despite the sale and survey, within the Eurozone we continue to like Germany and expect that its large industrial and manufacturing base and export-driven economy will benefit alongside global economies melting up. Yesterday, two bullish data points were released: German exports rose 3.8% in September month-over-month and German Industrial Output increased 2.7% in September compared to the previous month. Finally, today October CPI held steady at a comfortable level of -0.1% Y/Y. Stay tuned.
Matthew Hedrick
Analyst
