German Economic Sentiment Cliff Dive

Position: Short France (EWQ)


While we typically don’t give credence to any one economic survey, the latest reading from ZEW aligns with our fundamental view on Germany.  The 6 month forward-looking  economic sentiment number fell off a cliff, registering 28.7 in June versus a Bloomberg forecast of 42.0 and the previous month’s reading of 45.8, while the current situation reading improved sequentially, registering -7.9 versus a forecast of -15 and the previous month’s reading of -21.6 (see chart below).


What’s our read-through on Germany?


In the last weeks we’ve pulled back on our long call on Germany, which was part of our Q2 theme call Sovereign Debt Dichotomy, even though the DAX is in positive territory YTD with the performance spread over Spain’s IBEX at 22% YTD.


The fundamentals still look bullish for Germany: unemployment has improved over the last months, down to 7.7% (versus Eurozone average of 10.1%), a weaker Euro is benefiting the country’s export base, and inflation looks stable over the medium term. We think this is showing up in the improvement in current sentiment survey.  However, we caution that sovereign debt contagion in the region and poor go-forward prospects for Chancellor Angela Merkel’s coalition government could provide formative headwinds over the medium term, which look to be reflected in the economic sentiment survey.


While we’re not calling for new elections in Germany, the government is a real concern that we’ll have on our radar, one that would be a significant destabilizing catalyst in Europe should elections need to be called. What’s clear is that Merkel’s coalition has lost its majority in the upper house of parliament (Bundesrat) since losing a critical election in the economically important state of North Rhine Westphalia in early May. Her choice to fund the Greeks as part of the €110 Billion loan package was a main point of contention that lost her the election and has since eroded her support. Further, her recently-issued four year €80 Billion package of austerity measures, which we view as largely positive, is being met with fierce opposition at home.


The next piece of the puzzle for the government is finding a replacement as President following the resignation of Horst Koehler last month after he made an inappropriate comment related to the country’s economic interest in being involved in the Afghanistan war. While the position is largely ceremonial, the void has nevertheless added further uncertainty to Merkel’s party. The announcement of the next President is scheduled for June 30th.


The cocktail of German bank exposure to countries with sovereign debt risk combined with the future uncertainty of the government are downside risks that we’ll be monitoring acutely. Stay tuned.


Matthew Hedrick



German Economic Sentiment Cliff Dive - zew

Cartoon of the Day: Hard-Headed Bears

How's this for "hard data"? So far, 107 of 497 S&P 500 companies have reported aggregate sales and earnings growth of 4.4% and 13.2% respectively.

read more

Premium insight

McCullough [Uncensored]: When People Say ‘Everyone is Bullish, That’s Bulls@#t’

“You wonder why the performance of the hedge fund indices is so horrendous,” says Hedgeye CEO Keith McCullough, “they’re all doing the same thing, after the market moves. You shouldn’t be paid for that.”

read more

SECTOR SPOTLIGHT Replay | Healthcare Analyst Tom Tobin Today at 2:30PM ET

Tune in to this edition of Sector Spotlight with Healthcare analyst Tom Tobin and Healthcare Policy analyst Emily Evans.

read more

Ouchy!! Wall Street Consensus Hit By Epic Short Squeeze

In the latest example of what not to do with your portfolio, we have Wall Street consensus positioning...

read more

Cartoon of the Day: Bulls Leading the People

Investors rejoiced as centrist Emmanuel Macron edged out far-right Marine Le Pen in France's election day voting. European equities were up as much as 4.7% on the news.

read more

McCullough: ‘This Crazy Stat Drives Stock Market Bears Nuts’

If you’re short the stock market today, and your boss asks why is the Nasdaq at an all-time high, here’s the only honest answer: So far, Nasdaq company earnings are up 46% year-over-year.

read more

Who's Right? The Stock Market or the Bond Market?

"As I see it, bonds look like they have further to fall, while stocks look tenuous at these levels," writes Peter Atwater, founder of Financial Insyghts.

read more

Poll of the Day: If You Could Have Lunch with One Fed Chair...

What do you think? Cast your vote. Let us know.

read more

Are Millennials Actually Lazy, Narcissists? An Interview with Neil Howe (Part 2)

An interview with Neil Howe on why Boomers and Xers get it all wrong.

read more

6 Charts: The French Election, Nasdaq All-Time Highs & An Earnings Scorecard

We've been telling investors for some time that global growth is picking up, get long stocks.

read more

Another French Revolution?

"Don't be complacent," writes Hedgeye Managing Director Neil Howe. "Tectonic shifts are underway in France. Is there the prospect of the new Sixth Republic? C'est vraiment possible."

read more

Cartoon of the Day: The Trend is Your Friend

"All of the key trending macro data suggests the U.S. economy is accelerating," Hedgeye CEO Keith McCullough says.

read more