Exporting Away

Position: Bullish Bias on German Equities (EWG)

As an update to our bullish bias on German equities, we got two pieces of data over the last days, both of which are lagging indicators but nevertheless bullish.  Germany’s trade balance showed a surplus of €14.1 Billion in June, with a 3.8% gain in exports month-over-month and an increase in imports of 1.9% versus the previous month. Certainly the weakness in the EUR-USD in June (see chart below) is helping to support gains in exports. On Q2 earnings calls we heard again and again of strong demand from China. While China will increasingly become a larger export market for Germany, in the near term its exporting picturing will make its largest gains alongside economic improvement from its largest trading partner, the EU. However, here we caution that we expect to see slower growth throughout Europe in the back half of 2010 as austerity measures choke off growth. We do see stability in the EUR, unlike the Euro parity camp, and currently our support and resistance TRADE lines for the EUR-USD are $1.30- $1.33.

Exporting Away - mh1

Secondly, July’s final reading of German CPI was in line with the initial estimate of 1.2%, a level we believe should roughly remain stable throughout the end of the year, and looks favorable compared to UK levels (see chart below). Notable changes month-over-month in German CPI were: clothing and footwear -3.5%; diesel oil -2.0%; and restaurants and hotels +2.6%.

Exporting Away - mh2

Matthew Hedrick

Analyst