Position: Bullish Bias on German Equities (EWG); Long British Pound (FXB)
It’s just one data point, but it is in line with our forecast for fundamental economic data in Europe to show a meaningful negative inflection in August and continue downward into the end of the year as austerity measures throughout the region set in and choke off growth. ZEW’s sentiment survey for Germany is but one survey we track, however its 6-month forward-looking gauge of economic sentiment fell off a cliff month-over-month, from 21.2 in July to 14 in August, with consensus expectations at 21 (see chart below). Conversely, the current situation ramped up materially, from 14.6 to 44.3, however we’ve found the current situation to be a lagging market indicator and therefore put greater stock in marginal changes in the economic sentiment curve.
With the DAX just hovering above its TREND line of support at 6076, we’re waiting to see if it makes a confirming move before taking an investment position.
Should you need to get invested in Europe, we continue to like countries with lower deficit and debt levels, like Germany, Denmark, Sweden and the Netherlands. Inflation in the UK, which was reported today at 3.1% in July Y/Y, and further deterioration in its housing market continue to be concerns. We’re long the British Pound in our virtual portfolio as a play versus the deterioration in the US Dollar. Our TRADE (3 weeks or less) range for the GBP-USD is $1.55-$1.61 with TREND line support (3 months or more) at $1.50; our TRADE range for the EUR-USD is $1.26-$1.29.