EM FX weekly

Strong ZEW number suggests significant upside in European equities

Equities 5 minutes to read

Peter Garnry

Head of Equity Strategy

Summary:  The ZEW survey measuring expectations for economic growth by German industry hit highest level since May 2000 yesterday as the rebound narrative strengthens. We looked at European equities and their performance pre and post a strong ZEW reading measured as above 60 with a positive m/m change. There are 32 cases since December 1991 and in 66% of those cases the European equity market was higher.


Yesterday the ZEW Expectations of Economic Growth Index for September hit 77.4 vs. estimated 69.5 hitting the highest level since May 2000. Given the ongoing uncertainty over Brexit with Boris Johnson’s latest turnaround and resurgence of COVID-19 cases in Europe it seems that Germany’s industry is deriving its positive expectations from a strong economic rebound in Asia which has managed the COVID-19 pandemic much better than Europe.

16_PG_1
Source: Bloomberg

For the past six weeks the leading European equity index, the Euro STOXX 50 Index, has been trading in a tight trading range, but as we alluded to in our Saxo Market Call podcast today, the strong ZEW number is skewing the probability in favour of an upside breakout. Historically a strong ZEW reading with positive m/m reading has predicted strong returns in the subsequent two months to the release.

16_PG_2
Source: Saxo Group

66% win ratio and median return of 3.3%

We have looked at all the samples since December 1991 where the ZEW was above 60 and had a positive m/m reading. There are 32 samples in total corresponding to 9% of all ZEW readings. The chart below shows the median path of all 32 samples 42 trading sessions in the Euro STOXX 50 (on a total return basis) prior and after to the ZEW release. As can be seen there is a strong momentum in the European equity market in the months leading into such strong ZEW reading but even more importantly the strong momentum continues in the subsequent two months.

16_PG_3
Source: Bloomberg and Saxo Group

The median path ends up 3.3% after two months and the win ratio is 66%. But even more importantly the interquartile range goes from -2.6% (25% percentile) to +7.2% (75% percentile) indicating a distribution that is heavily skewed towards positive numbers increasing our conviction that the ZEW number yesterday will lead to positive European equities over the coming months.

The number of samples are of course small so the variance in outcome is large. A stronger EUR could also turn out to be a risk to this technical setup in combination with further Brexit uncertainty and surging COVID-19 cases.

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)
Full disclaimer (https://www.home.saxo/legal/saxoselect-disclaimer/disclaimer)

Trade responsibly
All trading carries risk. Read more. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more

This website can be accessed worldwide however the information on the website is related to Saxo Bank A/S and is not specific to any entity of Saxo Bank Group. All clients will directly engage with Saxo Bank A/S and all client agreements will be entered into with Saxo Bank A/S and thus governed by Danish Law.

Apple and the Apple logo are trademarks of Apple Inc, registered in the US and other countries and regions. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.