Strong ZEW number suggests significant upside in European equities
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.
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.
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.
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.
Latest Market Insights
Q4 Outlook 2022: Winter is coming
- Winter is coming to the financial markets as central banks are tightening their grip. How spring will look is still a question.
European energy crisis: it will get worse before it gets betterThe winter in Europe will be tough, but whether the result is political chaos or sustainable, innovative solutions is still undecided.
A difficult and volatile quarter awaitsAs the year draws to an end, commodities continue to be at centre stage of the world with growth pockets political uncertainty.
The bright side: crises drive innovationThe positive spin on crises is that they come with solutions. It is worrisome that deglobalisation may be a response to this crisis.
Green transformation in China: renewable energy and beyondGoing green, China needs to span numerous energy sources to ensure stability, as every source comes with a challenge.
Asia: Intermittent solutions, but a faster renewable adoption curveAsian energy supply is being squeezed. This and the adoption of renewables may change the investment sentiment in the region.
FX: A Fed thaw needed to deliver a sustained USD turn lowerThe US Dollar can keep momentum when the Federal Reserve continues to tighten, leaving the rest to play to their drum.
Autumn can become ugly for equities and bond holders. Comfort for Dollar longsTechnical analysis suggests that equities could face a tough Q4 as could fixed income. US Dollar positions could provide some upside.
The next stock market sector to watch, with stocks going nuclearAs the world scrambles to find affordable, sustainable energy, nuclear is getting attention from politicians and investors alike.
The crypto space is getting cold when the hype disappearsCryptocurrencies face a winter of their own as retail investors and governments are asking tough questions.