Why are market ignoring slow-down in Germany? German yield will test all-time low

Back from major trip to Brazil, Uruguay, US and Spain.

 

The one thing which to me is being ignored by the market is the coming slow-down in Germany. The market can of course go up in times of weaker growth, but my big "thing" is that no one believes Germany economically is slowing despite very negative macro changes in the last twelve months:

 

ü  The China rebalancing will cost Germany export volume.

ü  The most expensive energy policy in Europe – a drive away from atomic power dependency to a less obvious dependency on Russian gas.

ü  Ukraine crisis. According to the Federation of German Wholesale, Foreign Trade and Services (BGA) about 6.200 German companies are doing business in Russia.

ü  The coming Chinese devaluation of CNY – will significantly lift Chinese import prices.

 

I had to write a monthly OP-ED for Swiss Financial newspaper and as I sat down to verify my long held opinion that Germany would slow-down in Q4 I was surprised to find Germany already seeing relative dramatic slow-down signs:

 

German & China Export is interlinked. Germany export "capacity" – China converts it to net export….

 

 

Better link; https://twitter.com/Steen_Jakobsen/status/466152903968055296

 

 

 

German export climate in IFO survey. Slight negative trend recently.

 

Better link: https://twitter.com/Steen_Jakobsen/status/466177268264751104

 

 

Citigroups Surprise Index – Europe (Source: Bloomberg LLP & Saxo Bank A/S)

 

 

Better link from internet: https://twitter.com/Steen_Jakobsen/status/466495786105049088

 

 

German 10 Y Bund & Citigroup's Surprise Index (Source: Bloomberg LLP and Saxo Bank A/S)

 

 

Better link: https://twitter.com/Steen_Jakobsen/status/466495044262707200

 

New low for the year in CESIEUR Index – Citigroup Surprise Index…..

 

German Manu Export YOY & GDP Chain GDP YOY….. (Source: Bloomberg LLP and Saxo Bank A/S)

 

 

Better link: https://twitter.com/Steen_Jakobsen/status/466495245056999424

 

 

If history is any guide growth should hit zero inside next quarters..

 

Conclusion/Strategy

 

I have constantly argued for this slow-down being logic based on Germany's Asia dependency on export volume growth but with poor policy responses from Germany on energy and a neglected understanding of the Russian exposure the market is in for very negative surprise on growth as we leave 2014. More than 6.200 German companies are involved in Russia – The Economist claims more than 300.000 jobs depends on Russia export. Russia is Germany's 11^th biggest export market & its 7^th biggest import market. Germany now imports more than 70% of its energy and which more than 25% comes from Russia. Merkel has created a risky energy policy which makes her impotent in international dealings.

 

Europe and Germany must soon own up to the fact that we are energy deficient. We run major short position in energy. That should be the main topic for the next EU Council Minister meetings, but instead they are going to celebrate the crisis is finally over…. The King is dead – long live the King.

 

DAX Index – (Source: Bloomberg LLP & Matt Hastings)

 

 

https://twitter.com/Steen_Jakobsen/status/466496819833602049

 

 

I have been long core European bonds since Q4 last year – that position combined with short EUR and AUDUSD remains the only three trades I have on and also the only three trades I have done in the last three months. Our rule of stock market lagging real economy by three month would indicate that DAX is getting very close to "full price" – I have presently no positions in stocks, but I am looking for way to short either naked or against Nikkei over next week. We need a catalyst to upset the status quo.

 

Safe travels,

 

Steen

 

 

 

Med venlig hilsen  |  Best regards
Steen Jakobsen  |  Chief Investment Officer

 

Saxo Bank A/S  |  Philip Heymans Allé 15  |  DK-2900 Hellerup
Phone: +45 39 77 40 00  |  Direct: +45 39 77 62 23  |  Mobile: +45 51 54 50 00

 

Research: http://www.tradingfloor.com/traders/steen-jakobsen

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