From: Chris Jarvis <chris.jarvis@archr.com&gt;
Sent: 12 May 2021 10:12
To: Futures <futures@archr.com&gt;
Subject: ZEW as a contrarian indicator

 

German ZEW economic sentiment significantly beat expectations yesterday at 84.4 vs 72. This kept an offer tone to bunds for much of the session and broke the dreaded 12.5yr trendline…. 😐 (that GS allude to below). Banks continue to reiterate bearish takes on Euro duration with the subsequent RM repositioning beginning to reverse the widening trend in RX/TY from a high of 205bps to now challenging key support at 178bps. I am intrigued by an alternative hypothesis to these bearish rates views over a longer term view and argue that a lot of this hype is now in the price- particularly the case for equities. Non-US stocks and Euro nominals move in sync with the average ZEW expectation of economic growth for EU, UK and JP readings (attached). Coming off extreme readings like we have just seen often act as a precursor to equity weakness and ultimately feed in to lower yields as so much optimism is already baked into the price which, for rates, cant be sustained as equities begin to reverse. This is consistent with last weeks US data being fundamentally small neg for equities which is starting to be reflected in US equity market structure as smart money are beginning to distribute longs in to this euphoric, largely speculative, margin driven stocks buying. A dangerous combination!  ( https://squeezemetrics.com/monitor/dix? ).

 

GS- From a cash perspective Bunds yields are breaking some huge levels which also has important implications for FX, specifically EURUSD:

•             First it was the break of the 12.5yr trendline indicating an end to that long term bull trend from 4.70% to -91bps

•             Now we are breaking the pivot level of -20.6bps (Jul’16 low in pink). A sustained push above here completes an almost 2yr base and turns the medium and long term trends bearish for +10bps and eventually +51bps

•             This also puts further downward pressure on US-GER 10yr Spread which has reversed its 9m widening trend and begun a medium term narrowing trend targeting 164bps ahead of 155bps

•             This shift from widening to narrowing should put further upward pressure on EURUSD as it resumes its larger bull trend for 1.25/1.26

 

 

 

 

Chris Jarvis Futures and Options T +44 (0)20  7422 2989 E Chris.Jarvis@archr.com 49 Carnaby Street, London, W1F 9PY United Kingdom ARCHR.COM

 

 

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