ZEW biggest fall since infamous August 2011

Western sanctions on Russia and the escalating uncertainty on the spillovers to the eurozone’s largest economy are manifesting themselves in the latest German ZEW sentiment survey. Euro selling remains the order of the day in FX as traders are increasingly selling the rebounds against most major currencies.

The ZEW current conditions index fell from 61.8 to 44.3 in August, reaching the lowest level in seven months. The 17-point decline was the biggest since August 2011.

The ZEW economic sentiment index fell to 8.6 from 27.1, its lowest level since December 2012. The 18.5pt decline is the biggest since June 2012

The ZEW expectations index plunged to a 20-month low of 23.7 from 48.1, also registering the biggest slump since August 2011.

Recall that August 2011 witnessed the last major stock market correction, which was mostly dominated by the US budget deadline standoff and Berlusconi’s backtracking from public finance reforms urged by the ECB and the EU.

The S&P 500 fell 18% in 12 days to reach a 12-month low, which was the last time the index fell for four straight weeks, something not seen since February 2009. Germany’s Dax fell 26% in 10 days and sovereign bond yields had surged to record highs.

PMI next shoe to drop

The chart below shows Germany’s Purchasing Managers Index surveys to have shrugged the recent break in corporate confidence seen in the ZEW and IFO surveys. The services PMI hovers at a three-year high of 56.7.

The PMI survey is collected from a panel of over 500 companies based in Germany’s manufacturing and service sectors, while the ZEW survey includes up to 350 financial and economic analysts, conveying the net difference between optimistic and pessimistic views. The PMI’s greater pool of respondents may be a reason behind dampened volatility in the surveys. Any pullback towards the 50-level will trigger the alarms with regards to the eurozone’s biggest economy.

Meanwhile, Germany’s IFO surveys have drifted at 10 to 12-month lows. These are based on 7,000 monthly survey responses from firms in manufacturing, construction, wholesaling and retailing. The expectations component usually exaggerates sentiment during upturns and downturns, but the converging decline of the past three months cannot be missed.

The August release for Germany’s PMI services and manufacturing surveys is due on August 21st, followed by the August release of the IFO survey four days later.

These figures are not out before the release of Germany’s Q2 GDP report, due on August 14, which is expected to show the first contraction q/q since Q4 2012.

From EUR/USD to EUR/JPY

Our bullish euro stance from the start of the year was abandoned on the outcome of the June ECB decision to enter negative rates, with preferred shorts in EUR/AUD and EUR/USD. While we scaled down our negative stance in EUR/AUD, we stick with 1.3220 target in EUR/USD and more pronounced weakness in EUR/JPY to reach 131.70.