Germany’s imports fell 2.5% month on month in May, undershooting market expectations for a 0.1% increase. The outturn points to weaker inbound trade flows at the start of the second quarter.
The gap between the actual reading and the forecast was 2.6 percentage points, marking a clear downside surprise in the latest monthly data.
German Economic Momentum Weakens Further
The sharp -2.5% drop in German imports for May confirms a significant slowdown in domestic demand for Europe’s largest economy. This is not an isolated event, as recent industrial production figures also fell by 1.8% and the latest Ifo Business Climate index dropped for the third straight month. We see this as a clear signal of weakening economic momentum heading into the second half of the year.
Market Implications: Euro, Equities, Volatility, And Rates
Given this trend, we are positioning for a weaker Euro against the US dollar in the coming weeks. With Eurozone inflation recently dipping to 1.9% in June, the European Central Bank has little reason to be hawkish, making rate cuts a more probable scenario than rate hikes. We are therefore looking at buying EUR/USD put options with expirations in late August or September.
This economic weakness should also weigh on German equities. We anticipate corporate earnings forecasts for the third quarter will face downward revisions, putting pressure on the DAX index. Consequently, we are buying put spreads on the DAX to protect against a potential slide below key technical support levels.
The growing uncertainty suggests a rise in market volatility. The VSTOXX index, which measures Euro Stoxx 50 volatility, is currently trading near historical lows around 14. We believe this is too low and are buying VSTOXX futures to profit from an expected pickup in market turbulence.
Finally, we expect interest rate markets to price in a more aggressive ECB easing cycle. Historically, the ECB has acted decisively during periods of slowing growth, as seen in the 2011-2012 period. We are using Euribor futures to position for lower short-term interest rates across the Eurozone by the end of the year.
