Germany\u2019s working-day adjusted gross domestic product rose 0.9% year on year in the second quarter, up from 0.5% previously. The pickup points to firmer output compared with the prior period.<\/p>\n
The W.D.A measure adjusts GDP to account for differences in the number of working days between periods. The latest 2Q reading therefore indicates a faster annual expansion on this calendar-adjusted basis than in the preceding comparison period.<\/p>\n
Germany\u2019s Q2 GDP beating expectations at 0.9% year-on-year proves that Europe’s largest economy is finally pulling out of its stagnation phase. We believe this strong growth will force the European Central Bank to reconsider the pace of its interest rate cuts, especially since the market was pricing in a much softer eurozone recovery. Derivative traders should immediately prepare for a “higher-for-longer” rate environment in Europe, shifting away from aggressive easing bets.<\/p>\n
Historically, when German growth accelerates past 0.8%, 10-year Bund yields experience upward pressure as inflation worries linger. We suggest shorting German government bond futures (Bunds) in the coming weeks, as yields are likely to climb back toward the 2.5% resistance level. Additionally, traders should reprice December 2026 EURIBOR futures to reflect fewer rate cuts than the market previously anticipated. <\/p>\n
On the currency front, the euro is poised to strengthen, making EUR\/USD call options an attractive play as the monetary policy gap with the US narrows. Meanwhile, we advise hedging long exposure in DAX index options because higher yields will likely cap stock valuations despite the stronger economic growth. Focusing on short-term implied volatility in eurozone equity derivatives will be key as the market adjusts to this hawkish shift.<\/p>\n\n\n\n