Germany’s HCOB composite PMI rose to 49.5 in June, above expectations of 48. The reading moved closer to the 50 threshold that separates expansion from contraction, pointing to a softer pace of decline in overall private-sector activity.
The June outcome marked an improvement on forecasts and suggested the economy may be stabilising as mid-year progressed. While the index remained below 50, the higher-than-expected result indicated that conditions weakened less than anticipated.
Outlook for Growth, Equities, and Currency Markets
We see the latest German composite PMI data as a signal that the economic downturn may be bottoming out. While the 49.5 figure is still below the 50-point mark indicating contraction, it is a significant improvement over the expected 48 and the prior month’s reading. This “less bad” news reduces the probability of a deep recession and suggests a modest upward revision to growth is warranted.
Given this, we are adjusting our stance on German equities, particularly the DAX index which has been trading in a tight range around 18,500 points. We believe selling out-of-the-money puts with late July expiries is now a viable strategy to collect premium. This reflects our view that while a major rally is not imminent, the risk of a sharp downside move has decreased.
This data also provides support for the Euro, which has been struggling to hold the 1.09 level against the US dollar. A stronger German economic pulse lessens the pressure on the European Central Bank to consider rate cuts, a narrative that has weighed on the currency. We are therefore considering short-dated call options on the EUR/USD pair to position for a potential relief rally towards 1.10.
Interest Rates, Bunds, and Volatility Implications
For interest rate derivatives, this news suggests the German 10-year Bund yield, currently at 2.65%, may face upward pressure. Better economic performance typically stokes inflation concerns and reduces the appeal of safe-haven government bonds. We saw a similar dynamic in late 2023 when resilient data pushed yields higher, so we are cautious about holding long positions in Bund futures.
Finally, we expect this positive surprise to dampen market volatility in the near term. The VDAX-NEW index, a key measure of German market fear, is likely to drift lower from its current reading of 15. Selling volatility through options or futures presents an opportunity as investor sentiment cautiously improves.
