Germany’s ZEW current conditions index for July stands at -59.5, surpassing the expected -66.0 and showing improvement from the prior -72.0.
Economic sentiment has also increased to 52.7, outperforming the anticipated 50.3, up from a previous 47.5.
German Economy Outlook
Despite ongoing global uncertainty, nearly two-thirds of respondents anticipate the German economy to keep improving. Hopes for a quick resolution to the US-EU trade dispute and economic stimulus from Germany’s government are supporting the overall optimism.
Based on what we are seeing in Low’s report, the signal for derivatives traders is becoming clearer. The key isn’t the abysmal current conditions number, which everyone already feels; the real money is in the sharp divergence of forward-looking sentiment. This is a classic “look-through” market, where participants are deliberately ignoring the present pain in anticipation of future gain. For us, this suggests a tactical move into bullish positions on German equities, specifically targeting the coming months.
The play is to buy call options on the DAX index with expirations in September or October. Why options? Because while sentiment is improving, the -59.5 current conditions print is a stark reminder that underlying fragility remains. Outright long futures carry too much risk if the expected government stimulus falters. Call options, however, allow us to cap our downside while maintaining upside exposure to the recovery story that nearly two-thirds of ZEW respondents are betting on. We’ve seen this playbook before. After the initial shock of the pandemic in March 2020, ZEW Economic Sentiment surged from -49.5 to +28.2 in April, long before economic data confirmed a recovery. The DAX rallied over 30% in the subsequent three months. The current sentiment jump from 47.5 to 52.7 is a similar, albeit less dramatic, signal.
Trading Strategy
Furthermore, implied volatility on the DAX, as measured by the VDAX-NEW index, has likely been elevated due to the recent string of poor data. Recent readings have seen it hovering in the mid-teens, for example, around 14.8. As positive sentiment solidifies and the “bad news” is fully priced in, we expect this volatility to compress, making long option strategies cheaper and more effective. The German economy’s well-documented struggles in manufacturing, with industrial production figures having shown consistent weakness over the last year, have created this coiled spring. The market is now betting on the release of that tension, fueled by hopes of resolving the trade dispute and fiscal support. A secondary, more aggressive trade would be to buy EUR/USD call options, as a German recovery would be a primary driver for a stronger Euro.
