A Fiscal Bang for the Deutschland – Trade Ideas

A Fiscal Bang for the Deutschland - Trade Ideas | Economics Global

After two long days of negotiations, the German government finally presented the next phase of its unprecedented fiscal stimulus package in early June.

Fundamentals

After two long days of negotiations, the German government finally presented the next phase of its unprecedented fiscal stimulus package in early June. Up until now, previous stimulative measures were primarily focused on cushioning the German economy from the COVID-19 pandemic, and mitigating economic fallout throughout the country. With this new stimulus package now clearing the last remaining parliamentary hurdles, the new aim of the German government is to kickstart the economy.

Since the start of the COVID-19 crisis, the German government has agreed on unprecedented fiscal support and stimulus measures amounting to over 30% of GDP. In our view, what is fascinating about these measures, is not only the size of the stimulus packages, but the fact that the German government made a complete 180 in its approach to fiscal policy. The country went from being the poster child on austerity to big fiscal spender in a few months. Just last year, such a development on German fiscal policy would have been unimaginable.

Given these stimulative measures to support the German economy, we believe it is worthwhile for investors and traders to give German assets as second look.

Market Sentiment

As a result of the about-face from the German government in terms of its fiscal policy, coupled with the improving overall market sentiment, German assets have seen a nice uptick in market performance since March. Since bottoming out in March, German equities have risen an impressive 54.65% to become the top-performing equity market in Europe as of June. To lend further support to this stellar performance, yields on German the 10-year government bond have risen from their historic lows of -0.900% in March, to -0.309% in June, as investors sold German bonds to take on more risk across the asset spectrum.

Technical Analysis

German Equities – Bullish

The AUD/USD took a beating in the first quarter of the year, as the COVID-19 pandemic spread throughout the world, and traders dumped risky currencies for safe haven assets. The AUD/USD plunged to a low of US$0.5497 in March, a level not seen since the 2008 Global Financial Crisis (“GFC”). However, since the March lows, the AUD/USD pair has surged off the back of improving economic data from China, as well as increased global optimism over a COVID-19 vaccine, prompting global traders to rush back into the currency pair.

Since then, AUD/USD prices have broken out of a consolidation pattern in May, and haven’t looked back since, reaching US$0.7139 – a level not seen since December 2019. The AUD/USD is also showing strong bullish momentum, as the RSI has been rising steadily in recent weeks. To us, this is a clear indicator that the recent increase in price is backed by solid upward momentum. Lastly, the ATR has been trending lower since peaking at 0.0227 in April, finally breaking below its 20-day EMA. To us, this signals that market volatility in the currency pair has been decreasing in recent weeks, which is a good sign for the bulls.

In terms of market sentiment, it has been in favor of the Aussie since March. The Bull Power Bear Power Histogram rose to 0.00084 from its March lows, its highest since January 2018, as investors have become increasingly comfortable with taking on more risk in the Australian currency. Lastly, since May, the Schaff Trend Cycle has been solidly in green bullish territory, indicating to us that the Aussie is firmly in a bullish cycle against the US Dollar.

10-Year German Government Bonds: Prices: Bearish; Yields: Bullish

10-Year German bond prices put in a Double Top at around €107.55 in March, but have come off their highs since. Since their March top, German bond prices have fallen to €103.27 in June, as investors dumped bonds in favor of risky assets. However, it must be noted though that despite this recent price action, German bonds have been range bound since March 2019, fluctuating between €101.85 and €107.55 since then. Nonetheless, 10-Year German bond prices have been on the decline since their peak in March, as can be seen by the declining trend line (Red Trend Line), indicating that the bond bears are in control at the moment. This recent decline in bond prices is also backed by a declining RSI, which to us indicates that the recent sell off in bond prices is also backed by steady bearish momentum as well.

Further, market sentiment does not seem to be on the bulls’ side either. As shown by both the Bull Power Bear Power Histogram and the Schaff Trend Cycle, market bulls made an attempt in mid-May to push bond prices higher, but ultimately failed. This indicates that a bearish trend is currently underway.

If this bearish momentum continues, we could see 10-year German bond prices drift lower to €101.85.

Despite the bearish outlook in 10-year German bond prices, yields on the German 10-year paint a different picture.

Similarly to the price action, yields have also been range bound since May 2019, fluctuating between -0.20% and -0.748%. However, after putting in a Double Bottom in early March, yields on 10-Year German bonds have rallied from -0.748% in March, to around -0.332% in June, and look like they are trying to move higher. This recent increase in yields is also backed by a steadily increasing RSI, which to us indicates that the recent rise in yields is also supported by steady bullish momentum.

From a sentiment perspective, the Bull Power Bear Power Histogram has turned green, indicating that bullish sentiment is slowly beginning to creep into German bond yields. Further, the Schaff Trend Cycle entered green territory in early April, and has taken off since then. This signals that yields on the German 10-year have comfortably entered a weekly bullish cycle, and do not appear to be slowing down anytime soon.

If this bullish momentum continues in yields, we could see yields head toward -0.209% and attempt a move higher above this level. If they can “Breach and Close” above -0.209%, we believe the next stop for yields could be 0.187%. If on the other hand they can’t close above that level, we could see yields drift lower to -0.748% and stay within its current range.

Overall, we are bearish on 10-Year German bond prices, and subsequently bullish on 10-Year German bond yields.

Related Market Commentary

A Fiscal Bang for the Deutschland

Content Disclaimer

Any views expressed here are those of Economics Global Inc. as of the date of this publication, are based on available information, and are subject to change without notice. This document does not constitute investment advice.

The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns.

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A Fiscal Bang for the Deutschland – Trade Ideas

After two long days of negotiations, the German government finally presented the next phase of its unprecedented fiscal stimulus package in early June.

Fundamentals

Market Sentiment

Technical Analysis

German Equities – Bullish

10-Year German Government Bonds: Prices: Bearish; Yields: Bullish

Related Market Commentary

© 2020 Economics Global Inc.

Content Disclaimer

Any views expressed here are those of Economics Global Inc. as of the date of this publication, are based on available information, and are subject to change without notice. This document does not constitute investment advice.

The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns.