European stocks and GDP

It’s not been a great day for global growth with the UK and US seeing weaker than expected rates of growth for the first quarter of this year. Next week we get the first reading of Eurozone GDP, the market is expecting a healthy 0.5% quarterly expansion. If this is confirmed then it would easily outpace rates of growth in the US and the UK.

Eurozone puts its foot on the gas

The Eurozone has had a surge in better than expected growth recently. Citi’s Eurozone economic surprise index has turned higher in April, this compares with a spate of data disappointments from the UK and the US, with the UK’s economic surprise index dropping to its lowest levels since June 2016. While this is only an economic sentiment indicator, it does suggest that the US and UK economies are starting to hit the skids at the same time as Europe’s economy is putting its foot on the gas.

The impact of GDP on asset prices

So, can better growth in the currency bloc translate to an actual rise in European asset prices? To try and answer this question we have designed a correlation matrix that looks at the short term relationship between German 10-year bond yield (as a proxy for Eurozone growth), EUR/USD, Eurostoxx 50 index and the Dax. The 1-month correlation between the German bond yield is strongest with the Eurostoxx index, which tend to move in the same direction 64% of the time. The German stock index the Dax tends to move in line with the German bond yield 58% of the time, while the EUR/USD only has a 40% correlation with German bond yields, which is deemed insignificant.

We have used the German bond yield as a proxy for European growth because we expect the yield to be sensitive to the growth trajectory of the Eurozone, due to the very large contribution that the German economy makes to the overall Eurozone growth rate. The conclusions that we can draw from this analysis is that if we get a strong reading of Eurozone GDP next week, then we could see a jump in the German bond yield, if this is sustained then we can reasonably expect a rise in the Eurostoxx index and the Dax index.

Why the euro is not as sensitive to GDP as you would expect

EUR/USD’s reaction to the GDP report next week is slightly harder to forecast, while we would expect an immediate upswing in the euro if GDP is stronger than expected, this might not last. The most likely reason for this is that EUR/USD has multiple drivers that could be more important to the euro than just the GDP rate.

European stocks could be purest way to trade EZ GDP

Overall, our analysis suggests that the major European stock markets have a closer relationship to Eurozone growth prospects, and thus may be more sensitive to Europe’s GDP reading compared to the euro when it is released on 3rd May.

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