Euro's Fortunes May Turn On A Strong ZEW Investor Sentiment Report

German ZEW (Econ. Sentiment) (MAY) (9:00 GMT)
Euro-zone ZEW (Econ. Sentiment) (MAY) (9:00 GMT)
Expected: 23.0
Expected: 15.0
Previous: 16.5
Previous: 10.7

How Will The Markets React?

Though the European markets have started off the week on a relatively low note, tomorrow?s economic calendar is promising to pick things up a bit. This morning, the euro, DAX index and bunds were all making relatively restrained moves. These small shifts are stifling since all of these assets are at important technical crossroads. The euro was making new record highs this morning against the Japanese yen, while 10-year bund yields and the benchmark equities index were flirting with their own highs. So, what will turn these reserved gains into outright breakouts? Tuesday?s ZEW sentiment survey numbers. Gauges covering optimism in both Germany and the Euro Zone as a whole are scheduled for release, but it will be the former that truly captures traders? interest. German investor sentiment has seen a considerable and steady rebound over the past few quarters. Should the Economic Sentiment report - the outlook component - rise to 23.0 in May from 16.5 as expected, it would be the sixth consecutive improvement. There is considerable evidence to support this promising outlook. The most obvious read on overall optimism comes from price action itself. The buoyancy of the DAX 100 Index itself stands as testament to the market?s outlook on revenue growth and the performance of the overall economy. For the economy?s underlying currents, investors will also source business activity and domestic demand. Certainly executives at German firms have been very optimistic. The IFO Business Climate Index for May is scheduled to hit the wires on Thursday with its best reading since reunification in 1991. Consumer demand is the one puzzle piece that is already in place. GfK?s consumer confidence gauge for the current month has already reported its best showing on record. This report suggests the consumer has weathered Chancellor Merkel?s VAT tax hike and domestic spending will sustain growth running at near-six year highs.
Bonds - 10-Year Euro Bund Futures
Price action in the benchmark 10-year bund has cooled since making the break through 113.40 support last week. The lack of follow through shows the market?s apprehension in bidding yields too high before the ECB?s rate decision only a few week?s from now. As it stands, short-term interest rate futures are pricing in a rate hike for the June meeting; but the curve beyond this expiration flattens out. There is certainly fundamental support in the growth and inflation to carry the policy group?s policy of firming lending rates at a gradual pace for some time; though traders are showing their cautious side and are instead using ECB rhetoric to guide expectations. Nevertheless, tomorrow?s ZEW report could add to the hawkish sentiment if it backs the jump in May?s consumer confidence read.


By holding within a downtrending channel and hesitating near support at 1.3460, technicals suggest EURUSD may be ready for a bounce. The release of the German and Euro-zone ZEW surveys could be just the event to spark the price action to propel the pair higher. As the largest economy within the Euro-zone, the German economic sentiment reading will be the one to watch. That figure is anticipated to improve for the sixth consecutive month, as equities throughout Europe have continued to hit record highs, boosting optimism amongst investors. Another jump in the ZEW survey would bode well for expansion in not only Germany, but the Euro-zone as whole, leaving the region more likely to be able to withstand further monetary policy tightening by the European Central Bank. As a result, EURUSD may start to trek up towards resistance at 1.3520. On the other hand, a disappointing ZEW result could hurt prospects for a June ECB hike, leading the pair down to 1.3400.

Equities - DAX 100 Index
The German equity index worked its way higher, with the DAX 100 closing up 0.2 percent to 7,619.31, led by Bayer and Commerzbank while other European indices were supported by gains in commodity stocks. Bayer climbed 4 percent to 53.22 euros UBS AG raised its share-price estimate for Germany’s biggest drug maker. Meanwhile, Commerzbank AG gained 1.1 percent to 36.38 euros after CEO Klaus-Peter Mueller said he would stay in his job until his contract ends in response to speculation that he might step down early. BASF, the world’s largest chemical company, climbed 1.4 percent to 91.32 euros as the company celebrated the inauguration of its engineering plastics compounding plant in Shanghai, China.
The DAX 100 could further its gains as economic sentiment in Germany is anticipated to improve for the sixth consecutive month in May. Investors have been increasingly optimistic as gains in the equity markets and strong demand for exports have propelled the German economy along at a faster-than-expected pace of 3.0 percent in the first quarter, which has subsequently led to major tightening in the labor markets. While an encouraging ZEW reading isn?t likely to be the sole reason for a European stock rally, it would be nice support for any underlying strength, especially in the DAX 100.