European ZEW to drag broad Euro sentiment lower

The European Economic Sentiment Indicator is a broad measure for sentiment across the Euro Area and Union. It also includes sub-indices of confidence for industrial, services, consumer, retail trade and construction for Europe and each constituent member. I will be analysing it each month too assess the business cycles within Europe, with the goal of building a stock portfolio around it. Similarly, I’ll be using the ISM PMI reads for US to form my views on the US stock market and economy.

The YoY% change is fairly good at anticipating significant turning points on the underlying index. Notice how it has created a bearish divergence since the 2013 high and has recently dipped below zero. I expect the ESI indicator to remain below the 2015 high and make its way towards the 100 threshold and below, to mark broad bearish sentiment for the Euro Area.

I will delve into individual regions in follow-up analysis to drill down on the stock market as the purpose of today’s post is to compare the ZEW sentiment read with the ESI, as it appears to be a good leading indicator of the ESI.

 

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  • The ZEW economic indicator for the Euro area contracted at its fastest rate since Aug 2012
  • The Zew can lead the ESI by anything from 4-18 months, occasionally longer.
  • The ESI (grey shaded chart) has also produced a lower high in Q4 ’15, so we could begin to see the broad read for European sentiment become weighed down over the coming months.
  • As I’m bullish on US PMI reads, I’ll be seeking long US / short EUR stocks as part of my initial watchlist.

European Sentiment Indicator for July 2016

 

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