Of Double-Downgrades, Booming GDP And Stocks That Are Priced To Perfection

European shares were looking for some respite on Tuesday after a five-day selloff and it looked like they might find it after German GDP data came in hot.

The German economy expanded 0.8% q/q in Q3, easily beating consensus (0.6%) and matching the highest estimate of the 48 economists polled by Bloomberg.


There was the usual generic commentary about how Germany is the engine of the European expansion and about how this is further evidence that the ECB’s efforts to drag the bloc kicking and screaming out of the deflationary doldrums are paying off and all the commentary was accompanied by stock photos of people in hard hats making shit with screwdrivers.

Two things: it looks like Germany is overheating a bit, which is generally fine but worth noting, but more importantly, every time we get data like this it, of course, drives the euro sharply higher and pressures stocks. Here, look:


To be sure, there’s nothing particularly novel about that observation, but it’s probably not a stretch to say that it’s more important now than ever as the ECB gets set to start paring asset purchases. As we saw over the summer, you don’t want the euro running too far, too fast because that ends up short-circuiting the very recovery policymakers have spent years nurturing and it sets up an endless regression where tightening has to be delayed in the interest of not catalyzing still more upside in the currency.

Underscoring this is Deutsche Bank’s double-downgrade of German equities issued on Monday (they moved from Overweight to Underweight). Here’s the rationale:

Germany: downgrade from overweight to underweight. German equities have outperformed the European benchmark by 6% since mid-August. We now downgrade the country from overweight to underweight. We downgrade German equities to underweight again, given that: a) German equities’ price relative no longer looks too low relative to the trajectory suggested by Euro area PMI momentum; b) Germany has overshot its correlation with the euro trade-weighted index, which our FX strategists expect to stay around current levels until year-end; c) our country model, based on the trade-weighted euro and the performance of cyclicals versus defensives implies more than 5% underperformance over the coming months; and d) unlike three months ago, the index looks slightly expensive on our country valuation scorecard.



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