The Ground Is Shifting In Europe

Our favourite chart to watch these days is EWP (the Spain ETF) vs. EWG (The Germany ETF).

Here’s the latest update via Spain is up big today and Germany is down big today, and so EWP vs. EWG is up nearly 4%.



Not that Spain has been outperforming Germany all month, reversing a trend that had been in place for most of the year.

There are two things going on here, we suspect. One is that the German economy is weakening, finally, so it just makes sense that the German stock market (the DAX) would play catch up on the downside).

The other factor here is that people sense that Germany is backstopping Spanish debt, and that Spain will not ultimately be pulling a Greece.

So that’s one chart, and one shift.

Now here’s another chart that we think is interesting.

This is a chart (via of the intraday yield on the German 10-year bond.

The yield is higher on the day.


Photo: Bloomberg

Now in Germany, a rising yield on the 10-year would normally be associated with a rising stock market, because both would represent optimism, as traders abandoned the safe-haven German bunds.

But today we have the opposite. German yields are rising while the DAX is falling, which could mean two things, or maybe both.

One is that yields are rising because people perceive Germany to be more of a credit risk. And the other possibility is that yields are rising because people are less worried about a systemic event than they were before.

This seems likely, since Spanish yields are lower today (significantly).

Bottom line, things are changing. The German economy is weakening, Bunds are being seen as less desirable, and the Spanish blowup (for the moment) is being seenas likely.

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