Germany’s final manufacturing PMI for July is 49.1, up slightly from 49.0 in June, but still below the preliminary reading of 49.2. This indicates ongoing challenges, as a PMI below 50 signals a contraction. Job losses are slowing down, reaching their lowest point in nearly two years. Although the headline index shows some improvement, it has not yet crossed the line into expansion.

Market Optimism Remains Cautious

Companies are still reducing inventory, reflecting a careful approach and uncertainty about a sustained recovery. This cautious mindset is leading to less optimism in the market. There is a positive sign from foreign markets, where demand is picking up, with export orders increasing for four straight months. The recent tariff agreement between the EU and U.S. might affect Germany’s exports to the U.S., but overall demand could steady. The production index indicates output has been growing for five months, though the pace of growth is slowing. While the capital goods sector is thriving, the consumer goods sector is lagging, suggesting that international demand is stronger than domestic consumption. As of August 1st, 2025, the latest figures from German manufacturing show a slow and uneven recovery. Although the PMI has risen, it remains below the crucial 50-point mark, indicating that a strong rally in German stocks is unlikely soon. The DAX index has been range-bound between 18,500 and 19,000 for six weeks, and this report doesn’t provide a reason to expect significant movement. Due to the cautious sentiment among companies and continued inventory cuts, there are opportunities to sell volatility. With companies reluctant to shift into a full recovery mode, the market is likely to remain unpredictable and stable through August. Traders may want to consider selling call options at the top of the current DAX range to take advantage of the lack of strong upward momentum.

Foreign Demand Outpaces Domestic Consumption

One key takeaway is the contrast between strong foreign demand and weak domestic consumption. While capital goods production is thriving, the consumer goods sector is slowing. This situation suggests a pairs trading strategy could be effective: buying shares of major exporters like Siemens, which are performing better than the index, while shorting consumer-oriented companies. Weak domestic conditions are further highlighted by last week’s German retail sales figures, which fell short of expectations, potentially putting pressure on the Euro. The European Central Bank is likely monitoring this consumer weakness closely, especially since July’s flash inflation estimate dropped to 1.9%. This scenario may justify purchasing put options on the EUR/USD pair, betting on potential currency weakness ahead. The new tariff agreement with the U.S. presents a short-term risk, as it could dampen the recent spike in export orders to America. This may create challenges for the DAX in the near future and reinforce a cautious outlook. However, the agreement might reduce overall uncertainty, which helps explain why implied volatility on the DAX has decreased to around 12, its lowest this year. We can look back to late 2023 for a similar scenario. At that time, better industrial data didn’t immediately boost consumer confidence, resulting in a stagnant market for an entire quarter. History suggests that until there is a clear recovery in domestic demand, any rallies in the broader market should be approached with skepticism. Create your live VT Markets account and start trading now.

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