Ireland’s gross domestic product fell 17.1% year on year in the first quarter, undershooting expectations for a 6% decline. The result points to a sharper contraction than markets had priced in, reversing the pace implied by forecasts.
The 1Q reading leaves a gap of 11.1 percentage points versus consensus. The data show GDP running well below anticipated levels for the period, with the headline figure firmly in negative territory.
GDP Shock Driven By Multinationals And Market Volatility
The first quarter’s gross domestic product figure of -17.1% is a significant shock, far exceeding the -6% consensus. While alarming, we understand this is likely driven by the distorted nature of Ireland’s multinational-dominated economy rather than a true domestic collapse. The movement of intellectual property by just one or two large tech or pharmaceutical firms can cause these massive swings.
We have seen this kind of volatility before, such as the infamous 26% GDP surge in 2015, which was similarly disconnected from the real Irish economy. The key is to trade the headline sentiment while understanding the underlying cause. Therefore, our initial response will focus on the predictable market overreactions in the coming days.
Trading And Market Strategies In Response
For our foreign exchange desk, we see this as an opportunity to position for short-term weakness in the euro, particularly against the British pound (EUR/GBP) given the close economic links. We will look to build a position in put options on the EUR/USD pair, as international algorithms will sell the euro on this data. A break below the 1.06 level in the coming weeks seems highly probable.
On the equity side, the Irish Stock Exchange (ISEQ 20) is an immediate target. We will be shorting ISEQ 20 futures, as the headline number will undoubtedly spook investors who are not familiar with these statistical quirks. We expect the index, which has been hovering around 8,900 points, to test support levels near 8,500.
This kind of surprise data release dramatically increases implied volatility, which we can use to our advantage. We will be buying straddles on the most prominent Irish banking stocks, which are more sensitive to perceived domestic economic health than the multinationals. This allows us to profit from a large move in either direction as the market digests the news.
Finally, we anticipate a widening of the spread between Irish and German 10-year government bonds. While the European Central Bank will likely prevent a full-blown crisis, we expect Irish bond yields to rise from their current 3.1% toward 3.5% as credit risk is repriced. Shorting Irish government bond futures is the most direct way to execute this view.
