Germany’s ZEW current conditions index for July is at -59.5, which is better than the expected -66.0 and an improvement from the previous -72.0. Economic sentiment has risen to 52.7, exceeding the forecast of 50.3 and up from 47.5.

German Economy Outlook

Despite global uncertainties, about two-thirds of respondents believe the German economy will continue to improve. Optimism is fueled by hopes for a quick resolution to the US-EU trade dispute and government economic support from Germany. Low’s report is clarifying the signals for derivatives traders. The focus isn’t just on the negative current conditions number everyone can feel; the real insight lies in the significant difference in forward-looking sentiment. This is a classic “look-through” market where participants are ignoring current challenges, expecting future gains. For traders, this suggests a strategic move into bullish positions on German stocks, especially for the upcoming months. The strategy is to buy call options on the DAX index with September or October expirations. Why options? The current conditions at -59.5 remind us that underlying issues remain. Holding long futures carries too much risk if the expected government support does not materialize. Call options let us limit our risk while still allowing exposure to the recovery that many ZEW respondents believe in. We’ve seen this playbook before; after the initial pandemic shock in March 2020, ZEW Economic Sentiment jumped from -49.5 to +28.2 in April, long before recovery was confirmed. The DAX rose over 30% in the following three months. The current sentiment rise from 47.5 to 52.7 reflects a similar, though less dramatic, trend.

Trading Strategy

Additionally, implied volatility on the DAX, shown by the VDAX-NEW index, has likely been high due to a series of poor data reports. Recent readings are around 14.8. As positive sentiment strengthens and the “bad news” gets fully priced in, we expect this volatility to decrease, making long option strategies cheaper and more effective. The German economy’s well-known struggles in manufacturing, with steady weakness in industrial production over the past year, have created a buildup of potential. The market is betting on this tension being released, driven by hopes of resolving the trade dispute and providing fiscal support. A more aggressive strategy could involve buying EUR/USD call options, as a recovery in Germany would likely strengthen the Euro. Create your live VT Markets account and start trading now.

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