The Eurozone’s services PMI for July was 51.2, which is slightly higher than the expected 50.7 and up from last month’s 50.5. The manufacturing PMI was 49.8, compared to the forecast of 49.7. The composite PMI came in at 51.0, exceeding the anticipated 50.8. Overall, business activity hit an 11-month high, mainly due to improvements in the services sector. New orders are stabilizing, aiding the recovery, while input cost inflation is easing. Despite this progress, companies kept their output prices steady from June.

Gradual Recovery Observed

The Eurozone economy is gradually recovering. The decline in the manufacturing sector may be ending, while growth in the services sector improved slightly in July. The GDP Nowcast suggests strong growth for the third quarter, although more data is needed for a full picture. Germany is cautiously expanding its manufacturing output, balancing out France’s industrial struggles. Political uncertainties in Paris affect France’s outlook, which is marked by planned budget cuts and tension. Germany expects modest growth, thanks to government spending and investment, while France might contract slightly due to its political climate. The trend of reducing inflation in services continues, influenced by outside factors. The unexpectedly strong PMI data indicates that the Eurozone’s economy is starting to recover. Consequently, we are cautiously optimistic and see this as a chance to invest more in broad European indices, like the Euro Stoxx 50, using call options or bull call spreads. The decline in input cost inflation should help corporate profit margins.

Divergence Between Economies

The differences between Germany and France’s economies present a key trading opportunity in the coming weeks. German factory orders rose by 0.5% month-over-month, while French consumer confidence dropped to a six-month low of 89. This reinforces our preference for long positions in the German DAX index versus short positions in the French CAC 40. Political uncertainty in Paris, particularly regarding Mr. Bayrou, presents a risk not yet fully reflected in the European market. Implied volatility on CAC 40 options has increased to 18%, while the VSTOXX index for the Euro Stoxx 50 is lower at 14%. This creates a chance to buy volatility on French assets through straddles to protect against or speculate on significant market movements. The widening gap in economic performance echoes the 2012-2014 period, when long Germany/short France trades were quite profitable. History shows that once such divergences appear, often fueled by economic and political factors, they can last for several quarters. We are preparing for a similar trend. For the European Central Bank, this data paints a more balanced picture, lessening the urgency for further rate cuts. Money markets currently assign a 40% chance for another cut by September, and these stronger growth numbers might lower that probability. So, we advise caution in anticipating a sharp decline in short-term interest rates. Create your live VT Markets account and start trading now.

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