Future Outlook

Many are feeling uncertain about the future as the outlook index drops. This is mainly due to high long-term interest rates and challenges for the new government. While input price inflation has lessened, it still poses issues for construction. There are some signs of improvement, such as faster supplier delivery times—the best they’ve been since February. Subcontractor availability has increased, although the pace is slow, and their prices are rising more than before. The construction environment remains tough, and any recovery is expected to be gradual. The German construction PMI is at 46.0, clearly indicating weakness in this key area of Europe’s largest economy. This trend isn’t new; it mirrors what we saw during the economic downturn in 2023 when rising interest rates first impacted growth. The data strengthens concerns about German domestic demand in the coming weeks. With a significant fall in new orders for residential and commercial buildings, it may be wise to consider buying put options on major German construction and real estate firms. Companies like Vonovia and Heidelberg Materials, which are sensitive to the housing market, are good candidates for bearish bets. Recently, Heidelberg Materials lowered its Q3 revenue forecast due to a decline in residential project orders, aligning with the PMI data. A simple strategy would be to buy out-of-the-money puts on the DAX index, expiring in October or November 2025, to capitalize on a wider market decline. Weakness in construction often signals broader economic issues, and we expect German GDP for Q3 2025 to reflect this slowdown. With current market volatility low, options are an affordable way to prepare for a potential downturn.

Interest Rates and Economic Impact

High interest rates are contributing to the situation, with the European Central Bank keeping its main rate at 3.5% in its most recent meeting. This indicates that tackling inflation is still a top priority. The latest German inflation data for August 2025 is 3.1%, which is above the 2% target, meaning borrowing costs for construction projects are unlikely to decrease soon. This ongoing strain makes recovery in the sector seem remote for this year. On the plus side, civil engineering is benefiting from government spending on infrastructure. This creates an opportunity for experienced traders to engage in a pair trade. They can go long on firms heavily involved in public works projects while shorting a residential homebuilder, aiming to profit from the differing performances of these sectors. The ongoing economic weakness in Germany is also putting pressure on the euro. This could be a good time to short the EUR/USD currency pair using futures contracts or to buy put options on Euro-focused ETFs. With the US economy showing more strength, we expect the dollar to continue gaining against the euro through the fourth quarter. Create your live VT Markets account and start trading now.

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