Macro Metrics of German Panic Point

The chart below suggests the likely time of “concern” by German equities (a loss of at least 10%) may emerge when:

1. Both German manufacturing and services PMIs have shown at least three months of sub-50 readings,
2. ZEW current index drops below 10.0;
3. The IFO business climate index drops below 100.0 Given the current positioning of these variables, such a time could take part in early Q4.

Hours after Moody’s downgraded its credit outlook for Germany, German July manufacturing PMI hit a fresh three-year low at 43.3, posting its forth monthly contraction (sub-50). Germany’s July services PMI fell to 49.7, posting its second monthly contraction. Notably, the figure matches the 49.7 reached in Sep 2011-right before the Fed’s Operation Twist was delivered, followed by the ECB’s LRO in December.

Germany’s fiscal resilience is the latest variable being added into the European debt equation after Moody’s outlook downgrade for Germany, Luxembourg and the Netherlands implied the possibility of an actual downgrade by next summer – at least in theory. But if the pace of macroeconomic deterioration maintains its rapid pace, then an actual downgrade of AAA Germany may come in earlier than next summer.

A Spanish downgrade to junk status may become the next speculation point, which is seen synonymous to a second bailout. The increasing reliance on the EFSF/ESM is likely to exacerbate the sovereign’s debt burden as the autonomous regions line up for more assistance from the €14bn bailout fund. Another downgrade to Spain (possibly due in October) maybe well by the next market-punishing event, as paper of the Eurozone’s forth largest nation in the Eurozone may no longer be accepted as collateral by the ECB.

Meanwhile in the Netherlands, negotiations among the various political parties to cut the budget by €17bn see no progress. The cuts will require a rise in the VAT, a freeze in public sector pay and cuts in health and development budgets. All parties have and their constituents favour smaller budget cuts than those stipulated by the European Union.