This chart here illustrates the DAX (arguably the leading stock index in Europe given the fact that Germany is the locomotive / engine in European growth) and the German ZEW Index.
ZEW stands for "Zentrum fuer Europaeische Wirtschaftsforschung" or Centre for European Economic Research in Mannheim Germany. Important is here, this Index is seen as a leading indicator for the also very important IFO.
The monthly ZEW is an almalgamation of the sentiments of approx 350-400 economists and analysts regarding the economic future of Germany in the next six months. The survey shows the balance between the optimistic and pessimistic views.
There is a very high correlation between the survey outcome date and where the DAX Index is prices then and in six months. Also very interesting is obviously the trend of that survey itself, but also a potential divergence between this trend and the price index to sense market reversals.
It took me a while to get this on the chart, hope it is not too confusing.
- the red colour indicates worse than expected ZEW, green is better than expected.
- I also tried to put these ZEW numbers in a kind of scale to easier track a trend (improving or worsening trend)
- pessimistic survey balance is in negative numbers and below the price chart and visa verse
The initial reaction when the data is coming out can be very volatile given
a) the gauge itself
b) the trend
c) vs expectations
but check out the "forward price correlation" (six months)
btw - this is a weekly chart
The survey peaked in April at +23.4 hence in then six months (Oct) there would have been the DAX highs (which we have). Since that April reading we have had 4x consecutive worsening surveys with a possible bottom in August with a reading of negative 25.5, which for me means given the high correlation by March 2013 we will have a lower DAX than we have right now.