Another Day Another Reason to Avoid European CyclicalsOctober 07, 2014
It seems we are getting daily validation on why we should avoid European cyclical stocks. Yesterday the European retail PMI and Sentix Economic Index for the Euro Area undershot expectations (see Today’s Data Not Good For European Cylicals). Today Germany reports that industrial production suffered another severe drop. In the chart below we compare the relative performance of an equal-weighted basket of European industrials to the two quarter annualized rate of German industrial production. This is the third time since 2009 where industrial production has dipped negative over a two quarter span.
The continued stream of weak European data has also quietly taken German interest rates to new lows. At 86bps as of yesterday, 10 year Bunds have taken out the lows of early September and are now at new generational lows. In the chart below we compare the relative performance of an equal weighted basket of all European late cyclicals (stocks form the energy, materials and industrial sectors) to German 10 year rates. It is no surprise given the durability of this relationship to see the relative performance of late cyclicals breaking to new lows alongside new lows in rates.