DAX-Sentiment: The half-life of EU summits is zero.

27 June 2012. FRANKFURT (Börse Frankfurt). It is not certain whether the correct translation for German Chancellor Merkel’s recent comment about shared eurozone liabilities was ‘not in my lifetime’ or ‘over my dead body’, but the report appears to have sealed market expectations for the upcoming EU heads of state meeting. A gnawing feeling that nothing will be done to arrest the deterioration of the eurozone debt crisis had anyway been spreading. In recent months, investors at least waited for the outcome of major EU events in the hope of some positive news before selling out their stocks. Over time, the half-life of investor approval became shorter and shorter. This time, investors are so convinced that EU policymakers will not agree on any crisis-resolution measure at this week’s heads of state summit, they no longer even wait for the outcome; they have sold already.

A 3.5 percent DAX decline is usually not a price move that domestic institutional investors can regard with detachment. However, the investors on Boerse Frankfurt’ weekly survey had been well prepared for it. In last week’s poll, the proportion of bulls fell markedly; the number of bears increased even more sharply. Even as the DAX flirted with its highest level in a month, investors were obviously preparing themselves for disappointment. In the subsequent five trading days, the DAX slid steadily – accompanied by the euro-currency, suggesting that many of these sell orders came from abroad.

The timely preparation for the latest DAX decline has meant that the panel has been able to watch the development with sanguinity. This explains the almost negligible shift in the ranks. Only two percent of the entire panel has changed its view; there are slightly more bulls today, but too few to be truly indicative. It is likely that the current DAX does nothing to encourage any new opinions either. At the current price, it is almost exactly halfway between the low recorded at the start of the month (not cheap enough to bargain-hunt), and the high set last week (where they sold out). So, on the eve of yet another marathon Brussels EU meeting, where leaders have raised the stakes to unprecedented heights, doing nothing has been an attractive option for domestic investors.

The popular resignation to political inaction on the eurozone crisis has undoubtedly reached a new extreme. If markets are convinced that the crisis will persist and nothing will be done, the scope for a positive surprise increases. We would not go as far as saying that bad news is fully priced in, based on this data. We do suspect that this group does not have much more to sell. Rather, if the DAX were to return to its year-low, we would expect the panel to be a net buyer. More problematic would be a situation where the panel suddenly discovers stock prices sharply higher. Not only do they have precious little material left to sell, they might also find it psychologically difficult to buy.

© 27 June 2012/Gianni Hirschmüller, cognitrend