As the European crisis continues to play out, investors are once again taking a closer look at the German economy. The central European country is the largest economy in Europe and is basically the backstop for weaker nations across the bloc so a strong, growing economy is vital for the health of the entire euro zone. This is especially true given the speculation for more funds in the EFSF, a plurality of which will likely come from the German nation. In light of this, investors should pay close attention to both more speculation over the bailout program and the release of data due out today, the German unemployment report.
Current investor sentiment is pretty high thanks to rumors of a bigger stopgap in the European bailout program which currently sits at 440 billion euros. However, Germany faces an important vote today on the subject of increasing its participation in the fund, possibly pushing German investment up from 123 billion euros up to 211 billion euros. The status of the vote is still uncertain, but Merkel seems confident that it will pass in large part thanks to votes from her party as well as the Social Democrats and Greens. However, if the measure isn’t adopted, it will call into question the future of the entire euro zone as well as the successor to the EFSF, the European Stability Mechanism. Basically, if the vote doesn’t pass, the future of Greece in the euro becomes uncertain and a default becomes much more likely, possibly sending markets sharply lower on the day, making this an important event to watch for European-focused investors [see all the European ETFs here].
Beyond this speculation, investors will also likely take a closer look at the German unemployment report, due out later today. Most analysts expect the total number of unemployed people in Germany to decline by about 9,000, more than last month’s reading and in line with the rest of the summer months as well. Should investors see a dramatic decrease in unemployment, one that pushes the jobless rate below the current level of 7.0%, it could signal more strength in the German economy and suggest that, despite the worries of its neighbors to the south, the industrial heart of Europe is holding up quite well in these uncertain times [Pro Members can see our Ex-Europe ETFdb Portfolio here].
Thanks to these key events, investors should look for the Market Vectors Germany Small-Cap ETF (GERJ) to remain in focus throughout today’s trading session. The fund tracks a small cap focused index that consists of about 93 companies that are either listed in, or get more than 50% of their revenues in Germany. In terms of sectors, industrials make up nearly 28% while basic materials, consumer discretionary, and health care make up double-digit allocations as well [see more on GERJ's fact sheet].
Unfortunately for those invested in the fund, it has been a pretty brutal stretch for GERJ, as the product has declined by about 26.3% over the past quarter including a 10% loss in the past month alone. With that being said, GERJ has begun to storm back in recent trading sessions thanks to hopes for a resolution to the debt crisis, helping to boost shares of this beaten down fund by nearly 6% so far to start the week. Should unemployment come in better than expected and the important vote passes in the German Parliament, look for these gains to continue in Thursday trading. If, however, the Germans shock the market by rejecting the vote or if unemployment suddenly rises, we could see a return to GERJ’s longer term trend, leading the Van Eck fund down sharply lower in Thursday’s trading session [see more fundamentals of GERJ here].
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Disclosure: No positions at time of writing, photo is courtesy of Rebecca Kennison.