Worries in the euro zone over sovereign debt issues are continuing to plague the region as a number of nations appear on the brink of default. While countries such as Greece, Portugal, and Ireland continue to teeter on the edge, worries are beginning to crop up over large euro zone nations such as Spain and Italy as well. These two giants have massive budget deficits, high youth unemployment, and little hope for growth in the near future thanks to austerity measures and a bleak economic picture. As a result, investment dollars in the bond market have been flowing into the safe haven of the region, German bunds, as a way to weather the storm.
However, this influx of capital, as well as the nation’s robust level of growth, has begun to spur inflation concerns in Europe’s largest economy, forcing the central bank to raise rates for the second time this year. As a whole, euro zone inflation remains well above the target rate of 2% so further rate hikes could be likely if German inflation persists. Thanks to this, today’s release of the German CPI could have an impact on the markets, potentially signaling how the economy will react in the near future and how prices are holding up in the central European country.
Currently, predictions call for a 0.1% increase in CPI month-over-month, in-line with the previous reading and up from the early June one that saw no change in prices. Investors should also note that if this ten basis point increase in prices comes to pass it will represent a huge decline from the April figures in which prices were increasing at a rate of 0.5% a month. As a result, moderate levels of inflation such as this could prevent the ECB from raising rates again in the near future, possibly helping the peripheral nations catch up to their surging peers in Germany. “It looks like upward pressure on prices is easing. Inflation in Germany seems likely to be stabilizing at around 2.3 percent. The dynamic has declined somewhat because energy prices have eased. Food and clothing prices have declined month over month more than usual.” said Stephan Rieke from BHF Bank after the preliminary data release on the 28th of June. “I don’t see any new price pressures, at least not from energy. Inflation might rise to perhaps 2.5 percent in July but after that things should calm down.” [see Non Euro Europe ETF Options]
Thanks to this data release, as well as ongoing turmoil in the euro zone, investors should look for the DB German Bund Futures ETN (BUNL) from PowerShares to be in focus throughout today’s session. The fund tracks the DB USD Bund Futures Index which is a benchmark that is intended to measure the performance of a long position in Euro-Bund Futures. The underlying assets of Euro-Bund Futures are Federal Republic Of Germany government issued debt securities (Bunds) with a remaining term to maturity of not less than 8 years and 6 months and not more than 10 years and 6 months as of the futures contract delivery date. Thanks to this focus, the fund looks to be moderately impacted by today’s events, and definitely more so than their shorter-term counterparts [Three ETFs For Betting Against Europe].
BUNL has already benefited from the euro zone turmoil impacting its southern counterparts as the fund has gained 7.6% over the past quarter including a 2.7% gain in the past week alone, pretty solid figures for a safe haven bond fund. Should inflation once again come in at a moderate rate and give market participants reason to believe that price increases are under control, it could strengthen BUNL on the day. Meanwhile, if further worries are seen in nations such as Italy and Greece, additional inflows could be seen into the Bund market, even if inflation comes in above expectations. As a result, investors need to look out for both the inflation figure as well as additional news out of Greece and Spain tomorrow to see where this surging bond fund is headed in the near future [also see Ex-Europe ETFdb Portfolio Now Available].
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Disclosure: No positions at time of writing.