The Weak Euro Is Back, And So Are German Stock Bulls – Bloomberg

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German stocks, in a bear market less than two months ago, are back in favor.

Investors have piled into the biggest exchange-traded fund tracking the country’s equities in the past two weeks, pushing its market capitalization back up to values last seen in April. Germany’s benchmark DAX Index has regained two-thirds of its losses, and bulls are speculating on further gains via the options market, sending the cost of bullish contracts to the highest levels since at least 2010 relative to bearish ones.

With the euro near a six-month low and a December rate hike from the Federal Reserve looking likely just as the European Central Bank hints at more stimulus, things are looking familiar to Carsten Hilck at Union Investment in Frankfurt. He’s already enjoyed an 8 percent rally since buying German stocks last month.

“It’s certainly deja vu for us: when the euro goes down, the DAX goes up,” said Hilck, whose $1 billion UniDeutschland fund has outperformed 85 percent of peers in the past year. “I’m usually cautious, but I’m sticking to my guns here. Why shouldn’t the index go back to its April levels?”

Dizzying Pace

German stocks have swung between most loved and most hated at a dizzying pace. After a 26 percent rally this year pushed the DAX to a record in April, the gauge had entered a bear market by August. Since this year’s low in September, the DAX has rebounded 15 percent. The iShares Core DAX UCITS ETF attracted more than 24 million euros ($26 million) in the past two weeks, sending its market value to 9.3 billion euros.

German equities are once again among the best performing in developed markets this quarter, with the DAX closely tracking moves in Europe’s shared currency after concerns about a slowdown in China and a scandal at Volkswagen AG prompted the two asset classes to temporarily break away.

German stocks were some of Europe’s biggest gainers on U.S. jobs day last Friday, as well as on Oct. 22, when ECB President Mario Draghi said the central bank will re-examine the degree of stimulus in December. The euro tanked versus the dollar on both days.

The comeback is flashing warning signs for chart analysts. In a signal that the jump in the DAX has been too fast to sustain, its relative strength index has hovered near 70 for more than two weeks. Trading at overbought levels doesn’t bode well for German stock investors: the last time this happened was at the end of March, the month before it started its 24 percent slump.

For now, the optimism is paying off. The DAX rounded off five straight weeks of gains, a streak that since 1998 has been beaten only during this year’s rally in the first quarter.

“If foreign investors look at Europe, then you would definitely buy Germany as it’s a big, export-driven country, particularly if you expect the euro to be weak,” said Michael Kapler, an equities manager at Mittelbrandenburgische Sparkasse in Potsdam, Germany. “Central banks are supportive, global growth will be there next year, and this comes together that equities in Germany and Europe will do well.”