Once-Bitten DAX Traders Push Bearish Bets to Highest in Year

  • Lower index valuation than Europe peers not tempting traders
  • German ETFs traded in U.S. have some of the biggest outflows

The spell of trader skepticism that descended on Germany’s benchmark DAX Index as it surged toward a bull market last month has done nothing but intensify.

Bearish put options outstanding on the gauge rose 9 percent since April 21, when the DAX reached this year’s high, compared with a 5 percent increase in bullish calls. As a result, the ratio between the two stands at 1.54, near the highest in a year. Even after a four-day rebound, the DAX is 3.3 percent below its peak from two weeks ago, and volatility in recent days topped that of benchmark indexes of Spain and Italy.

The rally that pushed the DAX up as much as 19 percent from its February low has lost momentum on concern that global growth is slowing, hurting earnings. While German factory orders picked up in March, the nation’s economy is forecast to expand just 1.5 percent this year, the weakest pace since 2013. Analysts have already cut their projections for profit gains at DAX companies by 3.3 percent since January.

“The DAX won’t reach a bull market until the earnings cycle turns around, and the fundamentals are just not supporting this,” said Bernd Ondruch, managing partner at London-based Astellon Capital Partners, which oversees $700 million. “High cyclical, global trade, and China-related exposure make the index more volatile. The recovery in the DAX in recent weeks is not sustainable in the absence of earnings growth.”

2016 has been a tumultuous year for markets, but German companies -- more dependent on China than others in Europe because of the close trade ties to the Asian country -- have felt the pinch more. The DAX tumbled 19 percent through Feb. 11, becoming among the world’s biggest losers. It then posted the strongest rebound of its peers, beating equity markets of France, Britain, Spain and Italy through April 21.

Options that profit if the DAX falls 9.8 percent by next month are the most owned, data compiled by Bloomberg show. The cost of puts versus calls has also jumped, and bears are now paying the most since September to hedge.

The wild moves have dragged the DAX down 7.1 percent this year through Monday, sending its valuation to about 12 times estimated earnings -- that’s 17 percent lower than for the Stoxx Europe 600 Index.

Yet the discount isn’t enough to draw traders to the market. They’ve taken money out of the biggest exchange-traded fund tracking the German gauge almost every week since February, withdrawing more than $870 million this year. The nation’s shares were the most-disliked in Europe by U.S. traders and had more outflows than even China.

“Growth worries haven’t gone away,” said Mike Ingram, a strategist at BGC Partners in London. The DAX has had “had a nice bounce but there’s not really a lot of conviction behind it.”

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