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OUTLOOK IS GRIM FOR THE NEW SICK MAN OF EUROPE

FOR those traders stubbornly sticking with short FTSE positions from the sub-4,000 mark, last week’s profit-taking will have been a welcome relief. After the past few months of almost uninterrupted rallies in shares and green shoots spurring an 800-plus point bounce in the FTSE, those resolute bears must have been close to folding.

That’s fine if your risk management is disciplined enough to bear the brunt of such prolonged counter-trends. But if you are looking to short a market right now, the number one candidate is surely the DAX. The German stock index was happily following the recovery in global markets before the Eurozone GDP numbers came out: German GDP fell by 3.8 per cent in the first quarter, the biggest drop since records began in 1970. As a comparison, the UK contracted by 1.9 per cent and the US by 1.6 per cent over the same period. Germany is well and truly the new sick man of Europe.

The IMF expects the German economy to recover in the first half of 2010 but it’s difficult to see where from. For now the market’s focus is likely to be on how much deeper Germany can plunge. As the world’s largest exporter, it is hugely dependent on demand in other countries. While the UK and US might be bottoming out, a protracted period of stagnation looks more likely than any V-shaped recovery.

With unemployment at 8.3 per cent and climbing, the outlook remains grim. The underlying belief that the worst is over for the financial sector has been key to the shift in global sentiment. But with German banks estimated to still be holding more than €200bn in toxic assets, even Merkel’s bad bank plan is unlikely to stifle some potential future write-downs.

Final confirmation of the sour mood surrounding Germany came at the weekend from a most unlikely market indicator, Eurovision. Burlesque beauty Dita von Teese failed to spice up the German entry’s act, which finished a lowly 20 out of 25. Now that’s what you call a bare market.