European cyclicals continue to be the weakest segment of developed global equity markets, and there doesn't appear to be much sign of that changing. We refer to the extremely strong relationship between German 10 year bond yields and the relative performance of European cyclical sectors. In the chart below, we plot the relative performance of all cyclicals in the MSCI Europe index compared to the MSCI World index and then compare this to German 10 year yields. With a 92% correlation over the last five years, the movement of German rates is highly correlated to equity performance trends.
Drilling down one layer deeper, we continue be especially weary of European late cyclicals. In the chart below, we can once again see the close relationship between the relative performance of MSCI Europe late cyclicals and German 10 year rates.
After the poor PMI numbers reported this morning, German bond yields were down 5bps to 76bps. This is only 4bps away from the all-time low in German yields of 72bps on October 15, 2014. If German rates break out on the downside, a new leg of European cyclical underperformance will likely follow.