German business climate surprises by rising in November

The volatility of capital markets and sensitivity to short-term data was underscored today by the euro bouncing after Germany’s Ifo institute reported the country’s businesses felt the climate was more favourable in November, the first monthly jump since June.

It was only a small rise in the nation’s business confidence – from an index reading of 106.4 in October, to 106.6 – but this was enough to send the currency briefly  up, by 0.4% versus the US dollar, although it had lost value again by mid-afternoon.

The Dax share index was mildly up, by 0.1%, at 1530 CET.

Today’s brief optimism from German business leaders did not, however, help their increasingly embattled government, whose Bunds rose 0.33% to 2.23%.

Their prices had fallen, and yields rose, yesterday after a poorer than expected result from the latest Bund auction.

Today, UK gilt yields fell below that of Bunds for the first time in two and a half years.

Some commentators said the 0.25% interest rate cut by the European Central Bank also contributed to the better mood among German businesses.

Others said it showed markets were ready to react positively, if only politicians were able to cope with the crisis effectively.

Few managers believe they are doing so at present.

Valentijn van Nieuwenhuijzen, head of strategy in ING Investment Management’s strategy and tactical asset allocation group, called on the ECB to step in as lender of last resort to troubled economies.

“It is important to discuss the exact manifestation of a lender of last resort – whether it is a standalone entity, or in the framework of a restructured EFSF – as well as the requirements that must be fulfilled, so that the ECB takes over this role.

“Until the ECB can take on this role, the risk of contagion will grow further. The crisis has not been overcome by any means.

“Sooner or later the amount of suffering must become so great that the ECB cannot fight against [being] the lender of last resort. That is when our risk appetite will probably rise.”

Sentiment specifically regarding the eurozone is still gloomy.

Henderson Global Investors chief economist Simon Ward noted yields on a debt-weighted average of seven- to 10-year sovereigns in 12 eurozone markets are at their highest since 2008, having surged by 1% since early September.

“This represents a substantial tightening of financial conditions warranting a monetary policy response ideally combining a large cut in official interest rates with country-neutral QE aimed partly at reversing the yield rise,” Ward said.

He added this year EMU bonds have fallen 5.5%. If this fall remains, or worsens, over the coming six weeks, it will be the worst annual performance by the asset class since 1999, when seven- to 10-year Bunds plunged 9.6% as the ECB tightened policy.

Ward advocated a “country-neutral QE operation”, with buying in proportion to national GDP or population.

“This would emphasise the monetary motivation and counter criticism of a backdoor fiscal bailout. A reasonable initial target would be buying of 5% of GDP over four months, implying a monthly rate of about €120bn. For comparison, the ECB has purchased a cumulative €120bn since its ‘securities markets programme’ was restarted in early August.”

Ward added such a move would not be inflationary. “The ECB is already conducting QE via its SMP and covered bond purchases – the SMP ‘sterilisation’ operation involving auctioning one-week term deposits is entirely cosmetic, since banks will regard such deposits as fungible with central bank reserves.

“More importantly, money-printing is necessary to head off deflation if the banking system is destroying deposits by accelerating deleveraging in response to sovereign bond losses and misguided regulatory pressure.”


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