Swiss & Global’s Stefan Angele comments on this week’s developments

Stefan Angele (pictured), head of investment management at Swiss & Global Asset Management, looks at this week’s economic developments in Germany, the US and the Euro zone.

Global equity market returns are moderately positive for the week. Interestingly, 10-year yields for government bonds increased in the US, Europe and Switzerland despite the latest announcement by the Fed.

The euro managed to climb above the 1.21 level against the Swiss franc, but is currently trading below this level again. Crude oil is trading above $86/bbl, while gold has fallen below $1,700/oz.

The German ZEW investor sentiment index rose from -15.7 to +6.9 in December. This was a much stronger rise than expected, taking the index to its highest level since May 2012.

A ZEW sentiment index in positive territory means that the majority of respondents expect improving economic conditions for the next six months.

Though the ZEW index provides an encouraging picture, the latest economic data on trade and industrial production for October does not confirm the positive ZEW expectations.

German exports rose unexpectedly in October. Shipments to non-European countries more than offset weakening demand in the euro area.

The Federal Statistics Office in Wiesbaden reported an increase of 0.3%, with shipments to the US surging by 25.7% and those to non-EU countries increasing by 9.9%. Economists had expected a drop of 0.3%. Furthermore, imports also increased by 2.5% from September.

For the German economy, it will be crucial that the Chinese and the US economy improve further, as Europe continues to face recession as a result of austerity measures. The exports data once again shows how fragile the global economy is. At the moment, the European patient is in recession, while the US and China appear to be improving.

The US Fed replaced “Operation Twist” with an expansion of quantitative easing 3. As expected, the Fed will continue to buy $45bn of Treasuries per month as a result of the further expansion of QE. More than one quarter of the purchases will have maturities of more than 20 years.

Under “Operation Twist”, a specific amount of the Fed’s holdings of short-term Treasuries, with maturities of less than three years, were sold to offset the purchases of longer-term securities. With this action, the balance sheet of the Fed did not grow and the monetary base remained stable. Under another round of QE, this selling of short-dated securities will no longer be continued.

This latest step from the Fed is more aggressive than the steps taken previously and thus stokes inflation fears.

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