Because it signals that German companies have seen little impact from the Volkswagen scandal, the slowdown in China and the weakness in Emerging Markets. Perhaps all those fears that German exporters would suffer significant falls in their orders remain just fears.
Two other points are worth noting – the forward-looking business expectations reading rose to its highest level since March of this year (signaling further strong growth to come). Furthermore, according to Unicredit, the overall growth impulse coming from the influx of refugees amounts to at least 0.3% of GDP.
3. Politics Still Simmering Away in the Background
Being a multi-cultural group, the European Investment-Grade Fixed Income Team tend to spend a lot of time talking about politics. So while markets may push the subject into the background at times, it is usually always on our minds.
This week, the subject of politics began to move back onto the market’s radar screen again. In Spain, the Catalan pro-independence parties escalated their demands for secession, leading to a swift response from the central government in Madrid.
Although recent polls show a majority of Catalans do not approve of this escalation approach by the pro-independence parties, the issue is likely to get further airtime in coming weeks.
Meanwhile, Spain’s neighbour, Portugal, elected a new centre-right minority government led by outgoing Prime Minister Pedro Coelho. However, its lifespan may be limited to weeks as it seems possible that this government will be voted down in the government programme vote on 10th/11th November. Where Portugal goes from here is not clear, and most investors who can buy Portugal will probably steer clear.
S&P also reminded us of the potential effects of a British exit from Europe, as the rating agency noted that a Brexit could lead to a two-notch downgrade of Britain’s current AAA rating, held since 1978.
Finally a reminder of the difficulties of dealing with the European refugee crisis. An estimated 10,000 refugees are entering Germany each day and at that pace, close to 1m migrants will have entered Germany by the end of 2015.
While initially praised for her humanitarian handling of the problem, recent opinion polls have shown a significant fall in German Chancellor Merkel’s approval rating to its lowest rating since 2012. In fairness, her approval rating has fallen from levels that many other European leaders can only dream of, but it is a reminder of what a difficult crisis this has become.
The Financial Times speculated earlier this week that Chancellor Merkel’s job could be on the line if she cannot control the situation soon. That is not something that ECB President Mario Draghi and the ECB Council would like to have to deal with.