How Did the Markets React?
Sentiment
surveys out of Germany today
highlighted fears amongst consumers and businesses alike regarding German
Chancellor Angela Merkel’s VAT hike to 19 percent from 16 percent. The GfK consumer confidence report
unexpectedly plunged to 4.8 in February from a downwardly revised 8.5. A
breakdown of the data shows sharp declines in the willingness-to-buy and income
expectation components. However, business cycle expectations improved to 37.5
from 35.7, taking the edge of the dip in the headline figure and signaling
optimism for the future. The German IFO survey reflected a similar sentiment, as
the headline business climate report unexpectedly slipped to a reading of 107.9
from an all-time high of 108.7 as companies fear a decline in consumer spending
as a result of the VAT hike. Additionally, with the euro starting the year at
9-month highs, exporters worried about a drop in orders from abroad, as German
products would become more expensive and thus, less attractive. Nevertheless,
the future expectations component of the survey rose to 103.2 from 102.5, which
will help the European Central Bank maintain a hawkish edge. Forex and bond
traders had trouble seeing the positive aspects of the German sentiment surveys,
as the Euro declined and Bund prices jumped. Meanwhile, German equity markets
ignored the economic data at hand and instead focused on a spate of positive
earnings reports.
Bonds – German 10-Year
Bunds
Yields
on German 10-year Bunds dipped one basis point to 4.023 percent in European
trading as price popped to 97.78 following the release of a weaker-than-expected
German IFO survey, which only
reiterated the gloomy release of the GfK consumer confidence report earlier in
the morning. Bunds edged lower to 97.72 shortly after, however, as the outlook
components of both surveys were relatively positively and should keep the
European Central Bank on track to hike rates in March to 3.75
percent.
German
10-Year Bunds
(Intraday)
Source:
Bloomberg
FX –
EUR/USD
While EUR/USD ascended towards the
1.3000 level throughout most of the morning, despite a dismal headline reading
of the German GfK consumer confidence survey, the release of the German IFO
sentiment report reiterated the more pessimistic sentiment in Europe’s largest economy and left the pair to plunge to a
European session low of 1.2963. Euro gradually recovered to the 1.2975 level,
however, as the components of the German surveys were not entirely negative.
Both the GfK and IFO results reflected resilient outlooks by businesses,
indicating that the negative impact on consumption of the VAT hike to 19 percent
from 16 percent is not perceived as being a long-standing issue as economic
expansion keeps pace. Nevertheless, the European Central Bank is still widely
anticipated to tighten monetary policy in March to 3.75 percent, which should
help maintain the Euro’s lofty levels relative to the US dollar for the time
being.
EUR/USD (Intraday)
Source:
Bloomberg
Equities – Xetra DAX
Index
German technology stocks rose on news
out of Europe's biggest engineering company,
sending the German Xetra DAX index .06 percent higher to 6752.67. Siemens AG
shares jumped 5.4 percent to 82.2 euros, the biggest gain since June, after it
announced it will sell shares in its car-equipment unit VDO Automotive and
agreed to buy US software maker UGS Corp. for $2.1
billion. Meanwhile, AT&S Austria Technologie & Systemtechnik AG rose 2.7
percent to 19.26 euros after the maker of circuit boards for mobile phones
increased demand led fiscal third-quarter profit to gain 75 percent to 8.4
million euros. On the flip side, Deutsche Lufthansa AG, Europe's second-largest
airline, dropped 3.0 percent to 21.35 euros on rumors out of the carrier's
investor's conference in Frankfurt that the
company could not see any major growth prospects in the near
future.
Xetra
DAX Index
(Intraday)
Source:
Bloomberg
