SCOREBOARD: German spirit

With US markets closed for Thanksgiving overnight all the action was in Europe, and there were a few interesting bits and pieces. Naturally there was no solution to this bitter and never-ending crisis, but then I think everyone has given up on that.

One of the more noteworthy news items was an increase – yes, an increase – in German industrial confidence, according to the well-respected IFO survey. The business climate index itself, already about 6 per cent above average, ticked up again in November to 106.6, with the current conditions index unchanged at 116.7 (13 per cent above average) while the expectations component rose 0.3 points to 97.3 (just below average). Again, this is an extraordinary contrast to confidence in our own nation, the general flow of public discourse and the rhetoric of some of our business 'leaders' – despite our much better metrics (stronger growth, lower unemployment etc etc). It certainly raises a few uncomfortable questions.

Now this data initially saw European stocks and the euro push higher – the Dax for instance was up 0.9 per cent at the high. The fates decided it wasn't to be though and just after midnight (Australian time) risk was taken off the table. The catalyst here, it seems, were comments from Merkel that she remains opposed to a euro bond, such are market nerves.

The comment, however, was really just one of many made in a joint press conference with French President Sarkozy. In that press conference, the French and Germans agreed to stop publically discussing the role of the ECB, with Sarkozy stating that "in respect of the independence of this essential institution we must refrain from making positive or negative demands of it.” As I mentioned yesterday, this would be, and is, a very positive step. The real solutions aren't even being discussed in the broader press and thus the market and won't be while everyone is obsessed with printing money. We can't move forward until that is taken off the table by all parties and this is a good step in that direction. A pity the French foreign minister, just prior to the meeting, said that it was urgent the ECB should print. We need to pity the French though; they have been forced into this position by ratings agencies who take turns in threatening to strip them of their AAA rating. Indeed, Fitch just last night downgraded Portugal to junk.

In any case, a package of reforms is set to be announced on December 9. So we'll see what comes out of that. Bear in mind though that Europeans, including the Italians, have plenty of highly liquid assets, like cash, on hand they could use to pay down public debt if they wanted to. They simply don't want to, it seems.

At the close of then, the Dax was off 0.5 per cent, the CAC fell 0.01 per cent and the FTSE was down 0.2 per cent. S&P futures were in turn off smalls (0.1 per cent to 1158) and the SPI was up 0.1 per cent (4052). In the forex space, euro was down about 40 pips to 1.3334 compared to 1630, the Australian dollar was down about 20 pips (90 pips range) while Sterling fell about 60 pips to 1.5491. Yen did little and is at 77.14. Finally, Aussie debt futures moved little, with the 3s off a tick here or there to 96.93 while the 10s fell 3 ticks to 96.07.

That's pretty much it. Just note that German GDP was confirmed at 0.5 per cent in the third quarter, as was UK GDP. The UK index of services then rose 0.6 per cent in the three months to September. The RBA governor also gave a speech last night but he didn't give much away on policy. He noted that policymakers needed discretion in determining where rates should go. Decision shouldn't be dictated by forecasting, he said. That is, it seems, unless those forecasts suggest weaker growth and lower inflation, in which case it's A-OK for forecasts to dictate policy.

To the day ahead, there is literally nothing out today or tonight, so have a great weekend. And don't forget the New Zealand election is on tomorrow.

Adam Carr is senior economist at ICAP Australia. See Business Spectator's glossary for definitions of technical terms used in SCOREBOARD articles.

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