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Germany in 'party mood' Business confidence in Germany has registered its biggest gain since reunification in 1990. The closely-watched Ifo index released today jumped to 106.2 from 101.8 in June in Europe's biggest economy.
"The German economy is in a party mood," the Ifo statement said. "In manufacturing the business climate has brightened strongly. The business situation of the manufacturing firms has clearly improved. Moreover, the survey participants are now more optimistic with regard to the six-month business outlook ... Also in wholesaling, retailing and construction the business climate has brightened. An increasing number of wholesalers and retailers have assessed the current business situation as good. The business expectations of the survey participants for the coming six months are now more positive in both distribution sectors. The survey participants in construction have appraised the business situation considerably more favourably than in the previous month."
Germany has been rebounding from the global recession and its unemployment rate is falling. Chancellor Angela Merkel has heralded the recovery as "really robust."
Markets await results of European bank stress tests It's not the World Cup of banking, but you'd be forgiven for thinking that given the hype surrounding Europe's stress tests and the jostling among politicians.
Markets are eagerly awaiting the results of the tests on more than 90 major European banks, which authorities hope will ease the concerns of international investors amid the continent's debt crisis. But observers say that for the results to be meaningful, the data must be credible, and that means the banks can't all pass with flying colours. The results will be released after Europe's markets close and will be followed by news conferences.
"The expectation is that the larger banks should pass today's stress tests without too many problems, however it is how Europe plans to deal with the small banks that don't pass that will be key," said CMC Markets analyst Michael Hewson. "There have already been a number of leaks about who has and hasn't passed these tests this week that a few more leaks today probably won't make much difference. As it is both Spain's finance minister Salgado and France's finance minister Lagarde are claiming that all their banks have passed the tests, which hardly seems credible given the problems in Spain with the regional cajas."
Here's a guide to the tests, which aim to measure capital strength based on various shock scenarios, courtesy of Adam Cole, the global chief of foreign exchange strategy at RBC Dominion Securities:
The aggregate results will be published at noon ET, followed by a 30-minute period in which individual banks or regulators can disclose individual bank results. Then at 12:30 p.m., the Committee of European Banking Supervisors will publish the disaggregated results, followed by a news conference at 1 p.m. "According to press reports, the stress tests will be based on two alternative scenarios relative to the base case. Firstly, a 'macro shock' that simulates a sharp fall in GDP. Secondly, a 'sovereign debt shock,' which introduces sovereign debt haircuts on top of the macro shock. In order to pass the tests, banks need to have tier 1 capital ratios of 6 per cent or better - two percentage points above the legal requirement," Mr. Cole said, adding that the reaction in currency markets will probably depend on three key factors:
- Who passes or fails. "All other things being equal, the more institutions that fail (ie, have insufficient capital), the more [the euro]falls. The market is probably priced for five or six of the Spanish cajas failing the test (14 are being tested), Hypo Real Estate failing and perhaps one of the five Greek banks falling short."
- The severity of the tests. "The stricter the better for [the euro] Leaks/rumours suggest the tests will be based on 15-20-per-cent haircuts on Greek sovereign debt and three percentage point haircuts on Spanish debt. The tests are expected to assume a shortfall in GDP of around 3 per cent relative to the EC forecasts."
- Total capital requirement. "The more capital required under the tests, the more negative [the euro]response will be."
Britain looks brighter Britain's economy is picking up steam, expanding in the second quarter at a pace of 1.1 per cent, almost double what economists had been expecting. Britain is the first in the G7 to unveil gross domestic product for the quarter. "The U.K. economy grew by almost twice as much as the consensus was forecasting for the second quarter, and it was the country's third straight quarter of recovery," said Carl Weinberg, chief economist at High Frequency Economics. "... Despite the growth spurt, the economy is still 4.6 per cent below its pre-downturn peak. We will continue to call that level activity 'depressed.' It will take a full year of growth at this rate to regain the level of activity before the economic crisis, and have no reason to think that will happen."
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