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Why the biggest economy in Europe is in a 'party mood'

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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."

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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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Inflation remains tame As BMO Nesbitt Burns senior economist Sal Guatieri put it today, inflation in Canada is "really going nowhere fast." Consumer prices slipped 0.1 per cent in June, bringing the overall annual inflation rate down to 1 per cent from 1.4 per cent, Statistics Canada reported, while the core rate, which strips out volatile items and guides the Bank of Canada, dipped to 1.7 per cent. This all means that Bank of Canada Governor Mark Carney, who raised lending rates Tuesday by one-quarter of a percentage point for the second month in a row, has his hands free to do as he wishes. Some economists expect another rate hike in September.

"Well anchored expectations and rising demand have countered the downward pull from economic slack and the high dollar to keep the core rate range-bound and close to the 2 per cent target," Mr. Guatieri said. "Deflation is much less a risk in Canada than in the U.S. because of the explicit target and lesser slack. The risks to the economic growth outlook will guide monetary policy going forward."


Ford turns in strong quarter Ford Motor Co. , the only Detroit auto maker to come through the crisis without resorting to bankruptcy protection or government aid, today posted its fifth quarterly profit in a row and its best showing in six years. Beating analysts' estimates, Ford earned $2.6-billion (U.S.) or 61 cents a share, compared to $2.3-billion or 69 cents a year earlier. Ford said it expects even higher earnings next year. "We delivered a very strong second quarter and first half of 2010 and are ahead of where we thought we would be despite the still-challenging business conditions," said chief executive officer Alan Mulally.

Harry Winston buys Kinross Diavik stake Harry Winston Diamond Corp. is buying a 9-per-cent stake in the Diavik mining project northeast of Yellowknife held indirectly by Kinross Gold Corp. . The companies announced today that Kinross will sell its piece of the partnership that holds Harry Winston's 40-per-cent stake in the Diavik joint venture. Harry Winston will pay about $220-million (U.S.) for the stake, including $50-million in cash, some 7.1 million shares and a note. "The transaction represents an opportunity for Harry Winston to consolidate its interest in the Diavik mine, Canada's largest diamond producer and one of the most profitable diamond mines in the world," said Harry Winston chief executive officer Robert Gannicott.

Kinross is also selling an existing stake of about 15 million Harry Winston shares to a group of financial institutions. When all is said and done, Kinross will own 8.5 per cent, Harry Winston said.

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Celestica swings to loss Celestica Inc. today posted a second-quarter loss of $6.1-million (U.S.) or 3 cents a share, compared to a profit a year earlier of $5.3-million or 2 cents. Revenue rose to $1.59-billion from $1.4-billion. Adjusted earnings came in at $48.3-million or 21 cents a share, compared to $31.1-million or 14 cents a year earlier.

"Celestica's year-over-year increase in revenue reflects the progress the company is making toward achieving its revenue growth objectives in its targeted end markets," chief executive officer Craig Muhlhauser said in a statement. "Recent wins in our consumer, computing, industrial segments, and the after-market services business, are expected to further contribute to our revenue growth in the fourth quarter."

India eyes cheap tablet India's government wants to build a $35 (U.S.) tablet computer for students and, once it finds a company that can build it, hopes to begin producing the device next year. Similar in look to an iPad, it uses the Linux operating system and would have several functions, including word processing and Web surfing. "This is our answer to MIT's $100 computer," Human Resource Development Minister Kapil Sibal told the Economic Times. The Associated Press, which reported the development today, noted that India already boasts the $2,100 Nano car, a $16 water purifier and open heart surgery for $2,000.

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