Market commentary: German investor confidence drops as Greek crisis continues

German investor confidence fell for a third month in a sign that risks from a Greek debt default to bond- market turbulence are creating uncertainty in Europe’s largest economy.

The ZEW index of investor and analyst expectations, which aims to predict economic developments six months in advance slid to 31.5 in June from 41.9 in May. That’s the lowest level since November. Economists had forecast a decline to 37.3, according to the median of 36 estimates in a Bloomberg survey, however this has fallen significantly lower.

While the Bundesbank has raised its economic forecasts for Germany on the back of increasing consumer optimism, the euro area is currently suffering a bout of volatility due to Greece’s failure to reach a deal with creditors to unlock bailout funds. Sentiment has also been affected by a correction in bond markets that has seen yields for German 10-year bunds surge from almost zero in April to around 1 percent this month. However the Bund has retreated from its recent highs and is now trading below 0.8% once again.

Greece has snubbed European pleas to submit a proposal to avert a looming default as the forces pulling the euro-zone’s seams apart grew ahead of a key meeting this week. Greek stocks fell for a third day yesterday on concern time is running out. The country needs to seal an accord or get an extension before the euro area’s bailout expires on June 30, or risk missing payments on its debt of about 313 billion euros.

The most alarming thing about the Greek Saga which is concerning Greece’s creditors is that the Syriza government doesn’t seem to fully understand the obligations and institutional constraints it faces and is underestimating the risk and impact of capital controls. Many are of the opinion that even if a Euro summit is called, it may prove too late.

As a result of this uncertainty stocks are taking a beating, as the extent of the remaining policy divide was laid bare after weekend talks to find a resolution crumbled. The Athens Stock Exchange Index fell 2 percent this morning, while the Athex Banks Index dropped 3 percent at the time of writing.

Concern is also starting to spread to other markets. Spanish government bonds dropped, pushing the 10- year yield above 2.5 percent for the first time since August, while Italian and Portuguese bonds also declined. However following this morning’s disappointing German economic data, peripheral European bonds were better bid.

Finance Ministry officials from the 19-nation euro zone are due to hold a Greece call this afternoon. Yesterday ECB President Mario Draghi said Europe needs a “strong and comprehensive agreement, and we need this very soon,” and “While all actors will now need to go the extra mile, the ball lies squarely in the camp of the Greek government to take the necessary steps.”

The Greek government is challenging this tone and is saying that it is awaiting an invitation from its creditors to proceed with negotiations.  “The Greek side remains ready to conclude the negotiations,” the government said in an e-mailed statement today.

Should an agreement between Greece and its creditors not be reached, this could materially affect the improved forecasts for economic growth. On June 5, the Bundesbank boosted its German economic-growth outlook, forecasting an expansion of 1.7 percent in 2015 compared with the 1 percent it predicted in December.

In its monthly bulletin published this week, the Frankfurt-based central bank said the “extraordinarily positive” consumer climate remains the main driver of economic expansion while manufacturing “could soon shift into a higher gear.”  This positive momentum could come abruptly to halt should the market’s fears come to be.

This article was issued by Simon Psaila, Trader/Analyst at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri & Co. Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.