Overnight Markets-Leading News -Update 2


  • Germany grows by 0.5% in first quarter of 2012; France posts zero growth
  • Overall GDP for 17-nation eurozone as a whole was unchanged
  • Greece’s economy slips by 6%; Italy also falls by 0.8%
  • New French President to meet German chancellor in Berlin later today
  • European financial markets fall on news second election will take place

Greek deadlock heightens fears of full European economic crisis


German Economy Grew More Than Forecast in First Quarter

The German economy grew more than economists forecast in the first quarter as exports to emerging markets offset waning euro-area demand.

Gross domestic product in Europe’s largest economy rose 0.5 percent from the fourth quarter, when it fell 0.2 percent, the Federal Statistics Office said in Wiesbaden today. Economists predicted a 0.1 percent gain, according to the median of 40 estimates in a Bloomberg News survey. French GDP stagnated.

With the euro region’s debt crisis ravaging economies from Greece to Spain, German companies have shifted focus. Carmakers and their suppliers are benefitting from demand in faster- growing markets such as China, while falling unemployment and rising wages are stimulating spending at home. Business confidence rose for a sixth month in April after company earnings outpaced expectations in the first quarter.

“With this morning’s numbers, the German economy has not only avoided recession but could have even helped prevent the entire euro-zone economy falling into technical recession,” said Carsten Brzeski, senior economist at ING Group in Brussels. “One thing is at least for sure: the German economy remains the powerhouse of the euro-zone economy.”

The euro extended gains after the GDP report, rising to $1.2865 at 10 a.m. in Frankfurt from $1.2823 this morning.

Fillip for Merkel

Evidence of an improving economy is a fillip to Chancellor Angela Merkel as she prepares to host French President Francois Hollande today. Hollande, who travels to Berlin immediately after his inauguration in Paris, won election after campaigning against Merkel’s austerity drive in favor of more focus on growth.

The debt crisis has already pushed eight euro-region countries into recession, commonly defined as two consecutive quarters of contraction.

Italy said today its economy contracted for a third straight quarter, with GDP dropping 0.8 percent in the first three months of this year. The Netherlands also recorded its third quarterly contraction in a row. France had zero growth in the quarter, in line with economists’ median forecast.

The European Union’s statistics office in Luxembourg publishes euro-area data at 11 a.m.

The 17-nation economy probably shrank 0.2 percent in the period after contracting 0.3 percent at the end of last year, according to the median of 38 forecasts in another Bloomberg survey conducted before today’s German report.

Euro-Area Stagnation?

“The euro area could get away with stagnation in the first quarter,” said Andreas Scheuerle, an economist at Dekabank in Frankfurt. “Today’s data mean German growth forecasts for this year have to be massively revised up,” he added.

Germany’s economy will grow 0.7 percent in 2012 and 1.7 percent in 2013, the European Commission forecast on May 11. By contrast, the euro region’s and those of seven member countries will contract this year, it said.

The German statistics office said first-quarter growth was mainly driven by net trade as exports rose. Domestic consumption also increased while investment declined. A detailed breakdown for the quarter will be published on May 24. From a year earlier, GDP increased 1.7 percent.

Germany’s benchmark DAX Index (DAX) has climbed 9.4 percent this year, compared to a 1 percent gain in the Stoxx Europe 600 Index. Earnings at companies listed on Germany’s HDAX Index (HDAX) of the country’s most highly capitalized stocks beat analysts’ estimates by an average 7 percent in the first quarter, with carmakers and their suppliers surprising most.

‘Rosy’ Outlook

Earnings per share at Volkswagen AG (VOW), Bayerische Motoren Werke AG (BMW) and Daimler AG (DAI) exceeded expectations by as much as 52 percent. Continental AG (CON)’s Chief Financial Officer Wolfgang Schaefer said on May 3 that Europe’s second-largest auto-parts maker may raise its sales forecast next quarter should the stable development continue.

“World trade will pick up in the second half of the year, the global economy should become stronger and Germany will benefit from that,” said Aline Schuiling, senior economist at ABN Amro Bank NV in Amsterdam. “The outlook is quite rosy, with above-average growth but also above-average inflation rates.”

Annual consumer price gains in Germany have exceeded the European Central Bank’s 2 percent limit since January last year and Bundesbank President Jens Weidmann said in an interview with Sueddeutsche Zeitung published May 11 that inflation may be higher than in the past.

Wage Deals

That may weigh on consumer sentiment, even as unemployment holds at the lowest level in two decades and workers are securing some of the biggest pay increases in that period. Germany’s two million public-service workers negotiated 6.3 percent higher pay by the end of next year, and IG Metall, whose 3.6 million members make it the biggest union in Europe, is demanding a 6.5 percent raise.

Metro AG (MEO), Germany’s biggest retailer, reported a wider- than-expected first-quarter loss on May 3 after cutting prices of electronics goods to win back shoppers. Still, companies from Hugo Boss AG (BOS) to Beiersdorf AG (BEI) reported they are profiting from increased consumer spending.

“The domestic economy is still benefiting from an improving labor market and higher wage deals, which are strengthening consumption,” the Bundesbank said last month. “The German economy is currently lacking momentum, even though it’s in good shape overall.”


Former Greek Leader Sees Euro Exit as ‘Catastrophe’

An exit would require banks to close for at least three months while preparations, including printing a new currency, are made, Simitis said, citing the views of “experts.”

“Having the banks close for three months — that’s nonsense,” he said. “If they close more than three days there will be a bank run.”

The once-taboo issue of a Greek departure or expulsion from the 17-nation currency union burst into public debate last week, when ECB officials including Honohan of Ireland aired the pros and cons.

Simitis said he believes Greece will never leave the euro and that its political parties are in a “certain sense” trying to “renegotiate the conditions with the European Union.”

For now Europe is saying “’no’ but after a time, as it usually happens, says ‘all right,”’ Simitis said.


Greek Vote Escalates Crisis as Schaeuble Raises Euro-Exit

Greece’s decision to return to the ballot box in the search for a government unleashed a hazardous new phase in Europe’s debt crisis, with German Finance Minister Wolfgang Schaeuble calling the vote a referendum on whether the country stays in the euro.

Post-election attempts to form a ruling coalition in Athens broke down today after nine days, sending Greeks back to the polls next month with surveys giving the lead to an anti-bailout party that would tear up the conditions attached to 240 billion euros ($307 billion) of aid.

“If Greece — and this is the will of the great majority – - wants to stay in the euro, then they have to accept the conditions,” Schaeuble told reporters at a meeting of European finance ministers in Brussels. “Otherwise it isn’t possible. No responsible candidate can hide that from the electorate.”

The euro tumbled to a four-month low, European stocks dropped and investors sought the safety of German bonds amid speculation that Greece would be forced out and pull other countries with it, doing untold damage to the European financial system.

The Greek quagmire raised the tension for a meeting in Berlin tonight between German Chancellor Angela Merkel, the dominant figure in euro crisis management, and Francois Hollande, who took office as French president today in the first power shift to the Socialists in France since 1981.

Questions for Hollande

Hollande, who replaces Nicolas Sarkozy on the French side of the Berlin-Paris tandem, campaigned against the austerity policies that Merkel championed as the solution to the crisis. Now, in his first hours in a government post, he will confront questions about his stance on Greece as more than two years of crisis containment threaten to come unglued.

As in early 2010 when the first Greek bailout and broader rescue fund were improvised, the way forward will be charted by top political leaders. Their next summit is May 23 in Brussels, the 18th since the debt crisis erupted.

“What’s at stake isn’t just the next Greek government,” German Foreign Minister Guido Westerwelle said in an e-mailed statement. “What’s at stake is the Greek people’s commitment to Europe and the euro.”

Policy makers gave an inkling of the behind-the-scenes planning to cope with a Greek departure, which would send shockwaves through the European banking system and leave lenders to Greece’s government, businesses and households unsure of getting their money back.

‘Technically Prepared’

The International Monetary Fund has “to be technically prepared for anything,” IMF Managing Director Christine Lagarde, who started the crisis as French finance minister, told France24 television.

The once-taboo issue of a Greek withdrawal or expulsion from the 17-nation currency union burst into the public debate last week, starting in Germany, Europe’s biggest economy and the country that invented the euro’s low-debt rules.

European Central Bank officials including Patrick Honohan of Ireland and Luc Coene of Belgium weighed the arguments for and against a euro exit, adding to speculation that a currency designed to last forever might start splintering after 13 years.

EU treaties declare the euro “irrevocable” and provide no exit procedure. A December 2009 study by the ECB’s legal department deemed an ouster or departure “so challenging, conceptually, legally and practically, that its likelihood is close to zero.”

More Time

Hints from euro finance ministers late yesterday that Greece might get more time to meet budget-cut targets failed to encourage the feuding political parties in Athens to put together a unity government.

“Nobody was mentioning an exit of Greece from the euro area,” Luxembourg Prime Minister Jean-Claude Juncker said last night after chairing the meeting of euro finance ministers. “I don’t envisage, not even for one second, Greece leaving the euro area. This is nonsense, this is propaganda.”

Less than a day later, Alexis Tsipras, head of Greece’s Syriza party, counted on using his second-place finish in the May 6 election as a springboard to winning the Greek revote and shredding the bailout terms.

Greece’s economy has shrunk every year since 2008 and is likely to contract 4.7 percent in 2013, according to EU forecasts. Greek unemployment will reach 19.7 percent in 2012, the second-highest in Europe after Spain, the EU predicted last week.

Tsipras called for a “definitive end” to the bailout and vowed that the new elections will “permanently lock the old powers in the closet.”


Hollande’s First Day in Office Is Marked by Merkel Summit

President Francois Hollande will spend his first hours as French president huddled in meetings today with German Chancellor Angela Merkel, underscoring rising concern that Greece is headed out of the euro.

Franco-German summits have become such a feature of the European financial crisis that Hollande’s predecessor, Nicolas Sarkozy, and Merkel became known by the single name “Merkozy.”

The euro break-up story is gathering steam again,” Marchel Alexandrovich, senior European economist at Jefferies International in London, said in a note yesterday. “The political uncertainty in Greece is higher than six months ago, with the Spanish and Italian macro backdrops clearly worse. But not to worry, it will all be all right because Germany and Franceare getting ready for another summit.”

Hollande was sworn in today at the Elysee Palace in Paris as the seventh president of the Fifth Republic and the 24th in French history. Before the ceremony, he held a brief private talk with predecessor Sarkozy during which France’s nuclear weapon codes were passed on.

“Among the constraints we face are massive debt, slow growth, high unemployment and diminished competitiveness,” Hollande said in his first speech as president. “But nothing is inevitable. I want to revive France and open a new way in Europe. A clear direction has been fixed and we’re mobilizing the strengths of France.”….


China Foreign Investment Falls 0.7% in Sixth Monthly Drop

Foreign direct investment in China fell for a sixth month in April, the longest stretch of declines since the global financial crisis, amid renewed turmoil in financial markets.

Inbound investment dropped 0.7 percent from a year earlier to $8.4 billion, the Ministry of Commerce said today in Beijing. That compares with a 6.1 percent drop in March.

Today’s data underscore the risk of a deeper slowdown in China after April export and import gains missed estimates and industrial output growth was the slowest since 2009. China cut banks’ reserve requirements on May 12 to spur lending and arrest the deterioration, with UBS AG and Bank of America Corp. lowering their second-quarter and full-year growth estimates.

“Trade data was bad, production data last week was bad, and this time FDI is also pointing to the same direction,” Zhang Zhiwei, chief China economist with Nomura Holdings Inc. in Hong Kong, said in a Bloomberg Television interview today. The reports show a “very weak economy at this moment,” with chances of an interest-rate cut rising though “still below 50 percent,” Zhang said.

The yuan fell against the dollar for the seventh time in eight days, slipping 0.02 percent to 6.3225 as of 12:46 p.m. in Shanghai. The MSCI Asia Pacific Index of stocks dropped 0.9 percent at 1:31 p.m. in Tokyo.

The estimates of five analysts in a Bloomberg News survey on foreign investment ranged from a gain of 8.2 percent to a drop of 3 percent…


Guindos Rules Out Aid as Spain’s Bank Plan Seen Failing

Spanish Economy Minister Luis de Guindos ruled out requesting aid from the European Union for the nation’s banks even as the fourth attempt in less than three years to clean them up failed to rebuild confidence.

“There is nothing to hide,” de Guindos told reporters in Brussels today. The government won’t need to tap EU rescue funds for banks and the planned audit of banks’ loans will give clarity on their solvency, he said.

Bank stocks extended their decline in Madrid trading today and the yield on Spain’s benchmark 10-year bond rose to the highest since Nov. 29 as lenders outlined the costs of the government’s requirements and analysts said even those provisions wouldn’t be enough.

Spain’s government said on May 11 it would require banks to set aside about 30 billion euros ($38.5 billion) to cover potential losses on real estate loans that are still performing. That’s on top of 53.8 billion euros of charges and capital ordered in February.

“I don’t know why they even bothered,” Olly Burrows, a credit analyst at Rabobank International in London, said in a phone interview. “A lot of people were expecting a big announcement on a bad bank and all we really got was additional provisions to part of the real estate book.”

Disappointment centers on the latest plan’s failure to acknowledge the risk of greater losses on non-real estate assets as Spain’s recession deepens and unemployment exceeds 24 percent, said Burrows. It’s also unclear how and when real estate assets can be removed from banks through the creation of subsidiaries ordered by the decree, Daragh Quinn, an analyst at Nomura International, said in a report. Spain will hire two auditors, as yet unidentified, to value banks’ assets.

“We expect cleanup number five,” said Burrows…


Italy Economy Contracts Most in Three Years on Recession

Italy’s economy contracted for a third quarter in the three months through March as the nation’s recession deepened amid an intensifying euro-area debt crisis.

Gross domestic product declined 0.8 percent, the most in three years, Rome-based national statistics institute Istat said in a preliminary report today. The contraction was more than the median forecast of 0.7 percent in a survey of 14 economists by Bloomberg News. GDP fell 1.3 percent from a year earlier….


European Stocks Retreat as Greece Will Hold New Election

European stocks dropped for a second day as Greece called a new election after the country’s politicians failed to form a government.

Banks (SXXP) posted the biggest contribution to the Stoxx Europe 600 Index’s decline. Julius Baer Group Ltd. (BAER) plunged 5 percent, its biggest slide in three months, as revenue from assets under management decreased in the first four months of the year.

The Stoxx Europe 600 Index retreated 0.8 percent to 245.45 at 4:03 p.m. in London, reversing an earlier rally of as much as 0.8 percent. The gauge has swung between gains and losses at least nine times today after yesterday slumping to its lowest level since Jan. 9.

“Equities look cheap, but we all know why,” Didier Saint- Georges, a member of the investment committee at Carmignac Gestion, which oversees about 50 billion euros ($64 billion), said at a presentation in London today. “Valuations are not necessarily pointing to any clear direction. For Europe, you just don’t need growth, but also very profound adjustments both fiscal and external, and that won’t happen quickly.”

National benchmark indexes fell in every western-European market except Norway and Iceland. The U.K.’s FTSE 100 and France’s CAC 40 lost 0.7 percent. Germany’s DAX retreated 0.8 percent. Greece’s ASE Index plunged 3.6 percent to its lowest level since November 1992.

Greece will have to hold the new vote as early as next month. Polls showed that the anti-austerity Syriza group could win the ballot. The failure to form a government committed to austerity has reignited concern that the country will leave the euro area.

Euro-Area Economy

Greece will repay a bond issued under foreign law which comes due today, Athens News Agency reported, without saying how it got the information.

The repayment does not commit any future Greek government to repay other bonds out of the remaining 6 billion euros of notes governed by foreign law that were not tendered in the country’s debt restructuring, the state-run newswire reported.

Gross domestic product in the 17-nation euro area stagnated in the first quarter compared with the final three months of 2011, the European Union’s statistics office in Luxembourg said today. The median forecast of economists surveyed by Bloomberg had called for a 0.2 percent contraction. Germany’s economy expanded 0.5 percent, compared with the 0.1 percent median estimate of economists in a separate survey.

International Bailout’s Terms

Germany’s Finance Minister Wolfgang Schaeuble said Greece must elect a government that sticks to the terms of its international bailout if it wants to stay in the euro.

“If Greece — and this is the will of the great majority – - wants to stay in the euro then they have to accept the conditions,” Schaeuble told reporters at a meeting of European Union finance ministers in Brussels. “Otherwise it isn’t possible. No responsible candidate can hide that from the electorate.”

The Stoxx 600 lost 1.8 percent yesterday as Greece moved closer to a possible exit from the euro area, European industrial output slipped in March and German Chancellor Angela Merkel’s party lost a state election.

The volume of shares changing hands on the Stoxx 600 was 6.1 higher than the average over the last 30 days, according to data compiled by Bloomberg.

U.S. Retail Sales

In the U.S., a Commerce Department report showed that retail sales increased 0.1 percent in April. That matched the median forecast by 80 economists surveyed by Bloomberg. Sales advanced 0.8 percent in March.

UniCredit SpA (UCG) and Intesa Sanpaolo SpA (ISP), the biggest Italian lenders, declined 4 percent to 2.57 euros and 2.5 percent to 1.01 euros after Moody’s Investors Service cut the credit ratings of 26 of the nation’s lenders, citing weakened earnings and the domestic economic outlook.

Julius Baer slumped 5 percent to 32.50 Swiss francs after the Swiss wealth manager established in 1890 reported that its gross margin, a measure of profitability, was “slightly below” 100 basis points over the period, compared with 105 basis points in 2011. A basis point is one-hundredth of a percentage point.

FLSmidth & Co. A/S tumbled 8.4 percent to 319 kroner after the biggest maker of cement kilns posted net income and revenue that missed analysts’ estimates. The Copenhagen-based company reported first-quarter profit of 241 million kroner ($41 million) and sales of 5.15 billion kroner. Analysts surveyed by Bloomberg had predicted profit of 338 million kroner and sales of 5.55 billion kroner.


Feckless Greeks Fail to Form New Government

(Reuters) – Greece abandoned a nine-day hunt for a government on Tuesday and called a new election that threatens to hasten the nation’s slide towards bankruptcy and a future outside the euro zone.

An inconclusive election on May 6 left parliament split between supporters and opponents of a 130 billion euro bailout deal which is reviled by Greeks for imposing deep wage, pension and public spending cuts.

A second election is expected to produce a similarly divided parliament, with opponents of the EU/IMF rescue consolidating their gains and raising the likelihood of an anti-bailout coalition that reneges on the deal keeping Greece afloat.

“For God’s sake, let’s move towards something better and not something worse,” Socialist leader Evangelos Venizelos told reporters after a meeting of party leaders failed to agree on a government of technocrats. “Our motherland can find its way, we will fight for it to find its way.”

European leaders have said they will halt the aid if promises given in return for the bailout are not kept. If so, Greece could go bankrupt as early as next month. Analysts say that this will almost certainly herald a Greek return to its drachma national currency.

“There is now a considerable danger that Greece simply runs out of money next month – that it can’t pay wages, can’t run public transport, can’t maintain infrastructure and that the country just descends into complete chaos,” said Jonathan Loynes, chief European economist at Capital Economics, which predicts the country could leave the currency bloc this year…


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