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Germany through the worst of its downturn, peace in the trade war and green shoots for the global economy next year.
It’s what investors have long dreamed of. Now, they’re starting to believe it.
Confidence in Germany’s economy has risen to a six-month high, while a Bank of America survey showed a record surge in optimism about the global outlook. Stocks have rallied and the U.S. 10-year yield is back up near 2%, after recession fears drove it well below that level this summer.
Part of the uptick may reflect hopes that the U.S. and China are closer to a trade accord, while economic surveys are offering signs that the manufacturing-led slowdown has troughed. More recently, there’s been news that the Trump administration may delay a decision to slap tariffs on European cars -- a welcome development for Germany’s auto industry.
The improvement in the ZEW -- which dropped to a near eight-year low over the summer -- comes just two days before data are expected to show Germany sank into a technical recession in the third quarter. But that’s effectively old news, and the improvement in forward-facing indicators means many are looking past it.
Growth in Europe’s largest economy will probably resume this quarter, though remain at a very sluggish pace well into 2020.
But the sense of hope is helping global equities, with the S&P 500 and Germany’s DAX among indexes near record highs. Benchmark Treasury yields have risen 25 basis points this month, setting them toward a break above 2%. Capturing the mood, the Bank of America survey also said investors sold more defensive stocks, such as utilities and staples, while turning to assets sensitive to the economic cycle, like value shares, financials and equities in the euro area.
“Of course, it is early days. The hard data is still bad,” said Florian Hense, an economist at Berenberg. “But if genuine economic data start to confirm the message from markets and financial analysts, we can usually be reasonably confident that better times are ahead again.”
The outlook is murky in parts. Not least because of the U.K. election next month and the ongoing, though reduced, risk of a no-deal Brexit. U.S. President Donald Trump, who speaks in New York later, could also derail the optimism if he pushes back on hopes about the chance of a U.S.-China trade deal.
Any near-term relief on auto tariffs don’t necessarily mean a change the broad trend of trade tensions that will continue to weigh on global growth, according to HSBC global chief economist Janet Henry. HSBC sees the U.S. expansion slowing to 1.7% in 2020, below the 1.8% Bloomberg consensus.
“We are operating in a different world of ongoing de-globalization trends,” she said on Bloomberg TV on Tuesday. “The bigger picture is going to be with us in the coming years.”
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