Article / 24 November 2016 at 6:00 GMT

3 Numbers: German sentiment for November stays rock solid

editor/analyst / CapitalSpectator.com
United States
  • Flat performance expected for Germany’s Ifo business climate benchmark
  • Brazil’s stockmarket looks relatively resilient compared with EM counterparts
  • India’s rupee fell sharply against the USD and the selling may not be over

By James Picerno

US markets are closed today for the Thanksgiving holiday, but Thursday's a busy day for economic releases in Germany, including the November update of the Ifo Business Climate Index.

Meantime, keep your eye on Brazil’s stockmarket, which looks comparatively strong among emerging market equities in the wake of recent selling amid rising expectations for higher US interest rates. On the opposite extreme is India’s rupee, which has tumbled sharply against the USD this month.

Germany: Ifo Business Climate Index (0900 GMT) Europe’s main economy is picking up speed in the fourth quarter, according to new survey data. Today’s Ifo release will be widely read in search of confirmation that the trend is improving.

Yesterday’s preliminary figures for the Germany PMI Composite Output Index point to a firmer economic profile. Although the benchmark dipped modestly in November after touching a 10-month high in the previous month, the outlook is still bright.

“The data suggest that economic growth has picked up from the meagre 0.2% rate in the third quarter,” an IHS Markit economist said.

Germany’s central bank agrees. The Bundesbank this week advised that the country’s growth rate is accelerating.

“In the last quarter of 2016, growth in the Germany economy is likely to be significantly stronger after the temporary slowdown in the summer,” the bank said in its latest monthly report.

Today’s survey numbers via Ifo, however, are expected to deliver lacklustre results.

Econoday.com’s consensus forecasts for the trio of monthly metrics that track the mood in Germany’s business sector call for little to no change for the November readings.

If so, the news may be a sign that the Q4 rebound could be softer than expected.

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Brazil: Ibovespa Stock Market Index Rising confidence that the Federal Reserve is set to raise US interest rates has taken a bite out of emerging market stocks in recent weeks.

The reasoning: Higher yields in the US tend to strengthen the dollar, which pinches emerging market economies by inflating dollar-denominated debt in those countries.

Another headwind for emerging markets: Export-related profits are squeezed when the greenback rises.

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 To kill off a thriving black market India is getting rid of large denomination notes. Photo: iStock

The blowback, however, has been uneven. Brazil’s stockmarket has taken a mild hit lately, but is weathering the regime shift with US rates rather well.

Part of the reason may be related to the fact that Latin America’s largest economy has already suffered deeply and now appears to be in the early stages of emerging from a deep recession.

For an update on that narrative, keep your eye on today’s monthly report on consumer confidence (1000 GMT), which has been rebounding in recent months.

Meantime, Brazil’s Ibovespa index looks resilient. As of mid trading yesterday, this benchmark was still comfortably above key moving averages.

In addition, the index’s 50 Day Moving average is above its 100 and 200 day counterparts, which suggests that bullish momentum remains intact.

The question is whether higher rates in the US will eventually derail the Ibovespa’s bullish trend? Maybe, but for the moment the uptrend appears healthy.

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USDINR After eight months of relative stability, India’s currency has suddenly started crumbling in US dollar terms in November.

The new-found penchant for selling the rupee is partly linked to the greater caution for emerging markets generally in the wake of expectations that US interest rates will continue rising.

But India’s surprise announcement earlier this month that it was removing 500 and 1000 rupee notes from the economy - representing nearly 90% of notes in circulation - is weighing on expectations for growth.

The policy to demonetise the notes is part of a plan to fight the black market. Whatever the merits of the policy, economists say that the government’s plan could have repercussions for the economy, which is heavily dependent on cash transactions.

Adding to the pressure on India’s currency is the renewed strength in the US dollar.

“India is better placed compared with other emerging market economies and the rupee may feel the heat in the near term, falling possibly to the 70 level,” the head of India Forex Advisors told The Economic Times earlier this week. “But strong [foreign institutional investment] inflows in the long term would restrict any major fall in the rupee.”

Whatever reason for the rupee’s weakness, the dramatic change in USDINR is striking. In the long run, the country’s demonetisation program is expected to be a net plus for the economy. But for the near term, it’s been an excuse to short the rupee.

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– Edited by Adam Courtenay

James Picerno is a macro analyst/editor at CapitalSpectator.com. Follow James or post your comment below to engage with Saxo Bank's social trading platform.

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