German Investor Sentiment Jumps to Pre-Debt Crisis Highs

A broad measure of German investor sentiment jumped a three-year high in February as investors finally are becoming more confident in the health of Europe's largest economy. The news points to higher equity prices in the near-term.

The German ZEW Economic Sentiment Index, a broad measure of investor's views on the future health of the German economy, rose to 48.2 in February from 31.5 in January and crushing estimates of a reading of 35. The index is now at its highest level in three-years and should signal higher equity prices as equities in Europe are highly correlated to this index.

The news follows comments from the Bundesbank Monday that Germany should return to growth in the second quarter of 2013 after posting weak GDP data for the fourth quarter of 2012. Germany's fourth quarter GDP report was hurt by lower than expected airports due to global fears over the Fiscal Cliff and as investment decisions were postponed as Europe grappled with its debt crisis.

However, the news is not all positive. The current conditions index compiled by the ZEW Institute was actually weaker than expected at 5.2. Economists surveyed by Bloomberg had expected a reading of 9, higher than January's 7.2 reading. The weak current conditions reflects the sharp contraction of 0.6 percent in fourth quarter GDP in Germany and also the recent slowdown caused by a strong euro hurting exports. Nevertheless, these effects are most likely transitory and the expectations index mentioned above is much more closely watched as a leading indicator.

Truly bad news for the Eurozone economy as a whole, and German automakers, came in the form of new car registration data for January. The Brussels based European Automobile Manufacturers' Association said that new car registrations dropped 8.7 percent in January from the year before to a 23-year low of 885,159 new registrations. The data is the worst January figure since the EAMA started collecting data.

Germany's outlook “has improved relatively quickly and in remarkable fashion in the past three months,” the Bundesbank said in its monthly report yesterday. “For the first quarter of 2013 an expansion of overall economic output can be expected from today's perspective. For the remainder of the year, a gradual economic recovery is on the cards.”

The euro initially wiped out earlier gains on the news but then relaxed again on the auto registrations data. Currently, the EUR/USD traded slightly lower at 1.3344, a decline of 6 pips. German shares, as measured by the DAX Index, rose 0.79 percent in midday trading and led other European indexes higher.