May 15, 2012 / 12:42 AM / 5 years ago

German growth helps shares, euro stage recovery

6 Min Read

Traders work at their desks in front of the DAX board at the Frankfurt stock exchange May 14, 2012.Remote/Kirill Iordansky

LONDON (Reuters) - European shares edged higher and the euro held above a four-month low on Tuesday after Europe's biggest economy reported strong growth, but fears about the impact of the region's crisis on the global outlook kept demand for safe-haven assets strong.

U.S. stock index futures also signaled that Wall St will probably open higher, although April retail sales and inflation data due later could add to concern about the recovery in the world's largest economy after more signs of slower growth in China. .N

"What we term the elephant in the room is global growth. If we see U.S. and China growth deteriorating it becomes a lot more painful for Europe," said Gary Baker, head of European equities strategy for BofA Merrill Lynch.

Germany kept hopes for growth alive when it reported that strong exports had helped its economy grow 0.5 percent in the first three months of the year, ahead of market forecasts.

Germany's performance offset zero growth in France and recession in Italy and Spain, leaving the whole 17-member euro zone economy stagnating but not in recession.

"Germany is leading the bloc, but this doesn't mean we will have a strong rebound. Austerity is not going away and southern European economies are really struggling," said Mads Koefoed, a senior economist at Saxo Bank.

The German growth number gave a solid boost to the euro, lifting it 0.25 percent to $1.2857 and away from four-month lows of $1.2814 struck earlier in the day.

But share markets were more circumspect with worries about a possible Greek exit from the euro zone pushing the FTSE Eurofirst .FTEU3 index of top European shares down 0.1 percent to 1,002 points, although away from the lowest level since December 2011 of 998.62 points on Monday.

The Greek fears, combined with the signs of a slowdown in China, also kept world share markets under pressure, with the MSCI world equity index .MIWD00000PUS down 0.1 percent at 309.93.

German Outlook Clouded

Some of the optimism from the German GDP data was dispelled after a business survey by the ZEW Institute taken in the first two weeks of May showed a big dip in sentiment since the latest bout of political instability in Greece and the renewed concerns about Spain and Italy's banking systems.

Analyst Christian Schulz at Berenberg Bank said the ZEW survey showed Germany would probably cool off in the middle of the second quarter. "If Europe manages to get a grip on its problems, however, and German Chancellor Angela Merkel and French President Francois Hollande can renew the Franco-German crisis management, then trust could quickly return," he added.

Merkel and Hollande were due to hold their first meeting since the Socialist's victory in the French election later in Berlin with expectations high in the markets that some policy response to the current crisis will be forthcoming.

"Risk appetite is subdued but there is no panic because of expectation that there will be a policy safety net that will be rolled out if the situation so requires," said Baker at BofA Merrill Lynch.

Finance ministers from the 27-member European Union were also meeting in Brussels to discuss ways to strengthen region's banking system, a day after Moody's announced a sweeping downgrade of 26 Italian banks.

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German Quarterly GDP link.reuters.com/duw28s

Euro zone GDP by country since 2008:

link.reuters.com/tyw28s

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Meanwhile in the debt markets investors gained some relief when a Greek government official said the country will repay 430 million euros in maturing bonds, which were not included in its recent debt restructuring.

That news and the German data saw June Bund futures ease 26 ticks to 143.14, after the contract set a new high of 143.69 the previous day. Ten-year bond yields were 2.4 basis points higher at 1.48 percent, and above the all-time lows of 1.434 percent.

But markets are awaiting signs of a break in the political deadlock that has followed inconclusive elections nine days ago which is behind speculation that Greece's days in the euro zone are numbered.

Greece's president will ask politicians on Tuesday to stand aside and let a government of technocrats steer the nation away from bankruptcy, but leftists have already rejected the proposal and look set to force a new election they reckon they can win.

The debt markets have begun to price in the risk of a break-up of the euro zone, with fears that the chaos in Greece will drag down larger countries such as Spain and Italy.

But after sharp rises in Italian and Spanish bond yields on Monday, yields on the two countries' 10-year benchmark bonds were broadly steady on Tuesday at 5.89 percent for Italy and 6.26 percent for Spain.

Market participants were also keeping a close watch for any signs the European Central Bank may resume its bond-buying program, should any of the debt come under further pressure.

Commodity prices remained under downward pressure, reflecting growing risk aversion due to the euro zone crisis and fears of lower demand if global growth stalls as a result.

U.S. crude dropped 22 cents to $94.56 a barrel, after Monday's fall to $93.65, the weakest intraday price since December 19. However Brent crude recovered from earlier losses, rising by 30 cents to $111.87 a barrel after sliding to $110.04 on Monday, its lowest intraday price since January 25.

Gold edged back towards $1,560 an ounce in Europe on Tuesday, helped by some demand for bullion from jewelers in top consumer India and also southeast Asia.

Additional reporting by Sujata Rao.; Editing by David Stamp

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