Markets give German yes vote a lukewarm welcome

 

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There was relief in the markets after the German parliament gave its nod to the expansion of the European Union's bailout fund yesterday – but the optimism was tempered by persistent concern about the challenges on the road ahead as the eurozone grapples with its debt woes.

The Bundestag approved the extra powers for the European Financial Stability Fund that were agreed by officials in July. The German Chancellor Angela Merkel was able to push through the changes without resorting to support from the opposition, with 315 legislators from the ruling coalition backing the plans.

The wide margin for approval – in all, 523 said yes, 85 voted against the proposals and three abstained – was welcomed by the markets as a sign of Germany's commitment to resolve the debt crisis. Buoyed by the vote, the euro notched up steady gains against the US dollar, climbing as high as $1.367 in the afternoon.

Stocks were also higher, with European shares rising by 0.6 per cent. Supplementing the German vote was news of an upward revision in US growth figures for the second quarter, which helped drive London's FTSE 100 as high as 5,350.18.

However, the rally began to fizzle out as investors turned their attention to the road ahead. The FTSE 100 was 0.4 per cent lower at the end of the day, with weakness in commodity stocks hitting performance, and althoughEuropean shares were broadly higher, they closed off the session's highs.

Hours ahead of the German vote, the yield on Italy's 10-year bonds climbed to 5.86 per cent, its highest since the euro made its debut, at an auction of the country's debt on Thursday. "[Those are] eye-watering yield levels," said Commerzbank's David Schnautz.

Following the vote, the credit markets saw only limited improvement. The German Bund future, though lower, was little changed as equity markets closed. "Beyond [the German] vote nothing has changed and we're awaiting a more comprehensive response from eurozone policymakers," said Lee Hardman, a currency analyst.

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