Rumours, later squashed, that Chancellor Helmut Kohl had died of a heart attack hit sentiment, coming on top of worries stemming from the failure of his tax reform measures. Even so, most observers' trepidation still centres on what the Bundesbank will do with interest rates in the next few weeks.
Julian Jessop of Nikko Europe says speculation about an imminent announcement has been a little over-cooked, but he still expects an increase to come in September or October.
Even an uptick of as little as 0.1 per cent would be psychologically significant, coming as the first rise for five years. That could throw a spanner into the EMU works, particularly for investors who have made fat profits on the reducing yield gap between the Mediterranean currencies and Germany.
Stephen King of James Capel is more sanguine about the impact of higher rates, pointing out that German money costs are still well below the 4 per cent or so indicated as required after a European monetary area comes into effect. "But politically, it could stiffen rising resistance to EMU within Germany."Reuse content