March 26, 2012 / 2:27 AM / 8 years ago

European stocks rise on robust German morale

LONDON (Reuters) - European shares were higher on Monday and safe-haven government debt pared gains after a key German sentiment index rose unexpectedly, but Spanish stocks weakened after an election result that could hamper the ruling party’s austerity plans.

Traders are pictured at their desks at the Frankfurt stock exchange February 14, 2012. REUTERS/Alex Domanski/Files

The FTSEurofirst 300 index was up 0.1 percent at 1,080, recovering after early declines, while the German DAX gained 0.2 percent after the survey’s release.

The Munich-based Ifo think tank said its business climate index, based on monthly feedback from some 7,000 companies, rose to 109.8 in March from a revised 109.7 in February.

“The data was cautiously positive. After the rather disappointing purchasing manager indices (PMI) of last week many did not reckon with such a good Ifo index. So the euro is benefiting from,” said Antje Praefcke at Commerzbank.

The common currency rose to around $1.3262 against the dollar from $1.3237 before the data, though it stayed shy of an earlier session high of $1.3285.

The Ifo has now risen for five consecutive months, showing Europe’s largest economy continues to outpace other euro zone states.

A steady number had been forecast, with some expectations the index would fall after the weak PMI reports stoked fears China’s economy is slowing and that the euro zone is sliding into recession.

“March’s rise in the German Ifo business climate indicator suggests that, for now, the economy remains resilient,” said

Jennifer McKeown, Capital Economics.

“Note, though, that this month’s rise was the smallest in the past five months, suggesting that maybe the run of optimism regarding the German economy is coming to an end... While exports are faring relatively well, cautious German consumers are still not really spending despite the resilience of the labour market.”

German Bund futures pared gains after the Ifo release, trading virtually flat on the day at 137.40, while German 10-year yields rose half a basis point to 1.877 percent.

Yields on 10-year Bunds broke below 2 percent last week as recession fears boosted demand for low-risk government debt.

PAIN IN SPAIN

MSCI’s main world stock index was down 0.16 percent, while Spain’s Ibex was 1.75 percent lower.

Spanish government bonds outperformed Bunds following the Ifo but were expected to remain under pressure after the ruling People’s Party won a regional election in Andalusia but did not secure the outright majority it expected. That deprived Prime Minister Mariano Rajoy of a symbolic boost to help him push through harsh spending cuts.

Spanish and Italian bonds were boosted by a report suggesting Germany is ready to drop its resistance to a higher bailout fund for the euro zone and will consent to combining the resources of the current EFSF and the ESM for a limited period, creating a larger firewall for the big periphery states.

Bond markets are also eyeing an Italian debt auction this week that will provide a test of sentiment as technocrat Prime Minister Mario Monti’s government battles to push through labour reforms needed to spur growth.

Italy is seeking raise up to 7.5 billion euros.

Reporting by London markets team; Editing by John Stonestreet

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