November 27, 2013 / 10:24 AM / 5 years ago

GLOBAL MARKETS-German government deal boost euro, supports shares

* Major German parties reach deal on grand coalition

* Euro at four-year high vs yen, near one-month high vs dollar

* German DAX nears fresh record, European shares gain

* Markets wary over rising tension in East China Sea

By Richard Hubbard

LONDON, Nov 27 (Reuters) - A deal to form a German coalition government boosted the euro to a four-year high against the yen on Wednesday and helped buoy world shares, already well-supported by signs of more central bank liquidity.

The single currency peaked at around 138.54 yen, its best level since October 2009, and came close to a one-month high against the dollar of $1.3613.

The approach of Thursday’s Thanksgiving holiday in the United States and next week’s European Central Bank policy meeting and U.S. payrolls report kept a lid on the gains.

The long-awaited coalition agreement between German Chancellor Angela Merkel’s conservatives and the centre-left Social Democrats (SPD) was sealed early Wednesday, paving the way for a government to be sworn in by the end of the year.

Details of the new government’s policies were scant but included raising the minimum wage and increasing pensions, which should help boost activity in Europe’s largest economy.

“In the short run, it might help a little bit, but we are are very moderate on the impact, and on top of that it’s going to be very gradual,” said Philippe Gudin, chief European economist at Barclays.

The deal must still be voted through by SPD members, but ending the political stalemate has amplified the positive tone in equity markets. That tone was set by expectations the super-loose policies of the major central banks would continue into next year.

The MSCI world equity index was up 0.1 percent on the day to just over 400 points, close to a level it last reached at the end of 2007.

Europe’s main share markets all edged higher on the news of Germany’s grand coalition, helped by some solid earnings from the likes of Belgian discount grocer Colruyt.

“Germany is getting a more domestically focused economy,” said Gerhard Schwarz, the head of equity strategy at Baader Bank. “It’s not happening overnight, but this could be one element of appeal for equity investors.”

The pan-European FTSEurofirst 300 had risen 0.3 percent by midday, taking its year-to-date gains to 14.4 percent and keeping it on track for its best year since 2009.

Wall Street was similarly poised for modest gains before Thursday’s holiday. All its main indexes are at record levels after the Nasdaq composite closed above 4,000 on Tuesday for the first time since 2000.


Signs that the ECB could move early to implement fresh measures to support the struggling euro zone economy and tackle deflationary pressures were also growing, though inflation data on Friday is expected to show a small pickup..

German newspaper Sueddeutsche Zeitung reported on Wednesday that the central bank was considering a new long-term liquidity operation, which would be available only to banks that agreed to use the funding to lend to businesses.

The report follows a string of comments by ECB policymakers in the past week that they stood ready to act. However, many see next week’s meeting as coming too soon after the bank cut rates earlier this month to a record low.

Debt markets showed little reaction to the developments. German Bund futures slipped 6 ticks to 141.61 and the 10-year cash yield was virtually flat at 1.7 percent.


Outside Europe, tensions rose over Beijing’s demands that airlines inform it when they plan to fly over disputed islands in the East China Sea. The White House called the demand “unnecessarily inflammatory”, was worrying some investors.

The United States flew two unarmed B-52 bombers over the islands, while ANA and Japan Airlines stopped sending Chinese authorities their flight plans for routes that pass through the zone.

MSCI’s broadest index of Asia-Pacific shares outside Japan rose 0.1 percent. Shares in Japan weakened by 0.4 percent to slip further from a six-month peak touched on Monday.

In commodities, Brent crude was capped above $111 a barrel after oil industry group American Petroleum Institute (API) reported a 6.9 million-barrel rise in crude oil inventories, far more than the 600,000 barrels expected by analysts.

Investors have also concluded that a deal between Iran and world powers, which had caused a sharp fall in oil prices, will not bring an immediate increase in crude supplies.

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