German investor sentiment unexpectedly worsened in June, soured by fears of an impending loss of momentum in Europe's largest economy. The ZEW economic think tank said on Tuesday its economic sentiment indicator, based on a survey of 293 analysts and institutional investors, fell to 20.3 in June from 24.0 in May.
A Reuters poll of economists had pointed to a reading of 29.0. The euro fell, European shares pared gains and bond yields fell after the release of the reading. "The price of oil is a negative factor, as are rising interest rates," said BHF-Bank's Uwe Angenendt. "Because of this financing conditions are no longer so favourable. The economic momentum will therefore slow in the second half of the year."
The European Central Bank raised interest rates to a near six-year high of 4.0 percent earlier this month and showed its readiness to increase them again to combat inflationary dangers in a strongly expanding economy.
ECB Executive Board member Lorenzo Bini Smaghi said on Tuesday asset prices suggest the bank's monetary policy may be too accommodative. A separate ZEW gauge of current conditions for Germany rose to 88.7 this month from 88.0 in May. The consensus forecast in the Reuters poll was for a reading of 87.5. Investors' caution about the outlook contrasted with drugs and chemicals group Bayer, one of Germany's leading companies, which raised its profit outlook on Tuesday.
The release of the ZEW readings affected sentiment in the foreign exchange markets, with the euro losing momentum after hitting a lifetime peak against the low-yielding Japanese yen. Recent market turmoil may have hit investor morale, said Richard McGuire, fixed income strategist at RBC Capital Markets.
"We would argue in favour of taking today's readings with a pinch of salt given the recent turmoil in the treasury market could well have soured sentiment among this survey's predominantly analytical respondents," he said.
The Ifo institute's business sentiment index is expected to show a slight dip for June but remain in sight of a post-reunification high reached in December. The German economy grew 0.5 percent in the first quarter of this year despite the impact of a January 1 value-added tax rise. Economists widely expect full-year growth to come close to matching last year's six-year peak of 2.8 percent.
The economy has, however, shown some signs of running up against its limits. Industrial production suffered its biggest fall in nearly seven years in April, and retail spending edged up only tentatively. A ZEW measure of expectations for the euro region dipped to 19.0 from 22.3 the previous month, the institute said.
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