Fear is rising again in debt-plagued Europe. After signs of optimism had grown around European markets, this week's renewed concerns of a global slowdown have hit Europe's stocks hard. Germany's DAX (^DAX +0.00%) fell sharply on Thursday, finishing out the week down more than 1% despite strong gains on Wednesday. Germany's economy has managed to pull ahead of its contracting European neighbors, but even Europe's industrial heart has felt a blow from the recession still lingering across the continent.
Economic concerns spread across businesses
Germany's Bundesbank sounded optimistic earlier in the week, predicting a potential turnaround in construction and consumption later in the year that could spark a recovery in Europe's largest economy, which grew just 0.1% in the first quarter. However, German leadership still sees business investment as elusive, and even the Bundesbank estimates that the country's economy will grow just 0.5% this year. That's better than most economies on the continent, but hardly a sign of a long-term rise on the way.
Fear over slowing export growth has businesses holding back on investing more. The country's DIHK commerce chamber revealed that thousands of German businesses polled were concerned that export demand would fall, particularly as the Euro has remained strong against other depreciating currencies such as the yen. While the yen's rapid decline has already fueled export growth, German exports are predicted to rise just 2% this year -- a slower rate than in previous years. Until businesses are confident, investment will be limited, and Germany's economic turnaround will continue to creep forward at a snail's pace.
Those concerns -- as well as fears over a global economic slowdown after China released poor manufacturing data and U.S. Federal Reserve Chairman Ben Bernanke hinted at the possibility of reduced Fed bond-buying soon -- sparked a retreat in Germany's financial sector on Friday. Shares of Commerzbank fell 2.4%, hurt even more when JPMorgan downgraded shares of the German bank to "neutral" and cut its price target. Commerzbank recently launched a plan to raise another 2.5 billion euros in capital in response to regulatory pressure to pay back an 18 billion euro bailout granted in 2009. However, Commerzbank and many of its fellow European financial institutions are still exposed to risky holdings in unstable economies such as Spain and Greece.
Deutsche Bank (DB +4.50%) also dropped with Germany's financial sector, with shares falling 3.2%. The firm posted a strong first quarter that saw net income rise year over year, but like Commerzbank, Deutsche Bank is still on the lookout to increase capital in order to guard against exactly the kind of slowdown investors panicked about earlier in the week. The firm's leadership said at its annual meeting this week that the bank is on pace with cost-cutting measures, but so long as Europe remains mired in a slump, Deutsche Bank and other European financial institutions will be vulnerable.
It was a better week for German stocks outside the financial sphere. German chemical and pharmaceutical maker Bayer (BAYRY +2.46%) rose 0.8% after it received good news from a late-stage trial of its riociguat therapy for treating high blood pressure. Bayer predicts the drug could hit peak sales of nearly $650 million, and the firm has already submitted it to European and American regulators for approval.
