European investor sentiment slowly improving as euro uncertainty eases

European investor sentiment is slowly improving, according to the Sentix Research Institute based in Germany.

The index climbed for the fifth month in a row, jumping to -7 compared with -16.8 in December, the highest level it has reached since Jul 2011.

Economists had forecast a gain to minus 14.2, according to the median of 12 estimates in a Bloomberg News survey.

A gauge of economic expectations climbed to 12 from minus 1.5, while a measure of current conditions rose to minus 24.3 from minus 31, Sentix said.

“The European economy will get better in 2013, but I am not getting excited about how much it is going to get better,” said Lorcan Roche Kelly, chief European strategist with the US hedge fund, Trend Macro.

Mr Roche Kelly argues that the changes to the Basel III banking regulations will provide a welcome fillip for the economy.

Under the proposed Basel III guidelines, all banks would have been required to increase their capital and liquidity levels by 2015.

There had been considerable opposition from the banking sector to these new regulations as they complained that it would squeeze lending and undermine fragile growth.

However, banks have been given a much longer deadline to meet these requirements.

“This is a directional change and will greatly help banks on the periphery, particularly the Irish banks,” said Mr Roche Kelly.

Moreover, much of the uncertainty that was hanging over the future of the euro no longer shows up in investors’ concerns about the year ahead.

“That the improvement in the index has been so strong is partly down to many small improvements in the euro area such as Greece’s successful debt buyback,” said Sebastian Wanke, an economist at Sentix.

But there are still many factors constraining growth. The White House and the US Congress will resume hostilities over the next few weeks in negotiations over raising the debt ceiling and agreeing to spending cuts. These are scheduled for the end of February.

The Italian election is also set to take place at the end of February, which could be potentially destabilising for the single currency if an anti-euro alliance forms in the meantime.

None of these events are likely to trigger the same level of turbulence that gripped the markets for the past two years, but they will put a brake on growth potential, argues Mr Roche Kelly.

* additional reporting Bloomberg