Why are investors only waking up to risks now?

We have known for some time that the German economy was slowing. The economy contracted by -0.2% in the second quarter and since then the business and consumer confidence surveys as well as the PMI data have shown weakness. So why are investors only waking up now?

The reason is that the European Central Bank has so far disappointed with their monetary policy measures and it has become increasingly clear that the Germans will not give Mario Draghi free rein to implement full scale quantitative easing in the near term. The markets turned after the ECB’s first targeted liquidity auction spectacularly failed on September 18^th and then Draghi failed to elaborate on the size of the program for purchasing asset-backed securities at the October ECB meeting.

The German DAX equity index is down over 10% since September 18^th. At the same time the German finance ministry has made it clear they have no intention of embarking on a deficit spending program to appease the French and others in Europe who feel that Germany should start spending to stimulate the Eurozone economy.