EDITOR: | December 2nd, 2015

ECB stimulus hopes keep Europe stocks at three-month high

| December 02, 2015 | No Comments
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December 2, 2015 (Source: Reuters) — European stocks hovered at a 3-month high and the euro was just above a 7-1/2-month low on Wednesday, as euro zone inflation remained barely visible and underlined just why the ECB is set for more stimulus.

Asian shares and the dollar had both wobbled overnight after weaker than expected U.S. manufacturing data, though European investors were still mostly focused on Thursday’s expected move from Mario Draghi’s ECB.

A preliminary reading of November consumer inflation raised fresh alarm for the ECB as it stayed at just 0.1 percent, miles from the central bank’s target of just under 2 percent.

Markets are expecting another salvo of ECB easing measures, including an expansion of its bond buying program and even higher charges for commercial banks that hoard excess cash.

“It (euro zone flash HICP data) is not consistent with the trend that the ECB was expecting,” said Ruben Segura-Cayuela, a euro zone economist at Bank of America  Merrill Lynch.

“We are expecting a one year extension on QE purchases and quantities to go up to as much as 70 billion euros a month. We also see a cut in the deposit rate, we think 10 basis points, but it could 20.”

The bets saw Germany’s DAX .GDAXI, France’s CAC 40 .FCHI and Spain’s IBEX .IBEX open 0.2 – 0.5 percent higher and kept the pan European FTSEurofirst .FTEU3 at a 3-month high. [.EU]

London’s FTSE gained 0.3 percent too, while the pound GBP= was left near a 7-month low by weak construction data and UK government bonds GB10YT=RR were steady ahead of a vote by its politicians on whether to join bombing in Syria. [GBP/]

As the euro slid back below $1.06 on the inflation figures the U.S. dollar grabbed back some of the ground it had lost on Tuesday following the first contraction in U.S. manufacturing in three years.

Federal Reserve head Janet Yellen speaks in Washington later and all eyes will be on what she has to say with the Fed widely expected to pull the trigger on its first hike in U.S. interest rates in almost a decade on Dec. 16.

The economic data has not been playing ball with the Fed’s policy plans in recent weeks. With a huge consensus now assuming a hike, the sharp downturn in the manufacturing surveys have come alongside weaker retail sales and Chicago PMIs. ECONALLUS

And with the ECB poised to loosen monetary policy again this Thursday, euro zone inflation expectations EUIL5YF5Y=R are on the rise despite the extremely low headline rate. ECONALLEZ

The downward pressure was back on euro zone government bond yields though after the inflation numbers. Ten-year German yields dipped 4 basis points to 0.44 percent DE10YT=TWEB.

Two-year yields stayed just off a -0.43 percent low hit Tuesday, while going in the other direction, U.S. 2-year yields at 0.93 were eyeing a return to their recent 5-1/2 year highs.

“The poor ISM data is unlikely to derail any rate hike plans as U.S. domestic demand is firm and wages show inflationary signs,” wrote Makoto Noji, a senior rates strategist at SMBC Nikko Securities in Tokyo, adding focus was now on Friday’s non-farm payrolls.

OIL SPILL

In Asia overnight, MSCI’s broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS fell for a fifth straight day as a 1 percent fall in Thai stocks and host of other bourses offset a 3.6 percent rebound in Shanghai .CSI300.

Japan’s Nikkei .N225 also ended in the red but it was small scale at 0.4 percent and barely budged it from a 3-1/2 month high. [.T]

Australian stocks were down 0.2 percent but had cut most of its earlier losses following a robust domestic GDP data release, that showed the economy growing at a brisk 0.9 percent.

The Australian dollar, already on a bullish footing after the Reserve Bank of Australia (RBA) skipped a chance on Tuesday to cut interest rates or talk down the currency afresh, touched a 7-week high of $0.7345 AUD=D4.

In commodities, crude oil prices sagged for a fifth straight day on expectations that OPEC will not cut output to stem a supply glut when they meet later this week. [O/R]

U.S. crude CLc1 was down 0.7 percent at $41.57 a barrel and Brent LCOc1 lost 0.2 percent to $44.25 a barrel.

Global growth attuned metal copper slipped too on persistent worries over top consumer China, but traders said a pledge by Chinese smelters to cut production put the market at risk of a huge short-covering rally.

China’s 10 major copper producers have asked the government to buy metal for its strategic stockpile, joining a growing chorus in the country’s stricken base metal industry that is pleading for state intervention.


Raj Shah

Editor:

Raj Shah has professional experience working for over a half a dozen years at financial firms such as Merrill Lynch and First Allied Securities Inc., ... <Read more about Raj Shah>


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