Euro, European shares gain on expectations of ECB bond buying

MARKETS-GLOBAL-EURO-ECB:Euro, European shares gain on expectations of ECB bond buying

london  September 6, 2012, 14:37 IST

london  09 06, 2012, 14:40 IST

 

European stocks edged up and the euro hovered near an eight-week high on Thursday on expectations the European Central Bank will unveil new tactics to ease the high borrowing costs facing the region's highly indebted nations at a meeting later in the day.

The single currency jumped more than 1 cent on Wednesday when a string of leaks from euro zone officials suggested the ECB was ready to make massive purchases of short-term debt, subject to tough conditions, and would not give its own holdings seniority over those of private investors.

But fear of disappointment when the details are made public is keeping a lid on further gains.

"This meeting is absolutely crucial, because expectations are extremely high. If the ECB does not deliver, we will get into another bad patch," said Gilles Moec, senior European economist at Deutsche Bank.

The single currency was up 0.2 percent at $1.2627, close to last week's peak of $1.26378, which was the highest level since early July.

The FTSEurofirst 300 index of top European shares, which ended unchanged on Wednesday despite the reports of the ECB's plans, rose 0.4 percent to 1,083.97 points.

The EuroSTOXX 50 index of euro zone blue-chip stocks, which more closely tracks the swings in sentiment to the currency bloc, added 0.6 percent to 2,457.47 points.

Analysts said a key reason for the gains being capped ahead of the announcement was a view that implementation could still be some way off.

"Certainly it is helpful if there is an unlimited amount (of bond buying) possible, and also if the ECB will refrain from holding a preferred creditor status," said Gerhard Schwarz, head of equity strategy at Baader Bank. "But still we need a formal aid request from countries like Spain or Italy before the ECB will get busy."

A number of other events could also affect the ECB's ability to act, including a lack formal approval for the region's new permanent bailout fund from the German courts.

In the debt markets, safe-haven U.S. Treasury and German government bond prices have dipped ahead of the ECB announcement, while peripheral euro zone bond prices have been moving higher.

"It (the ECB plan) is going to be a helping hand but it's not going to be a miracle cure," said Alan Clarke, an economist for Scotia Capital.

Ten-year German Bund yields were up 6 basis points at 1.48 percent on Thursday, with equivalent Spanish and Italian debt yields dropping 10 to 15 basis points to 6.29 and 5.42 percent, respectively..

The prospect of future central bank buying ensured a successful Spanish debt sale on Thursday, with yields down, and debt investors are also watching France's return to the market as it plans to sell up to 8 billion euros of debt later in the day, including a new 15-year bond.

Commodity prices followed other risk assets higher on the speculation about the ECB's plans, but markets are also waiting for the August U.S. payrolls report, due out on Friday.

A soft jobs report would strengthen the case for a third round of monetary easing, also known as quantitative easing (QE3), by the Federal Reserve, which would likely lift commodity prices everywhere.

"Further price direction is likely to come from any additional details from the ECB on how they intend to tackle the euro crisis, as well as any hints of quantitative easing by the U.S. Fed," National Australia Bank analysts wrote in a note on Thursday.

Brent crude futures had climbed 44 cents to $113.53 per barrel in early trading, while gold rose 0.59 percent to $1,703.00 an ounce - its highest level since March.