Europe stocks and bonds up after ECB stimulus

London stocks up with Germany’s DAX and France’s CAC 40. — Reuters file pic
London stocks up with Germany’s DAX and France’s CAC 40. — Reuters file pic

LONDON, June 6 — European stocks rose and bond yields tumbled today in markets buoyed by the European Central Bank’s promise of another tidal wave of deflation-dousing cash, but impending US jobs data kept investors cautious.

Benchmark 10-year government borrowing costs for Italy, Spain and Ireland all plunged to record lows, with the Irish yield 11 basis points below comparable US borrowing costs.

Stock markets rose too, with bank shares leading the way and putting the pan-European index of Europe’s leading 300 shares on track for its eighth consecutive weekly gain.

US stock index futures pointed to a higher open on Wall Street after non-farm payrolls report for May due at 1230 GMT.

There was less movement in currency markets, which swung violently yesterday after the ECB cut interest rates — including taking deposit rates for banks below zero — and pledged hundreds of billions more euros of cheap funds for banks.

“The ECB decisions were largely in line with what the market was expecting. However, the negative deposit rate is certainly a brave move and hinting that QE (quantitative easing) is a possibility if necessary should be very welcome news,” said Mark Ward, head of execution trading at Sanlam Securities.

The ECB refrained from following the US, Japanese and British central banks in pursuing outright bond-buying. But its president, Mario Draghi, did not rule it out in the future, saying, “We aren’t finished here”.

At 1115 GMT the FTSEurofirst 300 share index was up 0.4 per cent at 1,385 points, with financials up 1.0 per cent.

Germany’s DAX rose 0.3 per cent to 9,981 points. Yesterday, it broke above 10,000 points for the first time.

Britain’s FTSE 100 was up 0.4 per cent at 6,840 points, and France’s CAC 40 up 0.5 per cent at 4,560 points.

US jobs up next

Investors’ appetite for risky assets and higher returns was most evident in euro zone peripheral bond markets, where buyers pushed yields to their lowest on record.

Italian 10-year yields fell 18 basis points to 2.77 per cent, Spanish equivalents were down 17 bps at 2.66 per cent and Irish yields fell 11 bps to 2.47 per cent.

“The real consensus coming out of the ECB meeting is that these measures will be supportive of the (European) periphery,” said Anton Heese, co-head of European interest rates strategy at Morgan Stanley. “This should be filtering through into lower funding costs in the periphery.”

The yield on 10-year German bonds, the benchmark for euro zone borrowing, fell 4 bps to 1.32 per cent.

Analysts at SocGen said this reflected concerns that the ECB’s measures to fend off deflation might not succeed. They also pointed to the euro’s sharp rally well above US$1.36 from the four-month low around US$1.35 immediately after the ECB statement and Draghi’s news conference yesterday.

The euro was down 0.2 per cent on the day around US$1.3635, with traders saying major moves were unlikely as billions of dollars of options at US$1.36 and US$1.3650 expire later in the day, and before the US jobs data.

The dollar was up a shade against a basket of currencies at 80.433.

Traders hunkered down ahead of the US jobs report, with the median forecast showing the US economy added a solid 218,000 jobs last month, down from 288,000 in April. Estimates range from 110,000 to 325,000.

Richard Hunter, head of equities at Hargreaves Lansdown, said the ECB’s move could soothe market jitters over a downbeat number.

“There’s every possibility of a sell-off should the number disappoint, but ... that could yet be short-lived,” he said.

Earlier in Asia, MSCI’s broadest index of Asia-Pacific shares outside Japan rose 0.25 per cent and Japan’s Nikkei closed flat at 15,077.

Yields on two-year US Treasury notes were at 0.38 per cent after dipping 2 basis points yesterday, while those on 10-year paper fell 1.4 bps to 2.57 per cent.

Gold steadied at US$1,251 having enjoyed its biggest gain in three weeks overnight as buyers were encouraged by the prospect of yet-lower rates for longer in the euro zone.

Brent crude oil nudged higher to just under US$109 a barrel. — Reuters

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