Sizzling euro zone periphery run continues

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Bullsandbears REUTERS A bull and a bear styrofoam figurine.

London - Euro zone periphery bonds and stocks rallied for a third day on Thursday, as investors cast aside their normal caution ahead of policy meetings at the European Central Bank and Bank of England.

Neither bank was expected to change interest rates, but markets were on alert for any signs of future moves in monetary stimulus or shifts in the economic outlook.

A jump in the euro zone sentiment index to a 29-month high for December set a positive mood for the ECB meeting and helped European stocks overcome an early wobble.

Spanish and Italian bourses had both jumped more than 1 percent by 13:00 SA time, while Portugal's main stock market added over 0.5 percent to take its gains so far this year past 8 percent.

Both the euro and sterling were also able to claw back some ground they have conceded in recent days to the dollar, which had been lifted by strong US data.

The pound looked the firmer of the two gainers at $1.6469.

The euro was up 0.3 percent at $1.3600, but with euro zone inflation bumping along at very low levels, HSBC FX strategist David Bloom expected the ECB to reiterate it remains on guard later - a move that could weaken the currency.

“I would say at least some dovish rhetoric from the ECB, but from the Bank of England we are not expecting much at all ... I think this mini dollar-rally, on the view the Fed is going to taper (the amount it pushes out as stimulus) and the ECB is going to loosen (eventually), is going to stay with the market.”

ECB chief Mario Draghi has been at pains to stress in recent months that the bank is prepared to ease its record low interest rates even further below 0.25 percent and test out other, more unconventional, policy options if necessary.

With euro zone inflation running at just 0.8 percent in December, deflation could become a risk if prices continue to slow.

In most respects though, the euro zone has got off to a good start this year. Germany's economy is gaining strength and bailed-out Ireland has seen a strong return to borrowing markets, which in turn has lifted Portugal and other 'periphery' members.

Euro zone growth is set to lag that of Britain, however, and some traders suggested the Bank of England could release a rare post-meeting statement to acknowledge the UK economy's progress, though HSBC's Bloom doubted it would.

 

ASIA WOBBLES

The BOE is due to make its policy announcement at 14:00 SA time, with the ECB due at 1245 followed by a news conference at 15:30 SA time.

In Asian trading, shares once again wavered after a lacklustre performance on Wall Street overnight, following Federal Reserve minutes and ahead of the US jobs report on Friday.

Seasonal bellwether or just hocus pocus, the first five trading days don't bode particularly well for 2014.

Since 1950, the direction of the S&P500 index of US blue chips in the first five trading days of the year has predicted the full-year direction more than 85 percent of the time.

At Wednesday's cut-off, it was just in the red.

Perhaps more relevant for more hard-headed investors will be the fourth-quarter earnings season in the United States, which kicks off on Thursday with earnings from mining giant Alcoa , as usual.

“This is the “show me” year in terms of earnings,” said Bill O'Neill, head of wealth management research at UBS.

“You have to see an improvement.”

A sharper-than-expected slowdown in China's annual consumer inflation in December caused some jitters in Asia but market reaction was limited.

MSCI's broadest index of Asia-Pacific shares outside Japan shed 0.4 percent after snapping a five-day losing streak on Wednesday.

Despite a weaker yen, which should help exporters, Japan's Nikkei benchmark lost 1.5 percent.

 

COPPER BOTTOM

Among commodities, gold was a tad higher at $1,227.05 per ounce, steadying after touching a one-week low on Wednesday.

US crude futures advanced 0.3 percent to $92.62 a barrel, rebounding from a five-week low hit overnight after data showed a large build-up of stockpiles at the US benchmark delivery point.

Brent crude also gained 0.6 percent, to $107.80 per barrel, while copper prices, highly sensitive to the economic outlook for top consumer China, slipped 1.2 percent to $7,256.25 on its way to a two-week low.

“I'm a bear on copper prices - I think $7,000 is a more sustainable level,” said Helen Lau, a senior commodities analyst with UOB Kay Hian in Hong Kong.

“The dollar will continue to strengthen because of US tapering (stimulus withdrawal), and China's economic growth is slowing down.” - Reuters



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