Business World

Monday 11 December 2017

Debt Crisis: European shares run out of steam ahead of central bank moves

European shares
European shares

Richard Hubbard

EUROPEAN shares edged down from two-month highs today after three days of gains made on hopes of more monetary stimulus from central banks and the progress made in dealing with the eurozone debt crisis.

But strong demand for German debt at a bond auction underlined investor concerns that Europe's problems are far from resolved, sending yields on Spanish and Italian debt higher and putting the euro under pressure.



However, activity was subdued, with US markets closed for the Independence Day holiday and ahead of policy decisions from the European Central Bank and Bank of England tomorrow.



In a quiet market Germany found it easily able sell €3.3bn of 5-year government bonds, receiving bids for 2.7 times the amount on offer.



"What we are seeing is that ... this demand for safety remains intact," said Michael Leister, rate strategist at DZ Bank.



After the auction 10-year Spanish bond yields rose 8.6 basis points to 6.35pc, and the Italian equivalent rose 10 basis points to 5.75pc.



The euro shed 0.3pc to $1.2575, but was still holding above Tuesday's low of $1.2559.



The single currency fell to an 11-1/2 year low against the higher-yielding Swedish crown after Sweden's central bank kept interest rates unchanged.



The FTSE Eurofirst 300 index of top European shares fell 0.3pc to 1,043.06 points, having risen 1pc on Tuesday to its highest closing level since early May.



European equity markets began their latest rally on Friday, having fallen sharply for much of June, after European Union leaders agreed on new measures to support the region's banks and address funding problems facing Spain.



Investors have also been encouraged back into riskier asset markets by expectations that the ECB will cut rates tomorrow and may also inject fresh funds to counter the region's struggling economy.



A Reuters poll of economists showed a majority of economists expect the ECB to cut its main rate to 0.75pc tomorrow, while money market traders are evenly split on whether the central bank will cut the deposit rate, a separate survey showed.



"Investors will also want to see if the ECB President will highlight downside risks to growth and inflation, which will set the ground for more easing," said Paul Robson, currency strategist at RBS.



The Bank of England is seen launching a third round of monetary stimulus at its meeting.



GLOBAL SLOWDOWN



Data releases from across the globe continue to add weight to the view that the world economy is slowing down.



An index of activity among private Chinese service sector firms showed them growing at their slowest rate in 10 months in June as new order growth cooled, though the index has posted 43 months of consistent expansion.



Another survey showed Germany's services sector unexpectedly stagnated in June, ending an eight-month period of expansion as new order intake dropped.



A composite Purchasing Managers' Index (PMI) for the whole euro area, which surveyed thousands of companies, was revised up in June, but has been below the 50 mark that separates growth from contraction for nine of the last 10 months.



"Even Germany looks to have fallen into a renewed decline, though only a very modest drop in output is signalled. The pace of downturns in other major euro member states is far more worrying," said Chris Williamson, chief economist at data provider Markit.



He said output in Italy probably declined 1pc in the second quarter, with steep downturns also on the cards in Spain and France.



COMMODITIES STEADY



The prospect of further central bank monetary easing has supported the prices of gold and other commodities this week, though gains in these markets have tapered off as the weak economic data mounted.



"We believe that the euro zone crisis, the U.S. fiscal cliff, and the possibility of a hard landing in China will give the markets plenty to worry about and will keep risk appetite low and constrained," Societe Generale said.



The bank has lowered its price outlook for Brent crude by $5 a barrel to $100.



Brent crude, which had also been gaining on rising tension over Iran's nuclear programme, was 49 cents lower at $100.18 per barrel after jumping more than 3pc on Tuesday.



Brent crude was trading as low as $88.49 on June 22.



Spot gold was little changed at $1,615.99 an ounce, after rising more than 4pc since last Friday. It hit a two-week high of $1,624.70 on Tuesday.



The gold market is likely to remain steady ahead of the release of U.S. monthly employment data on Friday, which may encourage talk the Federal Reserve will join with its European counterparts in taking additional policy easing measures.



The US monthly jobs report is expected to show 90,000 workers were added to non-farm payrolls in June and the unemployment rate held at 8.2pc.

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