BRUSSELS:The euro slipped back towards seven-month lows, bond yields fell and European shares rallied on Thursday as talk of aggressive stimulus from the European Central Bank next week gained ground.The pan-European FTSEurofirst 300, adding to Wednesday’s 1.4 percent gain, while the Euro STOXX 50 index.The firm gains came as Wall Street shares closed flat overnight in a pre-Thanksgiving holiday lull and Asian stocks closed modestly higher. MSCI’s broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS rose 0.5 percent.”Expectations surrounding the ECB are running very high and this is driving European markets higher, weakening the euro and helping them do better than U.S. stocks,” said Marco Vailati, head of research and investment at Italy’s Cassa Lombarda.”I think and hope the ECB will not disappoint but I realize that it won’t be that easy,” he said.
Euro zone central bank officials are considering options such as staggered charges on banks hoarding cash and buying more debt ahead of next week’s ECB meeting, Reuters reported on Wednesday.That fueled talk that the central bank is getting ready for aggressive measures to lift inflation and economic growth in the 19-member euro zone.HOW LOW FOR EURO?Against this backdrop, the euro remained on the back foot, dipping 0.15 percent to $1.0626. It tumbled on Wednesday to $1.0565, its lowest level since mid-April, before recovering. Against the yen, the euro fell 0.2 percent to 130.12 yen, having hit a 7-month low of 129.77 EURJPY=R on Wednesday.Overall market activity was thin due to the holiday in the United States.”Ultimately, I think the ECB will be aggressive and that divergence in policy with the United States must imply a weaker euro,” said Chris Scicluna, head of economic research at Daiwa Capital Markets in London.”The question now is how far can we go, and as the Fed tightens, euro/dollar parity is looking likely by the second quarter of next year.”
Euro zone lending expanded at its fastest rate in nearly four years in October while a broader measure of money circulating grew well ahead of expectations, data from the ECB showed on Thursday.Still, banks continue to park around 160 billion euros in overnight deposits with the ECB, indicating that even negative rates and extraordinary monetary stimulus has not unblocked the lending channel.Short-term euro zone interest rates fell to record lows as markets interpreted an ECB debate about two-tier deposit rates as signaling the intention for an aggressive cut.ECB easing expectations also pushed German five-year government bond yields DE5YT=TWEB to a new record low of -0.196 percent, while two-year yields DE2YT=TWEB hovered just above lows of -0.418 percent.
Expectations for a divergence in monetary policy meanwhile rose after U.S. economic data on Wednesday cemented expectations that U.S. interest rates will rise soon, helping push the gap between short-dated bond yields in the U.S. and Germany to their widest since 2006 and underpinning the dollar.