By Josie Cox
European shares hit fresh multiyear highs Tuesday, buoyed by
expectations that the European Central Bank will this week venture
into uncharted territory by launching a stimulus program aimed at
spurring Europe's ailing economy back to health.
The Stoxx Europe 600 ended the day up 0.8%--having earlier in
the session hit a seven-year high--while London's FTSE 100 and
France's CAC 40 added 0.5% and 1.2%, respectively.
Germany's DAX 30 in early trade came close to eclipsing its
all-time high scored Monday, but later erased some of those gains
after figures from the country's ZEW institute showed that business
sentiment in January rose more than expected, which may--some
say--marginally weigh on the argument for broad-based and vigorous
ECB action.
Nonetheless, government bonds in many Southern European
countries continued to hover close to record highs, driven by
consensus expectation that the ECB will Thursday announce that it
will begin buying sovereign bonds in an effort to strengthen its
balance sheet.
The German central bank said Tuesday that it was preparing to
auction EUR5 billion ($5.79 billion) of five-year government bonds
Wednesday with a 0.% coupon. Spain meanwhile, sold EUR9 billion of
10-year bonds at a record low yield of 1.656% Tuesday, via a
syndicate of banks.
"We expect the ECB to announce a program of around EUR500
billion-EUR750 billion ($579 billion-$869 billion) of [European
government bond] purchases and our economists believe that the ECB
will signal it will stay open so long as inflation and inflation
expectations remain unacceptably low," Barclays strategists wrote
in a note.
On Monday, French President François Hollande said in a speech
to business leaders at the Élysée Palace that he too expects the
ECB to announce that it will buy sovereign debt--a move that he
said "will provide significant liquidity to the European economy
and create a movement that is favorable to growth."
Strategists at Société Générale said they anticipate a program
from the ECB that includes sovereign, agency, and corporate bond
purchases on Thursday.
"Given that a broad consensus expects a substantial quantitative
easing plan to confront deflation risk and aid a stalling economy,
disappointing the markets with the scope of the QE plan is a risk,"
they said.
Denmark on Monday cut its interest rates in an attempt to damp
investor interest in the krone ahead of the ECB meeting, and to
prevent the euro from losing too much ground against it.
Nationalbank--whose main policy role is to maintain the
stability of Denmark's currency against the euro, in turn providing
stability for the nation's exporters and keeping inflation low and
stable--cut its deposit rate to minus 0.2% from minus 0.05%, and
its lending rate to 0.05% from 0.2%.
Strategists agreed, however, that Monday's move didn't mean that
the central bank won't act again, as early as Thursday, depending
on what the ECB announces.
Earlier Tuesday, Turkey's central bank cut its benchmark
interest rate for the first time in six months, that move, however,
is more likely to have been triggered by slumping oil prices,
optimism that inflation within the country will drop further and
mounting political pressure for lower borrowing costs.
The lira strengthened slightly against both the euro and the
dollar on the back of the move, which analysts attributed to the
central bank deciding not to make any changes to the interest-rate
corridor, and deciding not to change the overnight borrowing or
lending rate.
The euro remained under pressure against the dollar Tuesday,
also as a result of ECB action expectations, before gaining
marginally after Germany's ZEW figures were released. Losses over
the past six months, however, are still around 15%, taking it to
$1.156.
In contrast to the ECB, Federal Reserve officials are staying on
track to start raising short-term interest rates later this
year.
Elsewhere in currency markets, the Swiss franc remained close to
parity with the euro after the country's central bank last week
shocked markets by scrapping its long-standing cap on the strength
of the currency.
In late trading the euro was at 1.01 francs--more than 15% lower
than a week ago. Swiss stocks, which took a beating after last
Thursday's decision, continued to recover, with the SMI up by
around 1% by early afternoon. Swiss banks Credit Suisse Group AG
and UBS AG's shares edged higher too, but remained around 13% and
18% off last week's levels.
UBS Wealth Management's chief investment officer, Mark Haefele,
said in a note that Swiss corporate profits are now likely to fall
5%-7% in 2015, relative to consensus forecasts of growth of 10%-12%
before the Swiss National Bank decision.
"While equities have obviously adjusted in recent days, the
change from a market with steady earnings growth and easy monetary
policy to one with declining earnings and an overvalued currency
will weigh on Swiss equities, and we downgrade them to neutral
[from overweight]," he said.
In commodity markets, Brent crude was around 0.8% lower on the
day at $48.39 a barrel. Gold rose 1.2% to $1,292.80 a troy ounce,
having earlier in the session hit a 20-week high with traders
citing a strong bid for assets considered safest during times of
stress.
Write to Josie Cox at josie.cox@wsj.com
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