By Josie Cox
European stocks edged higher on Wednesday, while the euro fell
against the dollar, ahead of the latest policy announcement from
the European Central Bank.
By midmorning, the Stoxx Europe 600 was up 0.3%. The euro was
trading around $1.057 against the dollar, around 0.6% lower on the
day after the buck sold off sharply on Tuesday, burdened by weak
U.S. retail data as well as the International Monetary Fund
trimming its growth expectations for the U.S. and upgrading its
forecasts for the eurozone.
Later in the session, and a month into the launch of its
asset-purchase program, the ECB will make its latest monetary
policy announcement.
Its key rates are expected to remain unchanged, but strategists
at Mizuho said that ECB President Mario Draghi could announce a
broadening of the range of bonds eligible for purchase under
quantitative easing, and may also announce greater flexibility on
the bond maturities that can be bought.
"[Credit] curves are flattening as the stock of eligible assets
is shrinking, making the program harder to execute--something that
isn't in the ECB's best interests," said Peter Chatwell, a senior
rates strategist at Mizuho.
The ECB has pledged to buy EUR60 billion ($64 billion) of bonds
a month until September 2016, but not buy bonds with a yield below
the ECB's deposit rate of -0.2%. A ferocious compression of yields
in recent weeks though means that swaths of sovereign bonds already
trade below that level, making them ineligible for purchase.
On Wednesday, the yield on German 30-year government bonds hit a
fresh record low of just 0.54%. Yields rise as bond prices
fall.
Mr. Draghi is also expected to face questions over Greece.
Greece's Syriza-led government has been locked in negotiations
with its international creditors since coming to power in late
January, with progress slow.
The country needs a deal by this summer to secure billions of
euros in bailout aid to avoid defaulting on its debts and
potentially exiting the euro.
Greece's finance minister, Yanis Varoufakis, is to meet U.S.
President Barack Obama in Washington on Thursday, according to a
senior finance minister.
Already on Tuesday, Greek government bonds sold off sharply,
while stocks fell. On Wednesday, the yield on Greece's July 2017
bonds was marginally lower at around 23%. The yield on the
country's 10-year debt was around 0.1 percentage point higher at
around 11.8%. A so-called inverted curve, where shorter-dated debt
yields more than longer dated, indicates that investors see a
heightened chance of default.
Elsewhere, the Turkish lira tumbled to a fresh all-time low
against the U.S. dollar, above 2.70 on Wednesday, amid a
broad-based emerging market selloff driven by the strengthening
dollar and exacerbated domestic tensions.
There is no specific news fueling the latest move, said Piotr
Matys, a currency strategist at Rabobank, adding, however, that
"the lira is still one of the weakest links" among European
emerging market currencies.
He also said that there is a good chance of the Turkish central
bank raising rates in the coming months if the lira continues to
depreciate.
Back in equity markets, merger and acquisition activity
continued to dominate headlines across Europe more broadly.
Early Wednesday, Nokia Oyj said that it had sealed an agreement
to buy rival telecommunications-equipment firm Alcatel-Lucent SA in
an all-stock deal that values the French company at EUR15.6
billion.
Alcatel-Lucent shares surged by double-digit percentages on
Tuesday but were back down sharply on Wednesday. Shares in Nokia
took a beating ahead of the confirmation of the deal and were
higher in early trade on Wednesday.
In commodity markets on Wednesday, Brent crude was 1.7% higher
on the day at $60.84 per barrel. Gold was broadly flat at $1,193.20
per troy ounce.
In the U.S., the S&P 500 was seen opening 0.2% higher.
Futures, however, don't necessarily reflect moves after the opening
bell.
Write to Josie Cox at josie.cox@wsj.com
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