European stocks and bonds rose on Friday, buoyed by the European Central Bank’s promise of another tidal wave of deflation-dousing liquidity, but investors retained a note of caution ahead of the latest U.S. employment report.
Benchmark 10-year yields on Italian, Spanish and Irish government bonds all plunged to their lowest ever in early trading on Friday, with the Irish yield almost 10 basis points below comparable U.S. borrowing costs.
Stock markets, following Wall Street’s march to yet another record peak on Thursday, rose too, with bank shares leading the way and putting the pan-European index of Europe’s leading 300 shares on track for its eighth consecutive weekly gain.
There was less movement in currency markets, which had swung violently on Thursday after the ECB cut interest rates – including deposit rates for banks below zero – and unleashed hundreds of billions more euros of cheap funds for banks.
“The ECB decisions were largely in line with what the market was expecting, however the negative deposit rate is certainly a brave move and hinting that QE (quantitative easing) is a possibility if necessary should be very welcome news,” said Mark Ward, head of execution trading at Sanlam Securities.
The ECB refrained from pursuing outright bond-buying like the U.S., Japanese and British central banks have done in recent years. But its president Mario Draghi did not rule it out in the future, saying “we aren’t finished here”.
At 0850 GMT the FTSEurofirst 300 was up 0.1 per cent at 1,382 points, with financials up 0.4 per cent.
Germany’s DAX was also up 0.1 per cent at 9954 points. On Thursday, it broke above the 10,000 points barrier for the first time ever.
Britain’s FTSE 100 was up a quarter of one per cent at 6,830 points, and France’s CAC 40 was flat on the day at 4,545 points, with luxury goods giant LVMH among the biggest losers, down 1.5 per cent.
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Investors’ risk-taking appetite and hunt for yield was most evident in European peripheral bond markets, where yields fell to their lowest on record.
Italian 10-year bond yields fell 8 basis points to 2.87 per cent, Spanish equivalents were down 7 bps at 2.76 per cent and Irish yields fell 7 bps to 2.51 per cent.
“The real consensus coming out of the ECB meeting is that these measures will be supportive of the (European) periphery,” said Anton Heese, co-head of European interest rates strategy at Morgan Stanley.
“This should be filtering through into lower funding costs in the periphery.”
The yield on 10-year German bonds, the benchmark for euro zone borrowing, also fell, dipping a few basis points to 1.33 per cent.
Analysts at SocGen said this reflected concerns that the ECB’s measures to fight off deflation may not succeed. They also pointed to the euro’s sharp rally well above $1.36 from the four-month low around $1.35 immediately after Draghi’s statement and press conference on Thursday.
The euro was little changed on the day in early trading on Friday around $1.3650, with traders saying major moves were unlikely as billions of dollars of options at $1.36 and $1.3650 expire later in the day, and ahead of the U.S. jobs data.
The dollar was flat against a basket of currencies at 90.375.
Traders hunkered down ahead of the May non-farm payroll report, with the median forecast showing that the U.S. economy added a solid 218,000 jobs last month. Estimates range from as little as 110,000 to as high as 325,000.
Earlier in Asia MSCI’s broadest index of Asia-Pacific shares outside Japan rose 0.25 per cent and Japan’s Nikkei closed flat at 15,077.
Wall Street had notched up new records with the Dow up 0.59 per cent and the S&P 500 0.65 per cent, while the Nasdaq managed a 1.05 per cent gain.
Yields on two-year U.S. Treasury notes were at 0.38 per cent after dipping 2 basis points on Thursday, while those on 10-year paper fell a tick to 2.58 per cent.
Gold was up at $1,254.80 having enjoyed its biggest gain in three weeks overnight as buyers were encouraged by the prospect of yet-lower rates for longer in the euro zone.
Oil prices were mixed, with U.S. crude down 8 cents at $102.40, while Brent crude rose 15 cents to $108.94.
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