European shares near year highs on stimulus hopes
EUROPEAN shares neared their highs for the year on Thursday and oil prices rose after Chinese economic data kept alive talk that central banks will ride to the rescue again, five years after the financial crisis began.
The FTSE Eurofirst 300 index of top European shares traded choppily around 1,096 points, just under the 2012 peak of 1,106.79 hit on March 16 after the European Central Bank (ECB) had pumped a trillion euros of cash into the banking system.
Futures prices indicated US stocks could extend their recent gains when Wall Street opens, with the S&P 500 index having already broken through the 1,400 level this week.
"If you’re anticipating more quantitative easing and a reasonable possibility of modest earnings growth, equities aren’t particularly expensive and so they can grind higher," said Richard Batty, global investment strategist at Standard Life Investments. "But we shouldn’t get carried away," he added.
Europe’s stock markets began their latest rally two weeks ago when ECB President Mario Draghi said the bank was "ready to do whatever it takes to preserve the euro", raising hopes of bold steps to lower the borrowing costs for Spain and Italy.
Evidence that the eurozone’s problems have caused a slowdown in economic activity in the US and Asia has added to expectations that other major central banks will soon announce their own plans to ease policies.
China kept those hopes alive on Thursday when it reported annual consumer price inflation at a 30-month low of 1.8% in July and factory output growth slowing to 9.2% in that month, the weakest rate in just over three years.
"We are in an environment which we call ‘The Great Monetary Easing Part Two’, said Hans Redeker, Head of Global FX strategy for Morgan Stanley.
On August 9, 2007 the ECB began the first wave of massive monetary easing when it injected an unprecedented amount of funds into a stalled financial system after French bank BNP Paribas said losses on US subprime mortgages had forced it to halt redemptions at three of its funds.
Other leading central banks followed suit on a day widely regarded as marking the start of the financial crisis.
Since then the main central banks have cut interest rates to record lows and pumped huge sums into the financial system through unconventional policies, trying to keep the global economy ticking over as households, companies and governments cut back on their levels of debt.
The slowdown which has followed has exposed the scale of overspending by eurozone governments in particular and a massive amount of bad loans held by the region’s banks — problems that have yet to be resolved.
Last week the ECB outlined a plan aimed at directly helping two of the worst hit nations — Spain and Italy — which are battling with high borrowing costs while their economies wallow in deep recessions.
However uncertainty over the timing and the details of this aid prevented any the euphoria from the equities market spreading to the single currency or the region’s debt markets.
The euro fell 0.5% to $1.2306, though it had touched a one-month high of $1.2444 on Monday.
MSCI’s world equity index, already at three-month highs, was on track for fifth day of gains, but was up just 0.1% 322.42 points.
Many investors are worried that the ECB’s condition for action — that troubled countries ask for help from the eurozone’s rescue funds — has raised the risk that the crisis in Spain and Italy may have to get worse before a move can come.
The bloc’s new permanent bailout fund, the European Stability Mechanism, still needs approval by the German Constitutional Court, which doesn’t rule until September 12.
"We’re in a waiting game. This crisis has got to worsen enough for Spain to be forced to enter a bailout programme such that the ECB’s willingness to buy its bonds is tested," Rabobank rate strategist Lyn Graham-Taylor said.
The uncertainty over the ECB’s next steps left Spanish 10-year bond yields edging higher on Thursday at 6.93% but Italian bonds had eased slightly to 5.84%.
Benchmark 10-year German yields were up 1 basis point on the day at 1.436%, compared with their record low of 1.126% hit on July 23.
Commodity markets took their cue from the Chinese data and the prospects of further central bank action. Brent crude rose for a fifth session to add 61 cents to $112.75 a barrel while gold steadied just above $1.610 an ounce.
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