GLOBAL MARKETS-ECB policy talk lifts shares, euro

by on July 25, 2012 12:37 pm BST

Wed Jul 25, 2012 8:37am EDT

* Euro gains, shares recover

* Weak UK GDP and German Ifo data add to growth worries

* Concerns over Spain and Greece persist

* Poor U.S. corporate earnings to dominate Wall Street

By Richard Hubbard

LONDON, July 25 (Reuters) – Signs the European Central Bank
is open to changing the way it tackles the region’s growing debt
crisis lifted the euro and European shares on Wednesday but
deepening economic gloom kept a lid on the gains.

Weak corporate earnings also set the stage for a mixed open
to trading on Wall Street.

The rise in European assets came after ECB Governing Council
member Ewald Nowotny said there were arguments for giving
Europe’s new permanent rescue fund a banking licence, enabling
it to borrow unlimited central bank money, boosting its capacity
to prevent the crisis spreading.

The single currency saw its strongest gains of the
month on the comments, rising 0.85 percent to $1.2165, although
the outlook remains weak and it is only just above a two-year
low of $1.2042 hit on Tuesday.

“We take little solace from the fact that one member of the
ECB is suddenly working up to the fact that we need a bigger
firewall. That argument has been out there for two years, and
it’s not met with much response yet,” said David Page, senior
economist at Lloyds Bank.

Granting the fund, the European Stability Mechanism (ESM), a
banking licence means it could exchange bonds it buys to support
highly indebted countries for fresh cash from the ECB,
increasing its firepower without additional government funds.

ECB President Mario Draghi has long poured cold water on the
proposal and legal problems could also prevent such a move, but
Nowotny’s comments show the crisis is forcing policymakers to at
least consider options they have previously shunned.

Investors are worried that the firepower of the new fund
would be quickly exhausted if, as widely expected, Spain needs a
full sovereign bailout on top of the rescue deal for its banks.

The pressure on the central bank was also highlighted in its
quarterly bank survey which showed fears about the euro zone’s
future have made companies and other borrowers nervous about
taking on credit and investing in their businesses.

The Nowotny comments were enough to end a three-day selloff
in European share markets and lifted the FTSE Eurofirst 300
index by 0.2 percent at 1,020.69 points.

The MSCI world equity index was little
changed at 303.65 points though it has fallen 2.7 percent this
week as concerns about the impact of Europe’s problems on growth
spread across the world.


The gains in the euro and regional equities came in the face
of weak economic data from Germany and Britain, which reinforced
the view that the European Union’s biggest economies were being
dragged into the mire of the debt crisis.

German business sentiment dropped in July for the third
straight month to its lowest level in over two years, according
to the latest survey by the Munich-based Ifo think tank.

The monthly survey of some 7,000 companies, produced an Ifo
index reading of 103.3 for this month from a revised 105.2 in

“Today’s Ifo index sends a clear warning that even the most
solid ship can capsize in a rough thunderstorm,” Carsten
Brzeski, senior economist at ING Group said.

“With austerity-driven slowdowns coming now also to most
other core euro zone countries, an obvious cooling of the
Chinese economy and a still not very dynamic U.S. recovery,
order books are emptying and companies have started to reduce
stocks,” he said.

Britain’s economy is also suffering heavily from the impact
of the euro zone crisis on business and consumer sentiment.

The UK tipped into a second recession within four years at
the end of last year, and second-quarter data out Wednesday
showed the situation had worsened.

The Office for National Statistics said Britain’s gross
domestic product fell 0.7 percent in the second quarter of 2012
after contracting by 0.3 percent at the start of the year, much
worse than forecasts.

“The economy looks to be badly holed below the water line at
this stage. It’s a far worse period of activity than we’d
expected,” said Peter Dixon, an economist from Commerzbank.

Sterling fell sharply after data, hitting a 12-day low of
$1.5469 and pushing the euro to a 6-day high against
the UK pound of 78.40 pence.


Worries about Spain’s ability to fund itself as it faces
rising demands from regional governments for help overcoming
spiraling deficits were undiminished but Nowotny comments did
ease some of the pressure on Spanish debt.

Ten-year government bond yields eased 10 basis
points to 7.54 percent, and equivalent Italian debt yields
fell 16 bps to 6.49 percent.

While 10-year German bond yields were higher,
rising 6.3 basis points at 1.297 percent, after an auction of
bonds maturing in 2044 was met with poor demand.

Greece was also back in the headlines with inspectors from
the EU, ECB and International Monetary Fund in Athens to decide
whether to keep it hooked up to a 130-billion-euro lifeline or
let it go bust.

Three EU officials have said the team was likely to conclude
Greece cannot repay what it owes, making a further debt
restructuring necessary, but no decision is expected until at
least September.

In oil markets Brent crude edged higher on concerns about
Middle East supply.

Brent crude added 4 cents to $103.46 a barrel while
U.S. crude was up 22 cents to $88.72.

“It seems as though all the bad news (for Europe) is priced
in, and people are thinking things can’t get much worse,” said
Christopher Bellew, broker at Jefferies Bache.

Gold prices rose in line with the euro, gaining 0.6 percent
at $1,589.71 an ounce, while U.S. gold futures for
August delivery were up $12.90 an ounce at $1,589.10.

“We’ve had a modest uptick in sentiment this morning with
these comments about the banking licence for the ESM, but again
that kind of market reaction to political commentary can be very
easily undone by economic data, which has not been encouraging,”
Credit Suisse analyst Tom Kendall said.