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GLOBAL MARKETS-Europe’s risk assets bolstered by ECB action hopes

by on July 27, 2012 10:52 am GMT
 

Fri Jul 27, 2012 6:52am EDT

* FTSEurofirst 300, metals, oil rise

* Italian bond yields fall, narrow gap with Germany

* ECB action eyed after Draghi, Le Monde report

* German Bundesbank tempers risk appetite

By Toni Vorobyova

LONDON, July 27 (Reuters) – European equities rose and
peripheral bond yields fell on Friday on growing expectations of
ECB action to bring down Spanish and Italian borrowing costs,
but concerns about possible German opposition to such a move
kept risk appetite in check.

Euro zone governments and the European Central Bank are
preparing to intervene on financial markets, French daily Le
Monde reported, citing unnamed sources.

The report came a day after ECB President Mario Draghi
boosted risk assets across the globe with his pledge do whatever
it takes within the bank’s mandate to defend the single
currency.

“Now all of a sudden everybody thinks he (Draghi) is going
to start printing. He has backed himself into a corner, if he
doesn’t come up with anything then he could be in trouble,” said
Ioan Smith, strategist at Knight Capital.

“You wouldn’t want to be short (equities) at the moment
given the market’s reaction, the market is very skittish.”

Expectations for the U.S. Federal Reserve to potentially
open the door for a third round of quantitative easing at a
meeting next week – following a run of weak data – also
supported appetite for risk assets.

The FTSEurofirst 300 was up 0.3 percent at 1,045.89
points at 1027 GMT. Copper prices rose 1 percent and oil
also edged higher.

The euro traded around $1.2267, in sight of a two-week high
hit on the back of Draghi’s comments on Thursday.

Ten-year Italian government bond yields
reversed an earlier rise and were down 3 basis points on the day
at 6.0 percent, helping to narrow their spread over equivalent
German Bunds to 466 basis points.

However, risk appetite was somewhat tempered after Germany’s
Bundesbank said it viewed “in a critical fashion” the dormant
Securities Market Programme (SMP) under which the ECB had bought
bonds issued by weaker euro zone governments on the secondary
market. The SMP was seen by analysts as one possible tool to be
used this time.

The report weighed on the euro and briefly sent equities
into the red. Analysts said the onus was now on policymakers to
follow words with actions, and the market had set the bar high.

“There remains a fair degree of scepticism among investors
about whether and how they will move,” Steven Englander,
strategist at Citi, said in a note.

“If the ECB meeting comes and goes with nothing done – at
least via announcement of concrete future action – we will see
the euro sold, very likely to new lows. The reason is that the
failure would reinforce the view of a dysfunctional policy
process. So, no move, or an obviously token move would be very
poorly received.”

The chances for any action from the Fed, meanwhile, may be
affected by the strength of U.S. second quarter gross domestic
product (GDP) data due at 1230.