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GLOBAL MARKETS-Investors eye central banks for help on euro

by on June 19, 2012 11:08 am BST
 

Tue Jun 19, 2012 7:08am EDT

* Euro rises against the dollar as Fed awaited

* European stocks shrug off weak ZEW index

* Brent crude touches 16-month lows on demand outlook

By Richard Hubbard

LONDON, June 19 (Reuters) – The euro rose against the dollar
and shares gained on Tuesday as Europe’s worsening debt crisis
and its impact on global growth encouraged talk of a policy
response by the world’s major central banks.

The U.S. Federal Reserve begins a two-day policy setting
meeting later in the day, with attention focused on whether it
will unveil any more stimulus to support a flagging recovery.

While a surprise fall in British inflation for May also
strengthened the chance of steps from the Bank of England to
support the UK economy as it feels the heat of the euro zone’s
problems.

“Everything is pointing towards another liquidity injection
into the system,” said Francois Savary, chief investment officer
at Swiss bank Reyl.

However, gains in riskier asset markets were limited by
concerns over a sharp rise in Spain’s short-term borrowing
costs, a big fall in German investor confidence, and fresh
worries about Greece’s commitment to its bailout plan.

The single currency gained 0.3 percent to trade
around $1.2610, still below a one-month high of $1.2748 hit on
Monday.

The pan-European FTSEurofirst 300 share index rose
0.45 percent, but Brent crude hit a fresh 16-month low
at $94.44 a barrel on slack demand due to fears about the
slowing euro zone economy.

SPANISH YIELDS JUMP

Spain was made to pay yields of over five percent to sell
Treasury bills in an auction as investors worried the country
will soon have to ask for international aid. It faces a bigger
test on Thursday with a sale of longer-term bonds.

“The yields are over 5 percent in both lines, which is back
at the levels we saw in November 2011 when the market was in
huge distress and the ECB was forced to intervene,” Peter
Chatwell, an interest-rate strategist at Credit Agricole.

Borrowing costs across the euro zone fell sharply after the
European Central Bank flooded the market with around 1 trillion
euros in cheap credit through two long-term refinancing
operations (LTROs) in December and February but they have since
leapt back up.

Spain has said the ECB should take more steps to ease the
crisis, but the bank’s head, Mario Draghi, said this month that
it was up to Europe’s politicians to fix the euro zone.

However, he has hinted the bank may soon cut interest rates,
pointing to heavy downside risks for the European economy and
saying there was no inflation risk in any euro area country.

Spain’s debt problems and uncertainty over the Greek
election outcome took its toll on investor sentiment in Europe’s
biggest economy, according to the Mannheim-based ZEW economic
think tank’s monthly poll.

The ZEW index fell in June at its fastest rate since October
1998, to -16.9 from 10.8 in May, way below the forecast in a
Reuters poll of 42 analysts for a drop to 4.0.

“In the second quarter, Germany’s economy is likely to slow
down markedly, in particular private investment,” said Christian
Schulz, Senior Economist, Berenberg Bank.

“With the euro crisis once again threatening to push the
German economy into recession this summer, a convincing policy
response becomes pivotal for Germany as well,” he said.

The concerns about Greece have also not gone away despite
signs that Greece’s pro-bailout conservatives looked set to form
a coalition government with the Socialists.

Conservative New Democracy leader Antonis Samaras has
promised to negotiate less punishing terms for Greece’s
international bailout, after only narrowly beating a radical
left-wing party that campaigned to scrap the austerity deal.

Any move by Greece’s to change details of its
130-billion-euro bailout is expected to be opposed by Germany.

OPERATION TWIST

U.S. stock index futures pointed to a mixed open on Wall
Street as investors await the outcome of the Fed meeting.

The consensus had been for the Fed to announce no further
quantitative easing – effectively creating money to purchase
assets – for now, but the recent disappointing economic data is
may prompt the Fed to consider extending its long-term
bond-buying programme, known as Operation Twist, by a few months
from the current June deadline.

“Across the Street economists largely anticipate some form
of sterilized asset purchases and an extension of Operation
Twist,” said Morgan Stanley executive director Gabriel de Kock.

The liquidity boost delivered by previous doses of monetary
stimulus from the Fed has lifted global equities and most
commodities, and markets have become highly sensitive to the
waxing or waning of expectations of more such measures.