ECB stimulus talk knocks euro, peripheral yields


LONDON: Lower-rated euro zone bond yields fell to fresh record lows and the common currency slid further on Friday as investors positioned for more monetary stimulus from the European Central Bank.

An upgrade by Standard & Poor's of its credit rating outlook for Portugal added to the positive sentiment and gave a further boost to Lisbon as the country prepares to exit its international bailout this month.

Investors are betting the ECB will cut interest rates next month, paving the way for potential further steps such as a bond-buying programme, after its president Mario Draghi said on Thursday the bank was ready to act in June if updated inflation forecasts merit it.

Yields on Italian, Spanish and Irish 10-year bonds hit record lows of 2.91 percent, 2.87 percent and 2.68 percent respectively while the euro fell another 0.1 percent from Thursday's U.S. close.

"With the words from Draghi yesterday there is a good chance that peripheral yields continue to move lower in the next month or two," said Stewart Richardson, a partner at macro hedge fund RMG Wealth Management.

"There has been quite an about-turn in thinking in the last 24 hours. We think the chances are much higher now that we get some sort of action from the ECB and this is primarily done to bring down the euro."

Richardson said the yield on Italy's 10-year bond could fall to 2.75 percent. He has short positions on the euro against currencies such as the Japanese yen and the Norwegian krone.

Portuguese 10-year yields fell 2 basis points to 3.45 percent, the lowest since early 2006, after S&P lifted the country's credit outlook to stable from negative, far from peaks above 17 percent hit at the height of the euro zone debt crisis.

Some market participants are becoming cautious after the rapid fall in yields.

"In the European periphery we remain invested in Portuguese and Slovenian government bonds," said Scott Thiel, head of European Global Bonds at Blackrock.

"However, given their significant spread compression to German Bund yields in recent weeks and in light of excessive market expectations for imminent quantitative easing in the euro zone, we have reduced these positions."

SHARES PAUSE AFTER RALLY

Global shares paused for a breather after the MSCI All-Country World index rallied to its highest level since December 2007 on the previous day.

The index, down 0.1 percent, came off its intra-day low after data showed moderating consumer prices and persistent industrial deflation in China. That bolstered market expectations that authorities would ease their monetary policy or take other steps to arrest a loss of momentum in the world's second-largest economy.

"In the short term, unless we see some new stimulus or economic policy, I don't think there will be much flexibility for strong market performance," said Du Changchun, an analyst at Northeastern Securities in Shanghai.

Weak corporate updates from blue chips such as Spanish-listed telecoms operator Telefonica capped European shares, sending the pan-European FTSEurofirst 300 index down 0.3 percent.

Markets were also keeping a wary eye on the Ukraine crisis.

Pro-Moscow separatists in eastern Ukraine ignored Russian President Vladimir Putin's call to postpone a referendum on self-rule, declaring they would go ahead on Sunday with a vote that some fear could lead to war.

In commodities trading, Brent crude futures were up about 0.7 percent to $108.80 a barrel, supported by tension in Ukraine and limited supply from Libya, where a recent deal to reopen oil export terminals seemed unlikely to go ahead.

Spot gold was slightly higher at $1,290.80 an ounce but still on track for its second straight weekly decline.  - Reuters
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