Daily Management Review

Stocks Up On Talk of Aggressive ECB Easing, Euro on Shaky Ground,


Stocks Up On Talk of Aggressive ECB Easing, Euro on Shaky Ground,
As talk of aggressive stimulus from the European Central Bank next week gained ground, the euro slipped back towards seven-month lows, bond yields fell and European shares rallied on Thursday.
While the Euro STOXX 50 index was up 1.2 percent, the pan-European FTSEurofirst 300 index  rose 0.8 percent, adding to Wednesday's 1.4 percent gain.
The firm gains are being attributed to flat close of Wall Street shares on Tuesday due to a pre-Thanksgiving holiday lull and the modestly higher closing of Asian stocks. MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS rose 0.5 percent.
"Expectations surrounding the ECB are running very high and this is driving European markets higher, weakening the euro and helping them do better than U.S. stocks," said Marco Vailati, head of research and investment at Italy's Cassa Lombarda.
"I think and hope the ECB will not disappoint but I realize that it won't be that easy," he said.
Staggered charges on banks hoarding cash and buying more debt ahead are some of the options that Euro zone central bank officials are considering days before next week's ECB meeting. These reports raised debates about whether the central bank is getting ready for aggressive measures to lift inflation and economic growth in the 19-member euro zone.
 Dipping 0.15 percent to $1.0626, the euro remained on the back foot amidst the talks of the central bank’s possible measures. Euro had tumbled on Wednesday to $1.0565, its lowest level since mid-April, before recovering. Against the yen, the euro fell 0.2 percent to 130.12 yen, having hit a 7-month low of 129.77 on Wednesday.
Overall market activity was thin due to the holiday in the United States.
"Ultimately, I think the ECB will be aggressive and that divergence in policy with the United States must imply a weaker euro," said Chris Scicluna, head of economic research at Daiwa Capital Markets in London.
"The question now is how far can we go, and as the Fed tightens, euro/dollar parity is looking likely by the second quarter of next year," Scicluna added.
Data from the ECB showed that the Euro zone lending expanded at its fastest rate in nearly four years in October while a broader measure of money circulating grew well ahead of expectations.
Indicating that even negative rates and extraordinary monetary stimulus has not unblocked the lending channel, the banks continue to park around 160 billion euros in overnight deposits with the ECB.
Short-term euro zone interest rates fell to record lows as markets interpreted an ECB debate about two-tier deposit rates as signaling the intention for an aggressive cut.
Expectations for a divergence in monetary policy meanwhile rose after U.S. economic data on Wednesday cemented expectations that U.S. interest rates will rise soon, helping push the gap between short-dated bond yields in the U.S. and Germany to their widest since 2006 and underpinning the dollar.