Draghi's Shield Under Attack as Politics Exposes European Risks

Mario Draghi may be the euro region’s great protector, but investors can still get hurt.

From Portuguese government bonds to Italian bank stocks, the most stressed parts of the euro region are providing a reminder that the European Central Bank president’s stimulus and safety-net programs don’t bring immunity from losses. It’s an alarm that could prove timely if a series of political risks from Spain to Greece materialize.

With the ECB’s crisis-busting Outright Monetary Transactions program unveiled in 2012 and the quantitative-easing plan since last March, markets were mostly anesthetized to politics until now. While they look nothing like they did during the meltdown five years ago, investors wondering when the drugs would start to wear off may have their answer.

In reality, the countries that characterized Europe’s sovereign debt crisis from 2010 to 2012 never went away as potential sources of turmoil for financial markets.  

There was the arrival of a government in Portugal antagonistic to the reforms of its predecessor, the potential for a similar one in Spain and the looming threat that Greece’s rescue program will unravel. The simmering refugee crisis also has the potential to crack the consensus underpinning the European Union. All this, when the global economic hinterland even has Apple Inc.

European Stock Market News - ECB's Monetary Easing

In currencies, the euro slipped 0.1 percent to fetch $1.1010 EUR= after climbing a to one-month peak of $1.1044 overnight.

The common currency, already on a bullish footing after the ECB's monetary easing last week fell well short of expectations, received a further boost after Governing Council member Ewald Nowotny suggested on Wednesday the markets were expecting too much stimulus from the central bank.

A notable mover in Asia was the Australian dollar, which soared after a report showed Australian jobs surged by 71,400 in November, pushing the unemployment rate to a 19-month low of 5.8 percent. That followed strong gains in October, making this the strongest two-month total in 28 years.

Despite questions about the reliability of the data, the Aussie jumped 0.9 percent to $0.7300.

The New Zealand dollar also advanced after the Reserve Bank of New Zealand (RBNZ) cut interest rates early on Thursday but said further easing should not be needed.

The kiwi traded at $0.6730 NZD=D4 after gaining more than one percent in response to the central bank's statement.

European Central Bank News

ECB to decide in December if quantitative easing needs ramping up - Draghi

The European Central Bank will decide at its next meeting whether its asset-purchase program can counter a global economic slowdown or needs to be ramped up, its president said on Thursday.

"We need to examine whether, with a weakening of the global economy, it (the program) is also effective in countering headwinds that could hamper a return to price stability in the medium term," Mario Draghi said at an academic event in Milan.

European Stock Market News - European Shares Higher

European shares edge up led by Renault

Telecom Italia rose sharply for a second day.

European shares edged higher in opening deals on Friday, and were set for a positive close on the month, with gainers led by car maker Renault after a rise in quarterly profits and phone group Telecom Italia on stake building news.

The pan-European FTSEurofirst 300 index was up 0.2%, while the eurozone's blue-chip Euro STOXX 50 index  also gained 0.2%.

The pan-European FTSEurofirst 300 is up more than 8% so far in October, as the European Central Bank (ECB) has signalled the possibility of stronger stimulus measures.

Renault rose 5.8% after third-quarter revenue increased 9.4%, lifted by growing business with partners Nissan and Daimler, as well as sales of its own new models in a rebounding European market.

Analysts at SocGen and Nomura lifted their target prices on Renault to €101 and €107 respectively, both keeping a buy rating on the stock.

Telecom Italia rose sharply for a second day to gain more than 3% after the founder of Iliad raised a stake in the Italian telecoms group to 15%.

But British Airways owner IAG fell 4.6% despite upgrading its 2015 profit outlook after third-quarter results beat expectations.

Global stocks - European Shares

Global stocks hit two-month high on dovish Draghi message

The prospect of yet more European Central Bank stimulus pushed world stocks to a two-month high, the euro to a two-month low and left investors paying for the privilege of owning short-term Italian and Spanish bonds.

European shares and bonds kept climbing on Friday after soaring on Thursday's message from ECB chief Mario Draghi that the central bank was ready to adjust "the size, composition and duration" of its QE program.

It was set to be the fourth straight week of gains for MSCI's 45-country All World index .WORLD as the euro's nose dive back to $1.11 .DCY put the dollar on course for its biggest weekly rise against the major currencies since late May.

For investors hoping for a positive jolt to the lackluster global economic growth outlook, it was shaping up to be the second straight week of near 4 percent falls in oil prices LCOc1, which were edging higher on Friday.

The pan-European FTSEurofirst 300 index .FTEU3 rose 1 percent, building on a 2.1 percent gain in the previous session, while the euro zone's blue-chip Euro STOXX 50 index .STOXX50E advanced by 1.2 percent.

Bond market moves were perhaps the most eye-catching though. Italian IT2YT=TWEB and Spanish <ES2YT=TWEB > two-year government bond yields both turned negative for the first time ever, meaning that investors now pay to hold them rather than receive interest on them.

Greece's bond 'curve' was also close to normalizing, having been distorted for months in the wake of a political crisis.

Investors were spurred on by the prospect not only of the ECB increasing its bond buying but also of it cutting one of its main interest rates, the deposit rate, even further into negative territory.

European Stock Market News - European Shares

European shares and dollar edge up, ECB keeps investors wary

Shares edged up in Europe and the dollar made slight gains on Thursday, with investors focusing on the European Central Bank, which is expected to keep the door open to more economic stimulus after its latest policy-setting meeting.

Citi's economics team, led by influential chief economist Willem Buiter, cut on Wednesday its 2016 global growth outlook to 2.8 percent - a rate Buiter has previously said represents a recession.

While the ECB is not expected to take any new policy steps on Thursday, bank president Mario Draghi may signal readiness to extend its 1 trillion euro bond-buying quantitative easing scheme if necessary.

The pan-European FTSEurofirst 300 stocks index .FTEU3 rose less than 0.1 percent in early deals, helped by an increased full-year sales outlook from Swiss drugmaker Roche (ROG.VX). The company's shares were up 1.2 percent.

Earlier MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS slipped 0.3 percent. Japan's Nikkei .N225 closed down 0.6 percent.

However, China bucked the trend, rebounding from Wednesday's roughly 3 percent dive. The Shanghai Composite index .SSEC and the CSI300 .CSI300 both rose 1.5 percent.

The dollar, which has been losing ground in the past month as expectations the Federal Reserve will raise interest rates this year have waned, edged up against a basket of currencies .DXY.

The euro EUR= fell 0.2 percent to $1.1313 as investors were wary of the prospect of more ECB. The dollar was down 0.2 percent at 119.76 yen JPY=.

The European Central Bank News - ECB's Target

ECB to stay put, keep door open for more stimulus

The European Central Bank (ECB) headquarters are pictured in Frankfurt, Germany, September 3, 2015.

The European Central Bank is likely to keep the door open for more monetary stimulus but stop short of taking new policy steps at a meeting on Thursday as it awaits fresh indications about the outlook for euro zone inflation.

Consumer prices in the 19-country euro zone fell in September, prompting calls for the ECB to expand or extend its 60 billion euros ($68.09 billion) a month of asset purchases. The program was launched in March to help push inflation back to the ECB's target of just under 2 percent.

While stressing their readiness to act, the bank's policymakers have said the fall in prices is largely due to energy costs, which the ECB cannot influence, and that it is unclear whether a slowdown in emerging economies will have a lasting impact on the euro zone.

Their cautious tone suggests the ECB will wait until it gets new inflation forecasts from its staff in December before deciding on any change to its quantitative easing scheme. 

A broader debate meanwhile appears to be taking shape within the bank about whether monetary policy is already coming up against the limits of its effectiveness.

Euro zone economic growth is slowing again, with even powerhouse Germany seeing a recent string of poor data, and one of the ECB's favored gauges of inflation expectations, the five-year, five-year euro zone breakeven forward EUIL5YF5Y=R, has fallen to 1.7 percent from 1.85 percent in July.

Lending surveys have continued to improve, however, providing some ammunition for ECB President Mario Draghi to argue that QE is finding its way into the real economy and does not urgently need to be adjusted.

Draghi has said the ECB is prepared to intervene if risks to inflation increase or financing conditions tighten, and has cited the exchange rate as a key factor for price stability.

European Stock Market News - ECB Meeting

Euro edges up but top-heavy as investors await ECB meeting

Euro coins are seen in front of displayed flag and map of European Union

The dollar edged slightly down against the euro on Thursday, but its losses were limited ahead of a European Central Bank meeting later in the day that could pave the way for further quantitative easing.

The ECB is likely to stop short of actually taking new policy steps at the meeting as it awaits fresh indications about the outlook for flagging euro zone inflation.

"It seems Mario Draghi will try and keep a lid on EUR moves so it may be really hard and risky to be long EUR/USD," he added.

The median probability of the ECB extending its 1 trillion euro ($1.13 trillion) asset purchase program beyond its current end date of September 2016 was 70 percent, according to a recent Reuters poll of economists. 

The same poll saw a 40 percent chance that the ECB would increase its monthly purchases over the next six months.

The euro was up about 0.1 percent on the day at $1.1345 EUR=, holding above a 10-day low of $1.1306 touched on Monday but still shy of last week's levels above $1.400.

Against its Japanese counterpart, the dollar inched down about 0.2 percent to 119.69 yen JPY=, mired in a familiar range ahead of next week's policy meetings by both the U.S. Federal Reserve and the Bank of Japan.

One-month dollar/yen implied volatility JPY1MO=, which measures the cost of hedging against sharp swings in the yen, stood at 8.250 percent on Thursday.

The U.S. dollar was buying C$1.3117 CAD=D4, down about 0.2 percent from late North American trading after earlier rising as high as C$1.3149, its loftiest peak since Oct. 5.

European Stock Market News - Euro Inched Up

Euro takes back some ground lost to dollar ahead of ECB

A picture illustration shows Euro and U.S. dollar banknotes in Sarajevo March 9, 2015.

The dollar gave back some of its overnight gains against the euro on Tuesday after hitting a 10-day high ahead of this week's European Central Bank meeting, which some investors believe could set the stage for additional stimulus later this year.

The Canadian dollar, meanwhile, edged lower against its U.S. counterpart after Liberal leader Justin Trudeau won a stunning election victory over Prime Minister Stephen Harper's Conservatives.

The euro inched up slightly to $1.1331 EUR=, after dropping as low as $1.1306 on Monday, but its gains were seen limited ahead of Thursday's ECB meeting as it comes against a backdrop of deflationary pressure.

Lower oil prices helped push euro zone consumer prices into negative territory last month, which some believe could prompt the ECB to eventually expand or extend its asset purchase program.

Many economists believe such a move would be most likely to come in December if the ECB's quarterly economic forecasts due early that month prove disappointing.

Economists polled by Reuters expect the ECB to extend its plan to buy 60 billion euros of assets a month of mostly government bonds beyond its planned end-date of September 2016.After the ECB, investors' main focus will be the U.S. Federal Reserve's policy meeting on Oct. 27-28. [FED/DIARY]

Investors remain divided about whether the U.S. central bank will deliver its first rate hike since 2006. Interest rate futures indicated on Monday that traders were pricing in a 52 percent chance of the Fed raising rates in March 2016, according to the CME Group FedWatch.