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Eurozone markets dip as QE euphoria fades

Posted on April 30, 2015

epa04196377 (FILE) A file photo dated 06 November 2013 showing the Euro symbol sculpture illuminated at night in front of the European Central Bank (ECB) headquarters in Frankfurt Main, Germany. The European Central Bank kept interest rates on hold at an historic low of 0.25 per cent 08 May 2014, despite pressure to act to head off the threat a strengthening euro holds for consumer prices. Many analysts believe the ECB will now wait until June, when it releases its new inflation and economic growth forecasts for the 18-member eurozone, before considering any further action. The Frankfurt-based ECB, which held one of its regular out-of-town meetings in Brussels, last cut the cost of money in November, when it trimmed its benchmark refinancing rate by 25 basis points. EPA/DANIEL REINHARDT©EPA

European share prices saw their first monthly decline of 2015 in April, as enthusiasm for Europe’s quantitative easing programme began to fade.

Powerful rallies in eurozone stock and bond markets since the start of 2015 went into reverse this week, with analysts saying asset prices had risen too far, too quickly, and were due for a correction.

    The FTSE Eurofirst 300 index, which surged 16 per cent in the first three months of the year, ended April 0.6 per cent lower than a month earlier. Meanwhile, Germany’s Xetra Dax index ended 4 per cent down on the month, amid concerns that the recent strengthening of the euro had made the country’s exports less competitive.

    “With QE and the euphoria, the market got ahead of fundamentals,” said Sandra Crowl, investment committee member at Paris-based Carmignac Gestion. “There was a real disconnect. The economy is not that strong. It was an accident waiting to happen.”

    Mario Draghi, ECB president, launched eurozone QE on March 9 to prevent the eurozone falling into a damaging deflationary slump.
    Inflation figures on Thursday indicated he had succeeded in averting such a scenario.

    The programme was also designed to keep a lid on interest rates and weaken the single currency. Heavy ECB buying sent government bond prices soaring, pushing yields — which move inversely with prices — to all-time lows and yields on shorter term government debt into negative territory.

    But this week that process went into reverse as yields on German 10-year Bunds rose sharply, reaching a high of 0.38 per cent, up from about zero two weeks ago.

    Another catalyst for the share market turmoil was concern over the strength of the US recovery, which was underscored Wednesday by weak first-quarter figures for US GDP.

    As well as a slowdown in emerging markets, European exporters face the double whammy of an appreciating currency and potentially weaker global demand for their products.

    In the past two weeks, the euro has risen 6.5 per cent to $1.12 against the dollar, after falling as low as $1.05 in mid-April.

    The stronger euro would “automatically be causing some investors to reappraise what is the outlook for some of the European exporters that they were buying”, said Andrew Milligan, head of global strategy at Standard Life Investments.

    Lower bond yields and the weaker euro had “provided rocket fuel for European equity markets”, said James Barty, head of European equity strategy at Bank of America Merrill Lynch. “Markets were a bit overbought.”

    Traders reported swings in yields had been exacerbated by investors having crowded into the same positions — resulting in small shifts in sentiment leading to big price moves.

    Others said investors were keen to take profits after the strong rallies in the first part of the year.