By Josie Cox
European shares once again neared multiyear highs Tuesday,
buoyed by expectations that the European Central Bank will this
week venture into uncharted territory by launching a stimulus
program aimed at spurring Europe's ailing economy back to
health.
By late morning, the Stoxx Europe 600 was up 0.5%--close to a
seven-year high--while London's FTSE 100 and France's CAC 40 added
0.4% and 0.7%, respectively.
Germany's DAX 30 initially rallied, closing in on an all-time
high scored Monday, but later erased some of those gains after
figures from the country's ZEW institute showed that investor
sentiment in January has risen more than expected, which may--some
say--marginally weigh on the argument for broad-based and vigorous
ECB action.
Nonetheless, government bonds in many Southern European
countries continued to hover close to record highs, driven by
consensus expectation that the ECB will announce that it will begin
buying sovereign bonds in an effort to beef up its balance
sheet.
"We expect the ECB to announce a program of around EUR500
billion-EUR750 billion of [European government bond] purchases and
our economists believe that the ECB will signal it will stay open
so long as inflation and inflation expectations remain unacceptably
low," Barclays strategists wrote in a note.
On Monday, French President François Hollande said in a speech
to business leaders at the Élysée Palace that he too expects the
ECB to announce that it will buy sovereign debt--a move that he
said "will provide significant liquidity to the European economy
and create a movement that is favorable to growth."
Strategists at Société Générale, meanwhile, said they anticipate
a program from the ECB that includes sovereign, agency, and
corporate bond purchases on Thursday.
"Given that a broad consensus expects a substantial quantitative
easing plan to confront deflation risk and aid a stalling economy,
disappointing the markets with the scope of the QE plan is a risk,"
they said.
Denmark on Monday became the latest European country to cut its
interest rates in an attempt to damp investor interest in the
krone, ahead of the ECB meeting and to prevent the euro from losing
too much ground against it.
Nationalbank--whose main policy role is to maintain the
stability of Denmark's currency against the euro to provide
stability for the nation's exporters and keep inflation low and
stable--cut its deposit rate to minus 0.2% from minus 0.05%, and
its lending rate to 0.05% from 0.2%.
Strategists agreed, however, that Monday's move didn't mean that
the central bank won't act again, as early as Thursday, depending
on what the ECB announces.
The euro remained under pressure against the dollar in early
trade Tuesday, before gaining marginally after the ZEW figures.
Losses over the past six months, however, are still around 15%.
In contrast to the ECB, the Federal Reserve officials are
staying on track to start raising short-term interest rates later
this year.
Elsewhere in currency markets, the Swiss franc remained close to
parity with the euro after the country's central bank last week
shocked markets by scrapping its long-standing cap on the strength
of the currency.
In early trading the euro was at 1.02 francs--around 15% lower
than a week ago. Swiss stocks, which took a beating after last
Thursday's decision, continued to recover, with the SMI up by
around 1% in early trading. Swiss banks Credit Suisse Group AG and
UBS AG's shares edged higher too, but remained around 13% and 18%
lower than last week's levels.
UBS Wealth Management's chief investment officer, Mark Haefele,
said in a note that Swiss corporate profits are now likely to fall
5%-7% in 2015, relative to consensus forecasts of growth of 10%-12%
before the SNB decision.
"While equities have obviously adjusted in recent days, the
change from a market with steady earnings growth and easy monetary
policy to one with declining earnings and an overvalued currency
will weigh on Swiss equities, and we downgrade them to neutral
[from overweight]," he said.
In commodity markets, Brent crude was around 0.9% lower on the
day at $48.39 a barrel. Gold rose 0.6% to $1,284.80 a troy
ounce.
Write to Josie Cox at josie.cox@wsj.com
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