News Column

Euro yields, stocks fall on setback fear

August 15, 2014

Bond yields across the eurozone hit record lows on Thursday and the euro hovered near its weakest in nine months after Germany reported its economy unexpectedly shrank in the second quarter, casting doubt on the region's fragile recovery.

Germany's 0.2 per cent contraction came after data earlier this week showed gross domestic product fell in Japan, Chinese lending declined and US retail sales stalled.

The setbacks also weighed on global equity markets and crude oil futures, with the latter trading just off 13-month lows .

In addition, the French economy failed to expand for a second straight quarter. Combined with the threat to growth from sanctions on Russia, the slowdown in the eurozone's two biggest economies leave the eurozone's recovery looking increasingly endangered.

World stocks pulled away from one-week highs reached earlier this week. Europe's FTSEurofirst 300 index and Frankfurt's DAX slipped around 0.3 per cent .

France's CAC index fell half a per cent. Analysts now reckon the ECB will have no choice but to embark on more stimulus if it is to support growth in the eurozone.

Those expectations pushed German 10-year yields to record lows, touching 0.998 per cent. French yields fell as well, to 1.392 per cent, also a record low. Spanish bond yields reached record lows as well, dropping to 2.442 per cent

Jonathan Loynes, chief European economist at Capital Economics said it was now clear that the eurozone was too weak to tackle peripheral Europe's debt problems.

"As such, we still believe that the ECB needs to implement further policy action probably in the form of full-scale quantitative easing to try to bring the euro down and re-ignite the recovery," Loynes told clients. The euro hovered near nine-month lows against the dollar. Sterling also struggled, declining to a four-month low of $1.6657. The pound has dropped almost three per cent since climbing to six-year high in the middle of July.

Further disappointment is likely from data due at 0900 GMT that is forecast to show that the eurozone economy as a whole expanded just 0.1 per cent in the second quarter. Analysts say after the German and French numbers even that much growth looks unlikely.

"The GDP numbers for France and Germany released on Thursday were pathetic, and keep in mind that these numbers do not have any sanctions stamp on them yet," said Naeem Aslam, chief market analyst at online brokerage AvaTrade.

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Source: Khaleej Times (United Arab Emirates)

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