ECB President Mario Draghi said late on Friday that the bank was
prepared to respond with all its available tools should inflation in
the euro zone drop further.
Investors speculated this meant the ECB was more likely to embark on
an asset purchase program, or quantitative easing, or adopt other
stimulus measures in coming months.
Draghi's comments sent some euro zone government bonds to new record
lows while European stock markets rose, overshadowing news of the
resignation of the French government and a weak German Ifo business
"The key message is that Draghi stands ready for more action if
needed," Franz Wenzel, chief strategist at AXA Investment Managers
in Paris, said.
"Whether they're going to do quantitative easing remains to be seen
but we're fairly confident that the financial engineers at the ECB
will find other tools. At this juncture, we don't exclude
quantitative easing at the end of this year."
Yields on German, Spanish, Italian and Portuguese 10-year bonds all
hit new record lows.
The euro skidded to $1.3185 in early Asian trade, its lowest since
September 2013, from around $1.3246 late in New York on Friday. It
was last trading at $1.3204, down about 0.3 percent on the day, amid
lower than usual volumes due to a holiday in London.
A weak German business sentiment index, Ifo, also weighed on the
single currency in European trade, as it reinforced concerns about
Germany, the euro zone's biggest economy.
The euro zone's blue-chip Euro STOXX 50 index, however, was up 1.1
percent and U.S. futures pointed to a higher start on Wall Street.
Both Germany's DAX and France's CAC 40 gained 1.2 percent.
French Prime Minister Manuel Valls presented his government's
resignation on Monday, a day after Economy Minister Arnaud
Montebourg called for new economic policies, and questioned neighbor
Germany's "obsession" with budgetary rigor.
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Some investors said that a stronger and more unified French
government might emerge, more committed to President Francois
Hollander's deficit-cutting measures that have been aimed at
strengthening the French economy.
"The new government should be more unified. Hollande has shown he
will not change course," said Francois Savary, chief investment
officer at Swiss bank Reyl.
US RATES SEEN RISING EARLIER
In contrast to the ECB, U.S. Federal Reserve Chair Janet Yellen on
Friday gave a nod to some Fed officials' concerns about the
sustained level of monetary policy stimulus, even as she stressed
the need to move cautiously on raising rates.
As a result, Fed funds futures fell back as the market priced in the
risk of an earlier rise in interest rates, while the dollar index
rose to 82.563, its highest since September last year.
In commodities markets, the rising dollar pressured prices with spot
gold down 0.2 percent to $1,276.94.
Brent crude edged higher above $102 a barrel on Monday with support
from geopolitical tensions in Ukraine and Libya, although ample
supply limited the rebound from last week's 14-month low.
(Additional reporting by Anirban Nag and Marius Zaharia in London;
Wayne Cole in Sydney; Editing by Susan Fenton)
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