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 European shares were volatile, initially falling sharply before
rebounding into positive territory within an hour of the open as
investors digested the implications of the weak euro and yet another
hefty slide in oil to a 5-1/2 year low.
The euro fell to $1.18605 in early Asian trading on Monday, its
weakest level since March 2006. In early European trade it was at
$1.1964, down 0.3 percent from late U.S. trade on Friday.
Investors betting that the ECB will take the plunge and open up a
bond-buying program like the U.S., UK and Japanese central banks
have done were emboldened by an interview ECB president Mario Draghi
gave to German financial daily Handelsblatt on Friday.
He said the risk of the central bank not fulfilling its mandate of
preserving price stability was higher now than half a year ago.
German state inflation figures for December due later on Monday
before Wednesday's euro zone estimate will be closely watched, and
the downward pressure on the euro and government bond yields remains
intense.
"Wednesday's inflation data might determine the extent of the ECB's
action," said Gary Jenkins, chief credit strategist at LNG Capital.
"Confucius said it was good to live in interesting times, although
Mr Draghi might well be thinking 'yes but not quite this
interesting...' as yet again Greece threatens to upset the European
apple cart," he said.
Economists forecast that euro zone consumer prices fell 0.1 percent
in December, the first decline since 2009. That should fan
expectations the ECB will ease policy as soon as Jan. 22, when it
holds its first policy meeting of the year.
Greek politics were at the forefront of market thinking on Monday as
the debate around the possibility of elections later this month
resulting in the country leaving the euro zone picked up again.
The German government wants Greece to stay in the euro zone and
there are no contingency plans to the contrary, Vice Chancellor
Sigmar Gabriel said on Sunday, responding to a media report that
Berlin believes the currency union could cope without Greece.
European shares shrugged off an early selloff on Monday and the
FTSEuroFirst 300 index of leading shares was last up 0.3 percent at
1367 points, Britain's FTSE up a quarter of a percent at 6563
points, France's CAC40 up a fifth of a percent at 4262 points and
Germany's DAX up at 9763 points.
Also underscoring the pressure on central banks to implement more
stimulus, business surveys last week showed factories struggled to
maintain growth across Europe and Asia.
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Asian shares excluding Japan fell 0.8 percent and Japan's Nikkei
dipped 0.25 percent. Chinese shares, however, maintained their
bullish tone since last year on hopes of more stimulus and added 3.6
percent to hit a fresh 5-1/2 year high.
U.S. futures pointed to a steady open on Wall Street, with the main
three indices all called to open broadly flat.
All this political and monetary policy uncertainty in Europe helped
support major government bond markets. Euro zone yields were
anchored near record lows with Germany's 10-year yield at 0.5
percent and U.S. Treasury yields were steady at 2.12 percent.
Greece was the outlier, its benchmark yields up 7 basis points to
9.33 percent.
Oil prices, whose decline of more than 50 percent from peaks in June
last year rattled many energy producers, hit a 5-1/2-year low as
global growth concerns fanned fears of a supply glut.
Brent crude futures dropped as low as $55.36 a barrel, also its
lowest since May 2009, before edging back to $55.42, still down
around a dollar.
"Oil demand is unlikely to be robust this year when we look at the
state of economies in China, Japan and Europe," said Yusuke Seta, a
commodity sales manager at Newedge Japan.
The U.S. dollar rose broadly, extending a recent bull run as markets
wagered a relatively healthy U.S. economy will lead the Federal
Reserve to raise rates in the middle of this year.
(Reporting by Jamie McGeever; Editing by Andrew Heavens; To read
Reuters Global Investing Blog click on http://blogs.reuters.com/globalinvesting;
for the MacroScope Blog click on http://blogs.reuters.com/macroscope;
for Hedge Fund Blog Hub click on http://blogs.reuters.com/hedgehub)
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