Greece worries compound euro's record quarterly fall

[March 31, 2015] By Marc Jones

LONDON (Reuters) - The euro remained on track for its biggest quarterly fall and European shares for their best first quarter of the euro era on Tuesday, as worries about Greece's finances kept the single currency under pressure.

The European Central Bank's 1 trillion euro quantitative easing programme, launched this month, has prompted investors to pile into euro zone shares on bets a weak euro, low borrowing costs and cheap oil will drive a surge in company profits.

There was a 0.5 percent dip on the pan-European FTSEurofirst 300 index as traders squared up for the quarter end, while Wall Street was expected to see a similar-sized drop.

But Europe has rallied 16 percent since Jan. 1, with Germany's DAX  surging 23 percent and France's CAC 19 percent higher, compared to a more modest 5 percent for London's FTSE and just 1.3 percent for the U.S. S&P 500.

New euro zone data showed a small pickup in inflation following the launch of the ECB's stimulus, and with the programme set to run for a year and a half, investors remain upbeat on the region.

"For the moment we have decided not to take profits because Europe has been lagging for several years so it still has room to outperform," said Didier Duret, chief investment officer at ABN Amro.

"And we think it still makes sense to allocate into the equity market because the bond yields are quite frankly repulsive these days."

Duret was talking about the fact that bond investors effectively now have to pay to lend money to Germany as well as most other core northern euro zone members.

German Bund and other euro zone yields have been falling since 2015 and they turned lower again in early afternoon trading amid uneasy euro zone talks about Greece's finances.

Germany's Chancellor Angela Merkel said on Monday that Athens had a certain degree of flexibility on which reforms to implement but stressed that they must "add up".

"The question is: can and will Greece fulfil the expectations we all have?" she said during a visit to Finland.

Greece's leader Alexis Tsipras responded by appealing for an "honest compromise" but warned he would not agree to "unconditional" demands.

BUYS DOLLARS, WEAR DIAMONDS

The euro was last down 1 percent against the dollar at $1.0720. Its dive has been the dollar's gain, with the greenback recording its biggest quarterly rise against the world's top six currencies  since 2008.

Wall Street, which is now facing the headwinds of that strength, was expected to see a subdued session later though it will still notch up its ninth straight quarter of gains.

One of the key supports has been that even though the Federal Reserve is heading for its first rate hike in almost a decade, bond yields have continued to fall.

That is largely thanks to the ECB's efforts in Europe, but a staggering 26 central banks around the world have either cut rates this year or eased policy in some other way.

Japan's Nikkei finished the first quarter with a chunky 10 percent gain and the often volatile Shanghai Composite Index hit another seven-year high and gained 16 percent for the quarter on bets of more stimulus from Beijing.

"Tax cuts, reductions to down payments on second homes, along with further moves to (reserve) requirement ratios have all been introduced to assist China's slowing housing sector and will be a medium-term positive in the global growth story," Evan Lucas, market strategist at IG in Melbourne, said in a note.

Emerging market stocks headed for their first quarterly rise since the second quarter of 2014 driven by Chinese, but also Russian shares' which have seen their best run since 2010 after being trounced last year.

Russia especially has been helped as oil prices have steadied over the last couple of months.

But they were on the slide again on Tuesday on prospects that OPEC member Iran could reach a deal with six world powers on its nuclear programme that could allow Tehran to sell more of its oil onto an already saturated market.

U.S. crude was last down 1.8 percent at $47.80 per barrel with Brent down to $55.31. Although modest in recent terms, both were headed for their third straight quarterly fall, a run that hasn't been seen since the late 1990s.

(Additional reporting by Shinichi Saoshiro; Editing by Catherine Evans and Susan Fenton)
 

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