ECB prepares some sub-zero relief for wilting Europe

[July 25, 2019]  By Marc Jones

LONDON (Reuters) - The euro and bond yields wilted on Thursday as a slump in German business confidence added to pressure on the European Central Bank to push interest rates even deeper into sub-zero territory later.

With the chance of a ECB rate cut now priced at about 50-50, the euro was at a two-month trough [/FRX], German Bund yields were slipping back towards record lows [GVD/EUR] and Europe's main stock markets shuffled higher. [.EU]

New German data added to the call for ECB action as it showed business morale there had hit its lowest level since April 2013.

The ripple effect saw bond yields bow across Europe. Neighboring Switzerland's 50-year government bond yield even went negative, meaning that none of its bonds now offer buyers any interest.

"The weak macro data this week means the ECB will be forced to act sooner than later," said Daniel Lenz, a rates strategist at DZ Bank in Frankfurt.

"The German economy is navigating troubled waters," Ifo President Clemens Fuest added, saying companies there were increasingly concerned about the outlook for their businesses.

Overnight it had been a happier story. Wall Street's S&P 500 and Nasdaq had both hit record highs after reassuring comments from Texas Instruments about global chip demand blunted the impact of weak earnings from Boeing and Caterpillar. [.N]

Facebook also announced forecast-beating revenues, sending its shares higher in extended trading after the closing bell.

The social media company's stock has surged over 56% so far this year, despite warnings on future revenue growth from new data privacy rules and forthcoming privacy-focused product changes.

Asia then managed to overcome some early wobbles to finish higher and with some striking milestones.

Japan's Nikkei touched a near three-month high, although Australia stole the glory as it ended near a 12-year peak after its central bank chief stressed interest rates could continue to fall.

Chinese blue-chips also added 0.5% in Shanghai. Investors there looked with hope to a meeting between top U.S. and Chinese negotiators next week, even if there are few signs that it will produce real progress in the two countries' trade war.

"Lower rates are generally, in a traditional, mechanical way, good news for equity prices," said Jim McCafferty, head of equity research, Asia ex-Japan, at Nomura.

The German share price index DAX graph is pictured at the stock exchange in Frankfurt, Germany, July 24, 2019. REUTERS/Staff/File Photo

TALKING TURKEY

For all the ECB focus, the day's real fireworks were already going off in Turkey.

The country slashed its main interest rate to 19.75% from 24% in the first rate meeting since President Tayyip Erdogan sacked the former central bank chief for not cutting rates fast or furiously enough.

New governor Murat Uysal didn't waste anytime and the lira rose 0.3% in response.

"The CBRT (Turkish central bank) had room for manoueuvre given real rates are at 8%, and decided to front-load some of its expected easing," said Standard Chartered economist Carla Slim.

"It likely deemed the global market and geopolitical backdrop benign enough to give more weight to domestic issues. The risk is that cutting too much too soon could unnerve markets."

Back among the major currencies, the dollar was down against the yen at 108.07 and the dollar index, which tracks it against six major currencies, barely budged at 97.757.

Sterling was broadly flat at $1.2475, after falling for several sessions as market participants feared the looming possibility of a no-deal Brexit under Britain's new prime minister, Boris Johnson.

"If talks between the UK and EU break down, the GBP could see further losses," said Steven Dooley, currency strategist at Western Union Business Solutions.

In commodities, U.S. crude added 20 cents to $56.08 per barrel while Brent crude climbed 15 cents to $63.33.

The advance came amid Middle East tensions and a big fall in weekly U.S. crude stockpiles, although the gains were curbed by a frail demand outlook and increasing signs of slowing global economic growth. [O/R]

Spot gold slipped 0.2% to $1,423.09 an ounce, short of last week's peak of $1,452.60.

(Additional reporting by Saikat Chatterjee in London and Swati Pandey in Sydney; editing by Jon Boyle, Larry King)

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