Euro Soft as Yields Fall, China Stimulus Talk Aids Stocks

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March 28, 2014 3:11 PM EST

The euro was wallowing near three-week lows in Asia on Friday as speculation intensified that the European Central Bank might ease policy further, while similar hopes of stimulus in China gave a fillip to Asian shares.


The European Union is racing to create a banking union that will make banks and tax payers safe from crises (Reuters)

Speculation about the possibility of Chinese stimulus got a boost when Premier Li Keqiang was quoted by state media as saying the government would roll out targeted measures step by step to aid the economy.

Shares in Shanghai edged up 0.5 percent, while MSCI's index of Asia-Pacific shares outside Japan added 0.6 percent. Japan's Nikkei was flat as trading wound down ahead of the end of the financial year on March 31.

All the talk of a possible easing by the ECB pulled down bond yields across the European Union and undermined the euro.

Peripheral European bond yields hit a multi-year trough on Thursday while the premium that U.S. two-year debt pays over German paper widened to its fattest since late 2012.

That saw the euro peel off to $1.3744 and a long way from the March peak of $1.3967. Its largest losses came against the New Zealand dollar which has been on a tear since the country's central bank raised interest rates a couple of weeks ago.

The Reserve Bank of New Zealand has all but promised to hike rates several more times this year, setting it far apart from other developed nations and sending its currency to a two-and-a-half year peak on the U.S. dollar.

Asian stocks had got little inspiration from Wall Street, where the Dow and the S&P 500 both ended a fraction lower. The Nasdaq extended its recent pullback with a loss of 0.54 percent.

Yet the sluggishness of U.S. stocks contrasts with a sudden revival in emerging markets, leading some to suspect that stretched valuations on Wall Street are prompting fund managers to go bargain hunting elsewhere.

The MSCI index of emerging shares has climbed for six straight sessions to the highest in almost three months. The index for Latin America on Thursday boasted its biggest daily gain since July 2012 as Brazilian markets rallied.

TREASURIES IN DEMAND

In debt markets, a sale of U.S. seven-year Treasury paper drew red hot demand, just as a five-year auction had on Wednesday. Direct bidders, which include central banks, took a record share of the sale, leaving dealers scrambling to cover short positions.

The demand for U.S. debt also showed up in the amount of Treasuries that the Federal Reserve holds on behalf of foreign central banks, which surged by a record $56 billion in the week to Thursday, on top of a $32 billion jump the previous week.

The inflow almost entirely reversed a mysterious $104 billion drop three weeks ago that many had thought was due to Russia pulling its money out of the U.S. to avoid possible sanctions over Ukraine.

Whatever the source of the demand it has helped drag down longer-term U.S. yields and contributed to a marked flattening of the yield curve. The spread between five-year notes and thirty-year bonds has shrunk to its smallest in five years.

The shift also reflects speculation that U.S. interest rates will rise sooner than first thought and thus keep inflation well contained below 2 percent.

The downward revision in the market's inflation expectations might also be one reason gold has taken a turn for the worse in recent sessions. On Friday, the metal was stuck at $1,292.56 an ounce having lost 7 percent in nine sessions.

In the oil market, Brent eased 16 cents to $107.67 a barrel, while U.S. crude futures edged up 4 cents to $101.32.

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The European Union is racing to create a banking union that will make banks and tax payers safe from crises (Reuters)
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