Investors cautious on ECB plans

Tue, Jul 31, 2012, 01:00

European shares ended a three-day rally and oil dipped today as investors turned cautious about the likely outcome of central bank policy meetings in the United States and Europe this week.

Markets for riskier assets like equities and oil have rallied strongly since the head of the European Central Bank raised expectations of bold action at its meeting on Thursday by pledging last week to do all he could to protect the euro.

Signs of flagging growth in the US had also raised some hopes the Federal Reserve, which begins a two-day rate setting meeting later on Tuesday, might respond, though most economists do not expect any further easing before September.

“The markets have run ahead of themselves. And I think certainly the ECB and the Federal Reserve will hold back from pumping in more money at this point in time," said Manoj Ladwa, head of trading at TJ Markets.

European shares, which were heading for their best month since October after soaring more than 5 per cent in the last three sessions, went into reverse, with the FTSE Eurofirst 300 index down 0.3 per cent at 1,069.50 points.

“Today will probably be a quiet last day of the month. Everybody is waiting for Thursday to see if (ECB President Mario) Draghi can deliver,” said Lex van Dam, hedge fund manager at Hampstead Capital. “He'd better pull a big rabbit out of his hat.”

However, US shares appeared poised for a firmer start on Wall Street, building on their best year-to-date performance since 2003.

Investors in European shares were also given pause by weaker than expected earnings from several major banks, where the region's ongoing debt crisis has hurt revenues. Deutsche Bank said its second-quarter profit had been badly affected by the crisis, dropping 63 per cent in the second quarter from a year earlier.

“The European sovereign debt crisis continues to weigh on investor confidence and client activity across the bank,” Deutsche Bank's co-chief executives Anshu Jain and Juergen Fitschen said in a statement.

Meanwhile, the euro managed a slight gain against the dollar on month-end demand, but it stayed below three-week highs as doubts grew that the ECB would meet the market's high expectations of bold steps to combat the debt crisis.

“There is a clear danger that expectations might be too high... (Draghi's) got to put his money where his mouth is, as there is a risk of disappointment around Thursday,” said Nick Parsons, head of research for Europe at National Australia Bank in
London.

The single currency rose 0.25 per cent against the dollar to $1.2285, well below the high of $1.2390 hit last Friday. The safe-haven German bond market reflected the growing fears that whatever ECB President Mario Draghi says at the bank's policymaking meeting is likely to disappoint markets looking for meat on the bones of his pledge to defend the euro.

German 10-year cash yields were 4 basis points lower at 1.34 per cent. “There's a bit of scepticism and wondering if maybe Draghi over-promised. Thursday is going to be very interesting to see what's actually said,” one bond trader said.

Reuters