European stocks slipped and Spanish bond yields crept up today as investors banked some of their recent gains and refocused their attention on the economic outlook and potential hurdles for the euro zone's crisis-fighting plans.
German Bund prices rose 16 ticks, clawing back some of their sharp falls from Friday when markets across Europe reacted to news the US Federal Reserve would pump $40 billion a month into the economy until the jobs market improves.
Wall Street was also seen opening in negative territory having ended last week with the S&P 500 at its highest in almost five years.
Sentiment across markets remains broadly unchanged, however, with tests of new multi-month highs expected in the coming weeks for stocks and the single currency. "Nearer-term the liquidity is undoubtedly market friendly but it doesn't necessarily change the fundamental problems that still lie ahead," said Deutsche Bank strategist Jim Reid. "We think Europe will go back to worrying about this (growth prospects for weaker members) in Q1 2013 in spite of the ECB move... As for the US... there's no reason to believe an additional injection of liquidity will suddenly catapult this recovery."
At 1.30pm (Irish time), the FTSEurofirst 300 index of leading European stocks was down 0.3 per cent at 1,116.9 points, pulling back from a 14-month high hit in the previous session. World stocks, meanwhile, were down 0.21 per cent.
Asian stocks were generally higher overnight, with the MSCI Asia ex-Japan index hitting a 4-1/2 month high. Tokyo markets were closed although tensions between Japan and China over disputed territory bubbled in the background.
"There is still good upside potential for stocks as we are re-pricing the 'non-break up' of the euro zone. We've just started to realise all the downside that came from the debt crisis," Louis Capital Markets trader Jerome Troin-Lajous said.
"Now, the main signal we need that would fuel this rally won't be coming from the economic outlook, it will come from the investment flows. A lot of foreign investors have been strongly 'underweight' European stocks and should start to switch out of bonds and out of US equities and into European stocks."
Commodities including oil, gold and copper - all of which had risen strongly last week - levelled off today.
Fund flow data from EPFR showed Europe equity funds posted their biggest net inflows since early May in the week to September 12th, as the ECB action encouraged more investors to take on equity risk and move out of conservative debt.
While risk markets should get a fillip from the US stimulus plan, growth is ultimately needed to sustain any recovery, and here concerns remain.
"The Federal Reserve's decision to engage in an open-ended purchase programme reinforces the carry trade in the US dollar and risk assets. It is unlikely to produce meaningful change in economic growth, in our view," Jefferies analysts said in a note.
The single currency eased in early European trade but traded flat against the dollar after weaker than expected US data.
"We are due some consolidation. We could trade below $1.30 again but will see $1.35 by year-end. It's a combination of improvements in Europe and deteriorating dollar sentiment," said Daragh Maher, currency strategist at HSBC. The greenback is expected to remain under pressure in the coming weeks as the effects of the US stimulus plan work their way through the system.
It remained near a seven-month low against a basket of key currencies on Monday and extended losses versus the yen after the Empire State new orders index hit its lowest since November 2010.
The dollar's drop in recent weeks has been contrasted by the euro which has been the strongest performing major global currency. It is a rise which has been supported by the ECB's plan to help lower the borrowing costs of indebted euro zone countries, if and when the countries concerned - chiefly Spain - ask for that help.
ECB member Luc Coene and France's finance minister Pierre Moscovici are both due to speak in London starting at 4pm Irish time and could provide fresh information following policymaker meetings in Cyprus over the weekend.
The reversal of Friday's trend in currencies and stocks also fed through into the bond market, with German Bunds, up 16 ticks.
"A lot of good news is priced in and now the market is pondering whether or when Spain might require a bailout," said Rabobank rate strategist Richard McGuire. "The realisation is dawning it might not be rushing."
Reflecting the uncertainty, Spanish 10-year bond yields rose back toward 6 per cent today. Spain's prime minister Mariano Rajoy has said he would not accept a rescue that dictated spending cuts.
"The market has priced in an actual bailout and the longer Spain prevaricates, the greater the risk the market will strong-arm them into accepting a support package," Mr McGuire said.
Reuters
