Pending ECB Decision Injects Calm into Markets -- 2nd Update

By Riva Gold Features Dow Jones Newswires

ECB to announce QE plans

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-- Euro, German bond yields steady

-- Nokia, Barclays shares fall on 3Q earnings

Investors refrained from making big bets Thursday ahead of a pivotal meeting of the European Central Bank, where officials are expected to lay out plans to scale down their EUR60 billion-a-month ($71.88 billion) bond-purchase program.

The Stoxx Europe 600 edged up 0.3% midday led by gains in Spanish stocks, while S&P 500 futures were flat despite a flurry of earnings reports. The euro was steady at $1.1816 while yields on German 10-year bonds were nearly unchanged at 0.474% from 0.479% Wednesday. Yields move inversely to prices.

Later Thursday, the ECB is expected to announce the fate of its quantitative easing program, which has helped underpin the eurozone's economy and financial markets since 2015.

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"The recalibration of debt markets is probably the biggest question facing the global investment community," said Christopher Peel, chief investment officer at Tavistock Investments. "Europe will have a day of reckoning when the ECB stops buying bonds outright [and then signals tightening measures] ...but I think that's still a year away," he said.

For the most part, market participants expect the central bank to announce a nine-month extension of the program from its expiration at around EUR30 billion a month, pushing it through to September 2018.

Many investors believe the eurozone economy is strong enough to handle the gradual shift in policy, underscoring the calm in the region's riskier assets in recent months. Expectations for a policy change come as the currency bloc's economy is on course for its strongest year since 2007, with measures of consumer confidence in the bloc reaching decade-highs.

"Growth is absolutely on fire," said Michael Collins, portfolio manager at PGIM Fixed Income. "The need for central bank support is over, at least in the near-term," he said.

While inflation has remained well below the bank's target, purchasing managers' indexes released this week showed the currency area posted its fastest employment growth in a decade, raising the prospect that rising wages may lift still-weak inflation.

And while ultra-accomodative monetary policy has been a boon for eurozone equities in recent years, many believe the stock market can cope with a gradual rise in government bond yields and less central bank support, particularly if interest rates don't move for some time.

"We are not talking about stressed balance sheets in Europe, and companies can still access the bond market and raise debt at a very cheap level," said Hugh Cuthbert, portfolio manager at SVM Asset Management.

The bigger concern is on the currency, which could be sensitive to any commentary perceived as hawkish from ECB President Margio Draghi, Mr. Cuthbert said.

The euro is up over 12% against the dollar so far this year, a move that some companies have warned has cut into their earnings as they translate revenues from abroad. Long-positions on the euro have recently declined slightly, but remain at elevated levels, based on recent data from the CFTC.

A press conference with ECB President Mario Draghi following the policy decision later Thursday could be key for setting the tone for the common currency.

"He definitely has to be dovish," said Bastien Drut, fixed income and currency strategist at Amundi, noting he expects Mr. Draghi to reassert forward guidance on interest rates, emphasize that the path for inflation still isn't convincing and reiterate the need for substantial policy accommodation in the eurozone.

"He'll want to make it clear [QE and rates] are two separates policies to avoid a kind of taper tantrum," he said.

In other markets news Thursday, Sweden's Riksbank and Norway's Norges Bank both left their monetary policy unchanged.

Corporate earnings drove steep swings in individual stocks in one of the busiest days for third-quarter results. Shares of Nokia fell roughly 15% in after the Finnish telecommunications company reported a wider third-quarter net loss and warned of a tough year ahead.

Shares of Deutsche Bank fell 1.1% after it more than doubled third-quarter profits but said trading and revenue dropped sharply, while Barclays shares fell 5.5% amid a slump in bond trading revenues.

European chip maker STMicroelectronics jumped 6.5% after it beat forecasts with a substantial rise in third-quarter net profit.

Earlier, Asian markets were little changed after a downbeat session on Wall Street, where a series of disappointing earnings figures sent the Dow industrials down 112 points.

Japan's Nikkei Stock Average inched up 0.1% after declining on Wednesday, while Hong Kong's Hang Seng Index fell 0.5%.

Tom Fairless contributed to this article.

Write to Riva Gold at riva.gold@wsj.com

(END) Dow Jones Newswires

October 26, 2017 07:15 ET (11:15 GMT)