Pending ECB Decision Injects Calm into Markets

By Riva Gold Features Dow Jones Newswires

ECB to announce plans for stimulus program

Continue Reading Below

-- Euro, bond yields steady

-- Nokia falls sharply after 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 bond-purchase program.

The Stoxx Europe 600 edged down 0.2% shortly after markets opened amid a flurry of corporate results, while the euro was up less than 0.1% at $1.1823. Yields on German 10-year bonds were nearly unchanged at 0.481% from 0.479% Wednesday.

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

Continue Reading Below

"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.

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 eurozone economy is on course for its strongest year since 2007, with measures of consumer confidence in the currency bloc reaching decade-highs.

"Growth is absolutely on fire," said Michael Collins, portfolio manager at PGIM Fixed Income, noting growth is consistent across countries in the eurozone as well as different industries. "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.

"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 he said is on the currency, which could be sensitive to any commentary perceived as hawkish from ECB President Margio Draghi, he said.

The euro is up over 12% against the dollar so far this year, in a move that some companies have warned has cut into their earnings as they translate revenues from abroad.

Meanwhile Thursday, Sweden's Riksbank and Norway's Norges Bank also meet, with investors keeping an eye on their forward guidance.

Corporate earnings drove steep swings in individual stocks in one of the busiest days for third-quarter results. Shares of Nokia fell 13% in morning trading, leading declines in Europe, after the Finnish telecommunications company reported a widened third-quarter net loss, missing expectations.

Shares of Deutsche Bank fell 1.3% after it beat forecasts for third-quarter profit but posted a fall in revenue, while Barclays shares fell 4.8% as it said bond trading revenues slumped.

European chip maker STMicroelectronics jumped 6.3% after it beat forecasts with a substantial rise in third-quarter net profit.

Earlier, Asian markets were mixed after a downbeat session on Wall Street. Japan's Nikkei Stock Average inched up less than 0.2% after declining on Wednesday as a slightly firmer yen capped gains.

Shanghai stocks extended gains that followed the unveiling of members of the country's top governing body, but Hong Kong's Hang Seng Index fell 0.3%.

Tom Fairless contributed to this article.

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

(END) Dow Jones Newswires

October 26, 2017 03:58 ET (07:58 GMT)