Bonds Gain and Euro Weakens as Markets Pivot on Central Banks – Bloomberg

Central banks have financial markets in a spin.

Government bonds rose, the euro slid and equities fluctuated as investors waited to see if European Central Bank President Mario Draghi will satisfy heightened speculation on further stimulus measures. U.S. stock-index futures climbed. South Korea's won rallied after policy makers refrained from lowering borrowing costs, New Zealand's bonds surged on a surprise rate cut, and Hungary's forint dropped after an official hinted that policy may be loosened. Gold fell for a third day and crude oil retreated from a three-month high.

"We are waiting in anticipation of what Draghi will say — there is a good chance that the market could rally a bit on that," said Allan von Mehren, chief analyst at Danske Bank A/S in Copenhagen. "There has been some positioning ahead of the ECB meeting but there are also investors waiting on the sidelines. So there will be more cash ready to put to work if the ECB actually delivers."

The ECB is forecast to ease policy via measures including an interest-rate cut and an expansion of its quantitative easing, according to economists surveyed by Bloomberg. That would add to a wave of global monetary stimulus this year that includes a lowering of Chinese lenders' reserve requirements and Japan's introduction of a negative interest rate. The International Monetary Fund said Tuesday that volatile financial markets and low commodity prices were heightening risks for the global economy.

Bonds

Benchmark German 10-year bund yields declined two basis points to 0.22 percent at 11:07 a.m. in London. The yield fell to 0.1 percent on Feb. 29, the lowest since April, the month it reached a record-low 0.049 percent. Spanish 10-year bond yields dropped three basis points to 1.53 percent, while those on similar-maturity Italian debt declined three basis points to 1.38 percent.

Traders are pricing in an 83 percent chance that the ECB will cut the deposit rate to minus 0.4 percent, and 17 percent odds it'll be lowered to minus 0.5 percent, according to data compiled by Bloomberg using swaps on the euro overnight index average. That compares with 7 percent odds of a cut to minus 0.5 percent on Wednesday. The calculation assumes the gap between Eonia rates and the deposit rate would remain in line with recent levels.

The risk for investors is that there's a repeat of what happened on Dec. 3, when bonds tumbled even as the ECB delivered a cut in the deposit rate that was in line with what was implied by swaps before the policy meeting. That day, Germany's 10-year yield surged 20 basis points, the biggest increase since November 2011.

The yield on New Zealand's two-year bonds plunged 18 basis points to 2.03 percent following Thursday's interest-rate cut, while that on the country's 10-year notes touched a record-low 2.91 percent. The Reserve Bank of New Zealand lowered its benchmark interest rate a quarter of a percentage point to a record 2.25 percent and said further easing may be needed owing to a worsening outlook for the global economy. The change was forecast by just two of 17 economists surveyed by Bloomberg.

Abengoa SA bonds gained following a debt-restructuring agreement. The renewable-energy company is seeking to avoid becoming Spain's largest corporate insolvency.

Currencies

The euro weakened, cementing its position as the world's worst-performing major currency over the past month. It fell 0.2 percent to $ 1.0974 and was little changed at 124.62 yen. Traders' expectations for price swings in the euro over the next week climbed to the highest since January 2015 on a closing basis, reaching 18.2 percent.

"We have a small short position going into the meeting as we think if Draghi repeats the December episode, he'd risk undermining his power to influence the market," said Andreas Koenig, the Dublin-based head of European foreign exchange at Pioneer Investments. "That said, we keep the position small because there is a risk that even if he delivers more, the market impact could be short-lived."

The New Zealand dollar was little changed, after sliding as much as 0.5 percent.

South Korea's three-year bonds fell for the first time in four days, pushing their yield four basis points higher to 1.51 percent. The yield on U.S. Treasuries due in a decade declined two basis points to 1.86 percent.

Stocks

The Stoxx Europe 600 Index fell less than 0.1 percent, after swinging between gains of as much as 0.4 percent and a loss of 0.2 percent.

European shares have become increasingly responsive to the ECB's updates, with the moves in the Euro Stoxx 50 Index on rate-decision days exceeding the monthly average since last July. In December, when investors were disappointed by the extent of additional stimulus, the gauge swung 4.9 percent intraday, the most since at least 2012.

Hugo Boss AG gained 3.1 percent after saying it's maintaining its dividend at last year's level, after a series of profit warnings and strategic mishaps. Aviva Plc rose 4.3 percent after reporting a Solvency II ratio of 180 percent and raising its dividend by 15 percent.

Lagardere SCA tumbled 10 percent after its full-year net income halved. Carrefour SA slipped 4.3 percent after France's largest retailer announced a lower-than-forecast dividend, even as full-year profit increased. 

Standard & Poor's 500 futures rose 0.2 percent, indicating equities will extend gains after Wednesday entering the eighth year of a bull run. Investors will look to initial jobless-claims data for indications of the health of the U.S. economy and the trajectory of interest rates. The number of people seeking benefits is forecast to have fallen to 275,000 in the week ended March 5 from 278,000 the previous period.

Emerging Markets

The Hungarian forint weakened the most among emerging currencies, sliding 0.4 percent versus the euro. Hungarian central bank's deputy governor Marton Nagy said policy makers may reduce the benchmark interest rate this year to help ease inflation.

The MSCI Emerging Markets Index added 0.5 percent, its first gain in three days. Nine of the ten industry groups advanced with technology and raw material stocks leading gains.

China's Shanghai Composite Index slumped 2 percent, as traders weighed the level of government support. The suspected failure of state funds to prop up stocks on Thursday removed one of the key props for the world's worst-performing equity market this year amid deteriorating economic data and disappointment over stimulus measures announced during annual policy meetings this week. Data on Thursday showed February consumer prices rose the most since mid-2014.

Commodities

Oil traded at about $ 38 a barrel in New York, after jumping 4.9 percent on Wednesday to $ 38.29, the highest close since Dec. 4. U.S. gasoline consumption was at the highest level since September over the past four weeks, reducing inventories for a third week, according to data from the Energy Information Administration.

Gold fell 0.4 percent in London before the ECB's policy review. Copper declined 0.6 percent, after gaining 1.4 percent on Wednesday, and aluminum and nickel also fell.

"A slight retreat in safe-haven demand may be weighing on gold as oil and equities are rising at the moment," said Helen Lau, an analyst at Argonaut Securities (Asia) Ltd. in Hong Kong. "Gold should go higher as investors expect more easing from the ECB to reflate the economy."