By Josie Cox
Dismal economic growth figures for both Germany and France sent equities falling, while German government bonds jumped to a record high--a sign investors anticipate further stimulative action from the European Central Bank.
The yield on the 10-year German government bond slipped to 1.011%--its lowest on record--according to Tradeweb, and well below the previous troughs hit in July 2012, when the euro-zone debt crisis threatened to spiral out of control. Yields fall as prices rise.
In equity markets, Paris' CAC-40 lost 0.4% in early trade, while Frankfurt's DAX waned 0.3% and has now fallen 6.75% since the start of July. Just over two months ago, the index breached the10,000 mark for the first time.
Indexes in southern Europe felt the heat too, with Spain's IBEX 35 losing 0.4% and Italy's MIB tumbling 0.6%.
Citigroup economists said the weak data "continue to highlight the anemic growth backdrop which, coupled with the low inflation environment, signifies prospects of further European Central Bank action later in the year."
The euro was steady, edging lower against the U.S. dollar to $1.3357 and against the sterling to a shade above GBP0.80.
France reported its economy had stagnated for a second straight quarter in the three months to June. Crucially, Germany's gross domestic product was also weaker than expected, with the economy contracting 0.2% in the second quarter of the year. At the start of the year, the euro zone's two core economies were on divergent paths, with Germany surging ahead as French economic growth ground to a halt.
Economists polled by The Wall Street Journallast week had expected the German economy to shrink 0.1% on the quarter.
Economists at BNP Paribas termed the figures a "double-ouch" and highlighted that France and Germany account for around 50% of total euro-zone GDP.
"Two downward surprises in the two biggest euro-zone members today, combined with the downward surprise from Italy last weak do not bode well for the euro-zone average," they wrote.
Data last week showed that Italy has slipped into its third recession since 2008. The country's economy contracted at an annualized rate of 0.8% in the quarter ended June 30, according to a first estimate by national statistics institute Istat, surprising some economists who had even forecast a return to slight growth.
The composite GDP figure for the euro zone is due at 0900 GMT.
HSBC economists wrote in a note that they now expected the region to have registered "a very meager expansion" in the quarter.
"The weakness of economic growth in the second quarter will reinforce investor concerns over the euro-zone growth outlook at a time when rising geopolitical tensions have also increased downside risks to growth," says Lee Hardman, a currency economist at Bank of Tokyo-Mitsubishi UFJ.
Write to Josie Cox at email@example.com
(END) Dow Jones Newswires
August 14, 2014 04:02 ET (08:02 GMT)
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