By Josie Cox
Dismal European economic growth figures, particularly for Germany and France, sent German government bonds jumping to a record high, signaling that investors anticipate further stimulative action from the European Central Bank.
The yield on the 10-year German government bond slipped to below 1%--its lowest on record--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.
"This move is about the underperformance of the euro-zone economy," said Mark Dowding, co-head of investment grade debt at BlueBay Asset Management, which manages $66.6 billion. "The direction of travel is toward more disappointing data and fears that the ECB may need to do more," he added.
In equity markets, Paris' CAC-40 was 0.5% lower by midmorning, while Frankfurt's DAX declined 0.5% taking losses since the start of July to 6.75%. Just over two months ago, the German index breached the 10,000 mark for the first time. On Thursday it slumped to below 9,170.
Indexes in southern Europe felt the heat too, with Spain's IBEX 35 losing 0.7% and Italy's MIB tumbling 1.1%.
Citigroup economists said the weak data "continue to highlight the anemic growth backdrop which, coupled with the low inflation environment, signifies prospects of further ECB action later in the year."
The euro was steady against the U.S. dollar to $1.3357, and against the sterling at a shade above GBP0.80. Kit Juckes, a macro strategist at Société Générale said the heavy weight of existing bets against the euro was leaving little scope for the currency to move much lower against the buck. "Patience is needed," he said in a note to clients.
Data released last Friday by the U.S. Commodity Futures Trading Commission showed that bets against the euro are already at their highest level since mid-2012.
France reported its economy had stagnated for a second straight quarter in the three months to June. More eye-catching though, 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 Journal last week had expected the German economy to shrink 0.1% on the quarter.
The composite GDP figure for the whole of the euro-zone came in flat on the quarter and rose 0.7% on the same quarter last year.
"We cannot rule out that these numbers mark the beginning of a more prolonged downturn rather than a dip," said Riccardo Barbieri, Mizuho's chief European economist. Economists at BNP Paribas, meanwhile, 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.Commenting on the French figures, economists at Barclays struggled to identify any reassuring signs in the breakdown of the data.
"All in all, we see very limited leeway for a significant pick up in the economy's momentum," they wrote in a note to clients.
"The implication of today's disappointment is that our 0.6% and 1.3% growth forecasts for 2014 and 2015, respectively, have come down by 0.1 percentage points to 0.5% and 1.2%. If anything, we think risks are skewed to the downside," they said.
Elsewhere in Europe, Dutch GDP expanded by 0.5% on the quarter and by 0.9% on the year, providing some relief after a surprisingly weak first quarter, which saw a contraction of 0.4% due to a drop in gas exports as a result of a mild winter. Austria's economy grew at a modest 0.2% rate, an improvement on the 0.1% recorded in the first quarter, while Slovakia matched Spain in recording growth of 0.6%. For economists, however, those figures appeared to offer only limited consolation.
Lee Hardman, a currency economist at Bank of Tokyo-Mitsubishi UFJ said that Thursday's figures only "reinforce investor concerns over the euro-zone growth outlook at a time when rising geopolitical tensions have also increased downside risks to growth."
In the U.S., the S&P 500 was indicated edging 0.1% lower at the open. Futures, however, do not always reflect moves after the opening bell.
In commodities, gold, which like Bunds is considered an investors' haven at times of stress, rose 0.3% to $1,317.70 a troy ounce. Brent crude was steady on the day at $105.06 per barrel.
-- Tommy Stubbington contributed to this article
Write to Josie Cox at email@example.com
(END) Dow Jones Newswires
August 14, 2014 06:07 ET (10:07 GMT)
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