By Claire Jones in Frankfurt, Michael Mackenzie in New York and Stephen Foley in Las Vegas
Europe data trigger push for core bonds
Investors retreated from stocks and snapped up top-tier government bonds yesterday after poor eurozone data increased pressure on the European Central Bank to take aggressive action to bolster the region.
The European bloc’s economy expanded by just 0.2 per cent in the first quarter, missing consensus forecasts of a 0.4 per cent rise. Germany led the way with growth of 0.8 per cent while France was stagnant, Italy contracted slightly and the Netherlands shrank by 1.4 per cent.
Mario Draghi, ECB president, and other policy makers including Bundesbank president Jens Weidmann, have dropped hints in recent weeks that they are ready to act against inflation, which at 0.7 per cent is less than half its near-2 per cent target.
But investors fear the ECB has mistimed the moment to act and the region is slipping into a deflationary spiral, sapping growth and increasing debt burdens. Weakness in Europe also poses risks to other parts of the world, putting pressure on the global recovery.
David Tepper, the billionaire founder of Appaloosa Management, called the ECB “stupid” at the Salt conference of hedge fund managers in Las Vegas. He said there was a “co-ordinated complacency” among central banks, which were failing to recognise the threat of deflation.
“The ECB had better ease in June,” he said, adding that US growth was not strong enough to pick up the slack if Europe slowed. “I don’t know how far they are behind the curve, but I think they are really far. I’m nervous, it’s a nervous time.”
Investors bought German, UK and US sovereigns, pushing their yields, which move inversely to price, to new lows for the year. The US 10-year Treasury yield dropped below 2.50 per cent for the first time since October after disappointing industrial production data.
Hefty selling erupted across peripheral eurozone bonds, pushing yields higher for Italy, Spain, Portugal and Greece.
“There is a developing view that the ECB is behind the curve and we are seeing investors demand high-quality government bonds and it’s causing a lot of pain for people who thought yields would not continue falling,” said John Brady, RJ O’Brien managing director.
The euro touched an 11-week low as the prospect of ECB easing increased, while poor data hit European and US equities.
“We believe today’s weak outcome is another argument for further ECB easing at the June meeting,” said Apolline Menut, economist at Barclays. “In our view, a cut in all official rates is the most likely action at the June meeting, although we do not think this would be enough to weaken the euro further.”
After climbing into record territory this week, the S&P 500 was down 1.3 per cent at midday in New York and the Eurofirst 300 closed down 0.8 per cent. (FT)