European shares soft ahead of ECB decision

Last Updated: Thu, May 02, 2013 10:05 hrs

By Marc Jones

LONDON (Reuters) - European shares eased on Thursday as investors waited to see if the European Central Bank would cut rates and hint at more measures to boost struggling euro zone economies.

The ECB is expected to react to the recent downturn in even core euro zone countries like Germany by trimming its main interest rate for the first time in 10 months to a new all-time low of 0.5 percent from 0.75 percent.

The decision will be announced at 1145 GMT. After Wednesday's message from the U.S. Federal Reserve that it could step up its bond purchase programme if required, focus in Bratislava where the ECB meets this month will be on whether it also has other support measures up its sleeve.

Despite briefly attempting a recovery, top European shares on the FTSEurofirst 300 were down 0.2 percent as mid-morning approached. London's FTSE 100 fell 0.25 percent, Paris's CAC-40 dropped 0.3 percent and Frankfurt's DAX gave up its early gains.

In the currency market, the euro was off Wednesday's two-month high at $1.3162 by 0935 GMT.

"The central scenario is the main rate being cut to 0.5 percent and (the ECB's) other powder being kept dry for if the economy deteriorates further," said Nick Beecroft, a macro fund manager at Saxo Bank.

"That is priced in and the euro may continue higher if that is the case, especially in a world where the Fed has opened up the possibility of more easing."

With most other major central banks aggressively pumping stimulus into their economies, investors suspect the ECB could fall behind the curve. That assessment has been pushing up the euro over the last month while European shares have underperformed their peers in both Japan and the United States.

Fresh data from the euro zone supported the need for a cut, as manufacturing PMI numbers showed France, Italy and Spain all saw continued falls in production last month.

"There is nothing here to suggest that manufacturing will turn the corner and stabilise any time soon, putting greater onus on policymakers to act quickly to reinvigorate growth," said Chris Williamson, chief economist at survey collator Markit.


Weak manufacturing data out of China already reinforced doubts over the health of the global economy as did weaker-than-expected ADP jobs figures from the U.S. in the previous session.

The HSBC China Purchasing Managers' Index dropped to 50.4 in April from March's 51.6 and a tad below a flash reading of 50.5, as new export orders fell for the first time this year.

That had weighed on Australia's shares and currency while also hitting Chinese shares and oil and copper prices.

In Europe's bond markets, focus remained squarely on what the ECB would do with rates.

This month's move is unusually complex. While the central bank is likely to cut its main rate, it is also expected to leave its deposit rate at zero rather than risk the complications of moving into negative territory.

Demand for the already ready rock-bottom yields offered by German government bonds remained underpinned by the rate cut expectations and Italian and Spanish bonds, which have been the biggest beneficiaries of ECB support, rose to new 2010 highs.

"The market reassessed the global economic environment with lower growth and slower inflation so there was some adjustment with regards to central bank policy and this is supporting both core and peripheral bonds," said Patrick Jacq, a strategist at BNP Paribas.

"Having said that, when you see the Bund (yield) in the 1.20 (percent) area it's becoming very expensive on a risk/return analysis ... so it makes sense to be invested in other paper, semi-core or peripherals."

(Editing by Peter Graff)

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