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ECB interest rate cut talk lifts shares, pressures euro

Increased prospects of a European Central Bank interest rate cut this year sent the euro to a six-week low on Monday and boosted the region’s share markets, which extended gains on robust manufacturing data.

A plunge in the currency bloc’s inflation to well below the ECB’s target level and pressure on money market rates hardened expectations last week for a shift in ECB policy and look set to support prices until the central bank meets on Thursday.

“Clearly market expectations turned recently in favor of a potential (ECB) rate cut, probably not this week but there’s a high probability it could be delivered in December,” said Patrick Jacq, a strategist at BNP Paribas in Paris.

Europe’s broad FSEurofirst 300 index rose 0.4pc in early deals to be back near last-week’s five-year high. The index is up about 14pc this year.

Data showing factory activity picked up in Spain and Italy in October, following a weekend report that expansion in China’s giant service sector was gathering momentum, added to the positive tone, though it mainly served to confirm market expectations.

Earlier in Asia, investors shrugged off the Chinese data, preferring to wait for the outcome of the ECB meeting and the U.S. monthly jobs data out at the end of the week.

“I expect this to be a positive week for equities. European economic numbers have been good and there are expectations that Friday’s U.S. non-farm payrolls data could surprise on the positive side,” said Christian Stocker, equity strategist at UniCredit.

MORE CASH OR LOWER RATES?

In currency markets, the euro slipped to its lowest level since Sept 18 at $1.3443 during the Asian session, having suffered its biggest drop in over a year last week. It trimmed its losses when Europe opened to settle around $1.3510.

The bets on an easing in euro zone rates also lifted both core and lower-rated euro zone bonds, though there remained a debate among analysts over whether the bank would choose to cut rates or stimulate financial markets with more cash.

“I’d be surprised if they don’t do something before the year-end,” said Simon Smith, chief economist at FXPro. “On balance, I’d be thinking they were more likely to do something on the liquidity side where it would be more effective.”

The Bank of England also holds it policy meeting on Thursday and is expected to stay on hold following a run of improving UK economic data.

Other major currencies were mostly quiet with the dollar well supported by last week’s upbeat U.S. factory data, which stirred speculation the Federal Reserve might scale back its bond-buying in December, rather than in March as many in the market had been anticipating.


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