European Stocks Pause Ahead of ECB Meeting

By Josie Cox 

        European stocks paused after four consecutive sessions of gains Wednesday, ahead of a key European Central Bank meeting on Thursday at which markets broadly expect the bank to announce a lofty bolstering of its asset purchase program in a desperate attempt to stimulate growth in the region.
        Having hit a seven-year high in the previous session, the Stoxx Europe 600 was broadly unchanged to marginally higher in early trade. London's FTSE 100 added 0.6%, while Germany's DAX and France's CAC edged around 0.3% and 0.1% lower respectively.
        European government bond yields, which fall as bond prices rise, continued to hover around euro-era lows. The euro firmed marginally against the dollar but remains below $1.16. Over the past six months, the common currency has depreciated more than 14% against the buck.
        Barclays economists wrote in a note that, like many of their peers, they expect a "sizable program" from the ECB, which includes around EUR500 billion to EUR750 billion of European government bond purchases, which "could have a tangible impact on the economy."
        "Moreover, we feel that the stock market doesn't price this in," they add.
        They predict that consumer discretionary stocks should particularly outperform if the ECB delivers on market expectations.
        "A steepening of the yield curve, potentially driven by [quantitative easing], has in the past been associated with an outperformance from the sector," they write.
        Nonetheless, there some strategists and economists do warn that high expectations have also inflated the risk of disappointment.
        "We expect that the ECB will announce a purchase program of around EUR500 billion which could disappoint as many investors appear to be hoping for more," said Brian Jacobsen, chief portfolio strategist at Wells Fargo Funds Management.
        He added that if that is the case, there could be a fierce market reaction and the euro could retrace all the way back to $1.25 against the dollar.
        Elsewhere in currency markets Wednesday, Japan's yen gained sharply against the dollar after the Bank of Japan's decision to stand pat on its main policy dashed faint hopes among investors for additional monetary easing.
        The Swiss franc was broadly flat against the euro, around parity, having last week rocketed on a shock decision by the Swiss National Bank to allow its currency to climb freely.
        In commodity markets, Brent crude enjoyed some respite from a sharp day-earlier sell off. It rose 1% in early European trade to around $48.45 per barrel. Gold added 0.5% to around $1,300 a troy ounce.
        Write to Josie Cox at josie.cox@wsj.com
        (END) Dow Jones Newswires

        January 21, 2015 04:28 ET (09:28 GMT)

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