European Stocks, Bonds Continue Slide

By Tommy Stubbington 

        European stocks and bonds continued to tumble Thursday after the previous session's heavy selloff.
        Wednesday's pullback suggested that investors are growing increasingly uncomfortable with the plunge in bond yields in the euro area since the European Central Bank launched its program of quantitative easing. The rise in yields continued early Thursday, albeit at a slower pace, with Germany's 10-year yield rising above 0.3% for the first time since early March. The yield was as low as 0.05% earlier this month. Yields rise when prices fall.
        Traders said no single factor is behind the selloff, but recent signs of an improvement in the eurozone economy have left investors concerned that yields are unsustainably low. A slight uptick in German inflation exacerbated those worries on Wednesday.
        "While we don't think that QE will ultimately be successful in significantly increasing economic growth in the eurozone, we do think that it will ultimately cause an increase in inflation expectations that will [cause Bund yields to rise]," said fixed income strategists at Rabobank.
        The sharp move in German bonds--considered Europe's safest and most liquid market--was an echo of the October "flash crash" in U.S. Treasury yields that further highlights the lack of liquidity in bond markets, according to analysts at Commerzbank.
        "Markets will have to get used to these erratic swings going forward with banks being forced to curtail their balance sheet capacities and central bank interventions further undermining trading liquidity," they said.
        Stocks weren't spared in Wednesday's selloff, and the decline continued on Thursday. The Stoxx Europe 600 was down 0.8% having dropped 2.2% on Wednesday. The slump came after weaker than expected U.S. economic growth caused the euro to surge against the dollar. A weaker euro has been seen as crucial to the strength of European equity markets this year, helping companies that make a large chunk of their revenue overseas.
        "Sentiment in the eurozone's equity markets has been creaking for a while, as the euro's rebound versus the U.S. dollar has gathered steam," said Ian Williams, an economist and strategist at brokerage Peel Hunt.
        The euro continued to climb on Thursday, rising 0.3% to $1.1175 against the dollar, helped by stronger than expected growth data for the Spanish economy.
        Investors were also reacting to the latest statement from the U.S. Federal Reserve, which followed the disappointing U.S. GDP figures. Fed officials pointed to the recent cooling of economic activity, which may see the central bank hold off for longer from raising interest rates.
        Write to Tommy Stubbington at tommy.stubbington@wsj.com
        (END) Dow Jones Newswires

        April 30, 2015 04:12 ET (08:12 GMT)

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