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Periphery bond yields dip as weak PMIs back case for ECB easing
September 1, 2014 / 11:57 AM / 3 years ago

Periphery bond yields dip as weak PMIs back case for ECB easing

* Investors position for Thursday's ECB meeting
    * EZ manufacturing growth slowest in over a year
    * Coeure says ECB ready to adjust policy
    * Ukraine blames Russia as rebels regain ground

 (Adds data, updates prices)
    By John Geddie
    LONDON, Sept 1 (Reuters) - Low-rated euro zone bond yields
dipped on Monday as data showing tepid growth in manufacturing
fuelled speculation the ECB would renew support for the bloc's
faltering economy at its meeting on Thursday.
    Policymakers and national leaders joined calls over the
weekend for ECB president Mario Draghi to ease policy further,
although many think Draghi will favour words rather than action
this week as he waits for existing measures to take effect.
   Concerns about the economy rose on Monday after data showed
euro zone manufacturing grew at its slowest pace in over a year
in August, as new orders dwindled and factories suffered amid
rising tensions in Ukraine.   
    "Investors are positioning themselves for a dovish ECB
meeting," said Alessandro Giansanti, rates strategist at ING.
    Italian and Portuguese 10-year bonds were 3 basis points
lower at 2.41 and 3.20 percent respectively, while Greek
equivalents were 8 bps lower at 5.78 percent. Spanish yields
inched down 1 bp to 2.23 percent.  
  
    Banks including JP Morgan, Nomura and RBS are calling for
the ECB to cut interest rates this week, with some expecting
Draghi to lower the charges on emergency loans (TLTROs) that
will be made available to banks for the first time this month.
    Others will be keeping a close ear out for more readiness to
launch a broad-based quantitative easing (QE) asset purchase
programme, which Draghi hinted at in a speech at Jackson Hole,
Wyoming on Aug 22. 
    "An aggressive verbal intervention, signaling a greater
willingness to embark into a QE program is necessary to validate
Draghi's (Jackson Hole) speech," said Deutsche Bank in its
weekly bond market strategy note.
    ECB sources told Reuters last week that new action on
Thursday was unlikely but not impossible, and that the barrier
to QE was still "very high". 
    But as the euro zone's outlook dims, many are betting that
the ECB will eventually be forced to use all the tools in its
armoury. Deutsche Bank estimates the market is currently pricing
in a 50 to 70 percent probability of an unlimited QE programme. 
    
    INTO THE QUAGMIRE
    ECB executive board member Benoit Coeure said the ECB was
ready to adjust policy further if needed and boost bank
liquidity, in an essay published in Greek newspaper Ta Nea on
Saturday. 
    Meanwhile, French Prime Minister Manuel Valls reiterated on
Sunday calls for the ECB to go "further" in tackling the problem
of an overvalued euro. Valls said the ECB's decision in June to
cut interest rates was a "strong signal" but more was
needed. 
    Draghi's remarks at Jackson Hole, however, have appeared to
raise the ire of some politicians, pointing to divisions at the
heart of Europe's establishment. 
    German news magazine Der Spiegel reported on Sunday that
Chancellor Angela Merkel called Draghi to voice her discontent
over his comments that proposed a greater emphasis on fiscal
stimulus over austerity in order to boost growth in Europe.
    A German government spokesman denied Der Spiegel's account
of the call.
    "Europe is sinking ever deeper into the quagmire, be that on
the economic, military or political fronts. Yet the policy
responses show little evidence of the decisive leadership that
is needed," said Ciaran O'Hagan, strategist at Societe Generale.
    German 10-year bond yields were flat at 0.88 percent on 
Monday, just off record lows of 0.867 percent hit last week, as
the latest chapter of the conflict in Ukraine kept up demand for
safe-haven assets.  
    Ukrainian President Petro Poroshenko accused Russia on
Monday of "direct and open aggression" which he said had
radically changed the battlefield balance as Kiev's forces
suffer major reverses in the war with pro-Moscow separatists.
 
    Russian President Vladimir Putin, who called on Sunday for
immediate negotiations on the "statehood" of southern and
eastern Ukraine, blamed Kiev's leadership for refusing to enter
into direct political talks with the separatists.

 (Editing by John Stonestreet and Susan Fenton)

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