LONDON (Reuters) - The euro and government bond yields fell while stocks rallied on Thursday after Reuters reported that the single currency’s rapid gains are worrying a growing number of ECB policymakers, raising the chance asset purchases will be phased out only slowly.
The European Central Bank’s asset-purchase scheme is due to expire at the end of 2017 but formal talks over its future are only beginning, meaning the ECB is highly unlikely to take any decision at next Thursday’s rate meeting, the sources told Reuters.
The euro fell to day lows after the Reuters report and was last down 0.3 percent at $1.1844 EUR=.
The prospects of a prolonged unwinding of ECB stimulus cheered government bond markets with the periphery leading a fall in bond yields.
Portugal’s 10-year bond yield fell 4 basis points to a one-week low at around 2.82 percent PT10YT=TWEB.
As Italian yields slipped 3.5 bps to 2.04 percent IT10YT=TWEB, the gap between Italian and German 10-year bond yields hit its lowest in over a week at 169 basis points and was almost 3 basis points tighter on the day
“The stronger euro weighs on growth and inflation, although not immediately, and this complicates the ECB’s exit strategy,” said Commerzbank strategist Rainer Guntermann.
“It also implies a cautious QE exit that is positive for the bond market, which is why we see downward pressure on yields and tighter spreads in the periphery after the story today.”
Germany’s 10-year bond yield dipped to 0.36 percent, more or less erasing earlier rises DE10YT=TWEB. It was on track to end August with a fall of almost 18 bps — its biggest monthly fall in six months.
Euro zone stock markets rallied as the euro slipped, rising to an intraday high after the ECB report. They were last up 0.8 percent .STOXXE and in line with the bloc's index of largest stocks .STOXX50E. Euro zone banks traded 1.2 percent higher.
The euro earlier this week rallied to its highest level in more than 2-1/2 years just above $1.20 EUR=.
The currency’s strength, which weighs on the price of imported goods and dampens inflation, has added to a view that the ECB will be cautious about taking back its monetary stimulus.
Inflation in the currency bloc, targeted by the ECB at just below 2 percent, accelerated to 1.5 percent in August from 1.3 percent, data showed on Thursday.
(For a graphic on 'Biggest monthly fall in German bond yields since February' click reut.rs/2xATPID)
Additional reporting by Helen Reid, Saikat Chatterjee and Abhinav Ramnarayan; Editing by Ralph Boulton and John Stonestreet