European stocks and bonds edge up ahead of ECB meeting

European stock markets edged higher on Thursday, along with eurozone government bonds, as investors awaited clues from the European Central Bank on how policymakers might deal with a jump in global borrowing costs.

The regional Stoxx 600 benchmark rose 0.3 per cent to 423.5 points, putting it within touching distance of its pre-pandemic high of 433.9 reached last February.

The yield on Germany’s 10-year government bond dropped by 0.02 percentage points to minus 0.34 per cent as investors bought the debt. Italy’s equivalent bond yield fell 0.03 percentage points to 0.65 per cent.

At its meeting later on Thursday, investors reckon the ECB’s governing council will discuss a rise in eurozone bond yields — following a sell-off in the US driven by expectations of a jolt of inflation in the American economy — that has pushed the yield on Germany’s benchmark Bund up from around minus 0.55 per cent at the start of the year.

This threatens to increase the borrowing costs of eurozone companies operating in nations where the rollout of coronavirus vaccines has been slow and economies are expected to take longer to recover than the US.

“We expect some clarity of communication about this from the ECB” said Juliette Cohen, strategist at Paris-based CPR Asset Management, “which should allow the rise in eurozone bond yields to pause.”

That sentiment helped lift equities across the eurozone. France’s CAC 40 added 0.5 per cent while Spain’s Ibex and Italy’s MIB gained 0.9 per cent. The UK’s FTSE 100 lagged behind with a gain of 0.2 per cent.

“The ECB does have a real communications challenge,” cautioned Hetal Mehta, senior European economist at Legal & General Investment Management, because the central bank’s recent action on bond purchases had not reflected concerns about “this externally imposed tightening of financial conditions”.

The ECB increased its purchases of bonds under its pandemic emergency purchase programme (PEPP) by a net €11.9bn in the week to March 3, which was below the €18.1bn weekly average since the programme started last year.

Meanwhile, members of the ECB’s governing council have “shown signs of dissent” over how to deal with rising bond yields, CPR’s Cohen added.

Executive board member Fabio Panetta declared in a March 2 speech in Milan that the central bank’s stimulus policies needed to be “harder, better, faster, stronger”. But Jens Weidmann, president of Germany’s powerful Bundesbank, told Bloomberg on March 3 that the increase in financing costs was not “a particularly worrisome development”.

If the ECB “gets it right”, analysts at Bank of America commented, the euro was likely to weaken. Currency traders held back from backing this bet however, with the euro gaining 0.3 per cent against the dollar to purchase $1.196.

US government bonds were also steady on Thursday, with the yield on the 10-year Treasury declining by 0.03 percentage points to 1.494 per cent after an auction of US sovereign debt went smoothly on Wednesday despite fears buyers would stay away.

This increased investors’ appetite for US technology stocks, which have been out of favour as their high valuations were threatened by rising bond yields. Futures markets tipped the top 100 stocks on the technology focused Nasdaq Composite to rise about 1.6 per cent when New York trading opens. Contracts on the broader S&P 500 equity index rose 0.7 per cent.