The European 10-year bonds rallied on Friday as investors pour into safe-haven assets amid deepening economic growth fears after European Central Bank lowered GDP outlook for 2016 and next year. The benchmark German 10-year bonds yield, which is inversely proportional to bond price fell 2.16 pct to 0.227 pct, French 10-year bunds yield dipped 0.60 pct to 0.559 pct, Spanish 10-year bonds yield inched down 0.31 pct to 1.586 pct and British 10-year gilts yield tumbled 1.38 pct to 1.571 pct, Netherlands 10-year bonds yield inched down 1.81 pct to 0.433 pct and Portuguese 10-year bonds yield fell 0.25 pct to 3.191 pct by 0850 GMT.
The European Central bank in its Survey of Professional Forecasters report lowered the Gross Domestic Product (GDP) for 2016 and 2017 to 1.5 pct and 1.6 pct, from 1.7 pct and 1.8 pct, respectively. Longer-term inflation expectations were unchanged at 1.8 pct and unemployment rate expectations have been revised downwards across all horizons and remained on a downward path.
Yesterday, the ECB Governing Council decided to keep its monetary policy stance unchanged. Additional easing measures were not discussed at the meeting, but the Governing Council left no doubt to act immediately by using all the instruments available within its mandate if new downside risks to the outlook for price stability should arise. Therefore, the easing bias remains unchanged in place. The key ECB interest rates remained on hold and are expected to stay at current or even lower levels for an extended period of time, and well past the horizon of the ECB's net asset purchases. As regards helicopter money, ECB President Draghi pointed out that this instrument is fraught with operational and legal difficulties. In response on the recent criticism on the current monetary policy stance the Governing Council unanimously stressed that the ECB is independent and is acting according to its mandate. With no hints that another review and reconsidering of the monetary policy stance at the June meeting is necessary, the introduction of additional easing measures in that meeting is unlikely.
Moreover, Eurozone Markit April manufacturing PMI (flash) rose to 51.5, against market expectation of 51.9, from 51.6 in March. Individually, services PMI rose to 53.2, as compared to prior 55.1 and composite PMI rose to 53, lower than the investor’s consensus of 53.3, from 53.1 in the previous month.
The Eurozone government bonds have been closely following developments in oil markets because of their impact on inflation expectations and stock market sentiments, which are well below the European Central Bank's target. Yesterday, Crude oil prices jumped to 5-month high as Energy Information Administration's (EIA) showed that crude stock rose lower than the market expectation last week. The crude inventories rose 2.1 million barrels, from prior build of +6.6 million barrels for the week ending 15 April. This came alongside a decreases seen in gasoline inventories of -0.1million barrel, from prior -4.2 million barrel and distillate inventories of -3.6 million barrel, as compared to a build of +0.5 million barrel seen prior. Moreover, Market speculation that Petroleum Exporting Countries (OPEC) and Russia will meet in Moscow next month to again strike a deal on oil output freeze, boosted crude oil investors confidence. But, Russian Energy Minister Alexander Novak denied about any such meeting happening in Russia in May.
On Sunday, the negotiations between Petroleum Exporting Countries (OPEC) and Russia failed to reach an agreement in the Doha round of talks to strike a deal on oil output freeze. The International benchmark for crude oil prices, Brent futures rose 0.17 pct to $45.85, while West Texas Intermediate crude oil jumped 0.20 pct to $44.27 by 0820 GMT.
Meanwhile, the pan-European STOXX 600 index fell 0.36 pct and the euro-are blue-chip gauge, the STOXX 50, dipped 0.63 pct. The FTSE 100 Index is down 0.95 pct, the DAX trading 0.77 pct lower and the CAC-40 fell 0.41 pct by 0850 GMT.
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