European government bonds rallied and equities weakened after the European Commission cut its economic growth forecasts for the eurozone.
The eurozone economy will expand just 1.3 per cent this year, the commission forecast, down from a projection of 1.9 per cent in November. Its projection for 2020 has come down from 1.7 per cent to 1.6 per cent.
The gloomier prediction is a recognition of the deterioration in the eurozone in recent months. It was enough to inject fresh momentum into the rally for eurozone government bonds, with the yield on the benchmark 10-year German bond falling 4 basis points to 0.12 per cent. Yields on most other eurozone government bonds fell, too. Yields move in the opposite direction to a bond’s price.
Within equities, German and Italian stocks were both down about 1.5 per cent. US futures suggest Wall Street will open lower.
Hot topic
UK government bonds also joined in the sovereign debt rally, with the yield on the benchmark 10-year gilt falling 5 basis points to 1.17 per cent. The move was given extra impetus after the Bank of England became the latest central bank to grow less optimistic on the outlook.
The economy will expand just 1.2 per cent this year, the BoE forecast, the slowest rate of expansion since 2009. Sterling, which has been in the crosshairs of Brexit since the 2016 referendum, weakened 0.3 per cent to just below the $1.29 mark.
Italy, meanwhile, was one country that missed out on the sovereign debt rally. The yield on the benchmark 10-year Italian bond jumped 7 basis points to 2.92 per cent, as a much weaker economic outlook was seen as complicating the Italian government’s ambitions to introduce fiscal stimulus.
Strategists at Oxford Economics noted that the deteriorating economic backdrop could “spell trouble for the Italian government’s expansionary fiscal plans, even though a compromise was reached at the end of last year”.
Markets in Hong Kong and China were closed for the lunar new year but stocks in Seoul put in a weak showing on return from the holiday, with the Kospi index up 0.1 per cent. The mixed showing in Asia came after Wall Street broke a five-day run of gains on Wednesday, with the S&P 500 slipping 0.2 per cent as investors digested a mixed batch of earnings.
Forex and fixed income
Having proved resilient in the face of weaker economic data and softening expectations for monetary policy, the euro was down on Thursday, falling 0.3 per cent to $1.13. The dollar index tracking the greenback against a basket of peers was steady at 96.435.
Commodities
Oil prices were in retreat after gaining about 1 per cent on Wednesday. Brent crude, the international benchmark, fell 0.5 per cent to $62.41 a barrel, while US marker West Texas Intermediate dropped 0.94 per cent to $53.49.
Gold fell 0.2 per cent to $1,303.94 per ounce.
