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Stocks succumb to growth fears; ECB trillion euro question awaits

October 2, 2014

London (Oct 2)  World stocks and oil were knocked hard on Thursday after global manufacturing data and an Ebola health scare in the United States spooked markets, sending
investors scurrying to the safety of U.S. bonds, the yen and gold.

European markets had been sucked into the storm, anxious about the European Central Bank's monthly meeting where it is under pressure to launch an aggressive government bond purchase programme to revive the euro zone's stodgy recovery.
 
Investors flocked to the yen and safe-haven bonds following a slew of surveys on Wednesday that had shown German factory activity shrinking for the first time in 15 months, China's
manufacturing sector barely growing and the United Statesslowing more than expected.
    Confirmation of a case of Ebola in the United States joined
a growing list of bearish news stories, with geo-political
tensions in Ukraine, the Middle East and Hong Kong, and growth
concerns around China and the euro zone sapping risk appetite.
    All that pushed MSCI's 45-country world stock index
 to a five-month low as a fourth day of
back-to-back falls left it down more than 5 percent in the last
month.
    There was little sign of the rout coming to end in Europe
either. Britain's FTSE, Germany's DAX and
France's CAX saw 0.3-0.6 percent falls while Italy
 and Portugal were down more than 1 percent.
    "The market is quite nervous," said Alvin Tan, a strategist
at Societe Generale in London.
    "What we are most concerned by is the risk backdrop. The S&P
500 appears to be in the process of breaking below the 100-day
moving average and on top of that we see volatility picking up
in not only equities but also currencies."
    On top of all the geopolitical and growth concerns, markets
are also struggling with the fact the Federal Reserve is about
to end years of pumping billions of dollars of stimulus into the
U.S. and global economy each month.
    After Wall Street had dropped 1 percent Japanese
equities had led the selloff in Asia overnight. A rebound in the
yen after a sudden loss of altitude for the high-flying
dollar pushed Tokyo's Nikkei down a sharp 2.1 percent to
three-week lows.
    
    TRILLION EURO QUESTION   
    Markets in both China and Hong Kong had been closed for
public holidays but sustained civil unrest in Hong Kong is also
weighing on investor confidence, although the city's streets
were calm for most of Thursday.
    The risk-averse global mood had pushed 10-year U.S. Treasury
yields -- the benchmark for world debt markets --
into their biggest drop in just over a year on Wednesday. They
were steady at 2.4 percent in European trading as German Bunds
 sat not far from all-time lows at 0.9 percent.
 
    The dollar subsequently slipped back below 110 yen - a
threshold breached for the first time since 2008 this week. It
was last down 0.3 percent at 108.61 yen and on course for
its biggest drop in over a month against major currencies.
    The euro was a shade higher at $1.2638 having crawled
away from a two-year low of $1.2571 hit earlier in the week.
    Traders were focused on the European Central Bank meeting
later in the session with the divergence in U.S. monetary policy
from those of Europe and Japan now an established market theme.
    ECB head Mario Draghi is set to give details at the bank's
1230 GMT post-meeting news conference of a new plan to buy
asset-backed securities and covered bonds, hoping this will
finally revive the euro zone economy.
    It hopes the plans will add a trillion euros to its balance
sheet, but poor demand for a new round of cheap loans last month
is raising the pressure for it too be more aggressive.
    "In the longer term people are still hoping for full-scale
quantitative easing," said Robert Kuenzel, euro area economist
at Daiwa Securities in London.
    "But it is unlikely to come in the near future. I think the
first line of defence is the TLTRO (cheap long-term loans to
banks) and the covered bond and ABS purchase programmes, but
there is a risk that both of those components disappoint."
   
    OIL PLUNGE
    With the focus on damage limitation, gold added to small
gains to rise 0.5 percent to $1,219.27 an ounce.
    In commodities though, Brent crude oil tumbled below
$92 a barrel, extending a three-month losing stretch as weak
economic signals from China and Europe and ample global supply
continue to weigh.
    It has now lost 20 percent since June and sharp cuts in
official selling prices from Saudi state producer Saudi Aramco
on Wednesday gave the clearest sign yet that the world's largest
exporter is trying to compete for crude market share.
    "This is a structural change in the oil market, with Saudi
Arabia explicitly stating that they are willing to compete on
price," said Bjarne Schieldrop, chief commodities analyst at SEB
in Oslo.
    "I think Brent will fall below $88 before we see the bottom
of the market."  

Source: Reuters

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