By Josie Cox
European stocks remained volatile Friday, with investors
weighing the prospect of more monetary stimulus in Europe against
the threat of political upheaval in Greece as well as the Russian
currency crisis.
Having opened the day higher, mirroring a surge on Wall Street
on Thursday, the Stoxx Europe 600 was trading around 0.3% lower in
the early afternoon.
On Thursday, the index ended the session up almost 3%, spurred
at least in part by the U.S. Federal Reserve's pledge to adopt a
"patient" approach when raising interest rates, but traders said
that investors may have overshot, considering there are still
several underlying sources of volatility.
Barclays economists noted that market moves in Russia have over
the last few sessions "evolved from a commodity-focused correction
to a correlated selloff." Even though comparisons with the 1998
default crisis may be exaggerated for now, they added, the
situation remains "difficult."
The ruble on Friday continued to recover from its selloff
earlier in the week, but still remains volatile. Sberbank
strategist Tom Levinson said that the selling "frenzy" may have
receded for now, but the pressure is here to stay.
Earlier this week the Russian finance ministry said it was ready
to sell as much as $7 billion to stabilize the ruble after the
central bank carried out massive monetary tightening, hiking its
key interest rate by 6.5 percentage points to 17%.
Ultimately though, strategists agree that the fate of the
Russian economy depends on the price of oil.
On Friday, Brent crude was trading just over $60 a barrel,
having recovered somewhat from the 5- 1/2 -year low of $58.50 hit
earlier this week. Year-to-date, the commodity has still tumbled
more than 45% and Credit Suisse economists predict that the floor
may be as low as $55.93/54.26 per barrel
Other currencies of oil-dependent economies, like the Canadian
dollar and the Norwegian krone, were broadly unchanged.
Nigeria's naira remained close to an all-time low against the
U.S. dollar after the country's central bank imposed new
foreign-exchange controls on Wednesday. The bank barred dealers
from depositing their currency-trading funds overnight, preventing
traders from placing bets for or against a single currency at the
close of a session.
Back in Europe, the equity selloff was also being spurred by
political uncertainty in Greece as well as ratings agency Standards
and Poor's on Thursday trimming its rating on several Italian
lenders including two of the country's largest banks, citing its
recent downgrade of the sovereign's rating from BBB to BBB-.
Shares in UniCredit SpA and Intesa Sanpaolo SpA were both down
more than 3% after S&P cut both to BBB- from BBB. Milan's main
stock index was 1.3% lower in the early afternoon, lagging all
other major indexes in the region.
S&P said that the move reflects its view that economic
prospects in Italy are likely to remain weaker over the next couple
of years than they had previously anticipated.
Despite Friday's lull though, European stocks have proved
relatively resilient this week, which economists and investors
attribute to confidence that the European Central Bank would
announce a broadening of its asset-purchase program to include
sovereign bonds early next year.
In an interview with The Wall Street Journal earlier this week,
ECB executive board member Benoît Coeuré sent one of the clearest
signals to date that the bank is poised to embark on large-scale
asset purchases early next year, as it grapples with a weak economy
and dangerously low inflation.
"The ECB has fired all its monetary shots except [sovereign]
quantitative easing. We are at the point now where QE is the most
likely next step," said Andrew Bosomworth, head of portfolio
management in Germany at Pacific Investment Management Co., which
manages around $1.87 trillion in assets globally.
UBS chief European economist Reinhard Cluse said that so far his
base-case scenario had been that the ECB will announce sovereign QE
in March.
"But, should the December inflation data disappoint on the
downside, this could, in our view, increase the likelihood that the
ECB might announce sovereign QE as early as January," he added.
Earlier Friday, data showed that German consumer sentiment has
hit its highest level in eight years, on hopes economic expansion
in Europe's largest economy will accelerate in the coming
months.
Write to Josie Cox at josie.cox@wsj.com
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