Investors continued to retreat from stocks in Asia on Friday morning after poor eurozone data increased pressure on the European Central Bank to take aggressive action to bolster the region.
The European bloc’s economy expanded just 0.2 per cent in the first quarter, missing consensus forecasts of a 0.4 per cent rise. Germany led the way with growth of 0.8 per cent while France was stagnant, Italy fell slightly and the Netherlands shrank 1.4 per cent.
US and European investors responded to the data by switching into top-tier government bonds. Investors in Asia, similarly spooked by stuttering growth in a market on which the region relies on to buy its exports, began their day dumping shares.
Japan’s Topix index was down 1.7 per cent in early morning trading, while Korea’s Kospi slipped 0.5 per cent. Hong Kong also opened lower, with the hang Seng Index down 0.4 per cent.
Mario Draghi, ECB president, and other policy makers including Bundesbank president Jens Weidmann, have dropped hints in recent weeks that they are ready to act against inflation, which at 0.7 per cent is less than half its near-2 per cent target.
But investors fear the ECB has mistimed its moment to act and that the region is slipping into a deflationary spiral, sapping growth and increasing debt burdens. Weakness in Europe also poses risks to other parts of the world, putting pressure on the global recovery and potentially weighing on the US.
David Tepper, the billionaire founder of Appaloosa Management, called the ECB “stupid” at the Salt conference of hedge fund managers in Las Vegas.
He said there was a “co-ordinated complacency” among central banks, who were failing to recognise the threat of deflation. “The ECB had better ease in June,” he said, adding that US growth was not strong enough to pick up the slack if Europe slowed. “I don’t know how far they are behind the curve, but I think they are really far. I’m nervous, it’s a nervous time,” he said.
That was reflected by investors buying German, UK and US government bonds and pushing their yields, which move inversely to price, to new lows for the year. The US 10-year Treasury yield dropped below 2.50 per cent for the first time since October after disappointing industrial production data.
Hefty selling erupted across peripheral government eurozone bonds, pushing yields sharply higher for Italy, Spain, Portugal and Greece.
“There is a developing view that the ECB is behind the curve and we are seeing investors demand high-quality government bonds and it’s causing a lot of pain for people who thought yields would not continue falling,” said John Brady, managing director at RJ O’Brien. “Macro hedge funds are being stopped out as they did not expect the 10-year yield would fall below 2.50 per cent.”
The euro touched an 11-week low as the prospect of ECB easing increased, while the weak data knocked European and US equities.
“We believe that today’s weak outcome is another argument for further ECB easing at the June meeting,” said Apolline Menut, economist at Barclays. “In our view, a cut in all official rates is the most likely action at the June meeting, although we do not think this would be enough to weaken the euro further.”
After climbing into record territory this week, the S&P 500 closed 0.9 per cent lower, the same fall as the FTSE Eurofirst index.
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