The euro slumped to a nine-year low on Monday as investors bet that the prospect of inflation across the region turning negative and mounting political uncertainty in Greece will force the European Central Bank to unleash quantitative easing.
European shares were volatile, initially falling sharply before rebounding into positive territory within an hour of the open, as investors digested the implications of the weak euro and yet another hefty slide in oil to a 5-1/2 year low.
The euro fell to $1.18605 in early Asian trading on Monday, its weakest level since March 2006. In early European trade it was at $1.1964, down 0.3 per cent from late US trade on Friday.
Investors betting that the ECB will take the plunge and open up a bond-buying programme like the US, UK and Japanese central banks have done were emboldened by an interview ECB president Mario Draghi gave to German financial daily
He said the risk of the central bank not fulfilling its mandate of preserving price stability was higher now than half-a-year ago.
German state inflation figures for December due later on Monday before Wednesday’s euro zone estimate will be closely watched, and the downward pressure on the euro and government bond yields remains intense.
“Wednesday’s inflation data might determine the extent of the ECB’s action,’’ said Gary Jenkins, chief credit strategist at LNG Capital.
“Confucius said it was good to live in interesting times, although Mr Draghi might well be thinking ‘yes but not quite this interesting...’ as yet again Greece threatens to upset the European apple cart,’’ he said.
Economists forecast that euro zone consumer prices fell 0.1 per cent in December, the first decline since 2009. That should fan expectations the ECB will ease policy as soon as January 22, when it holds its first policy meeting of the year.
Greek politics were at the forefront of market thinking on Monday as the debate around the possibility of elections later this month resulting in the country leaving the euro zone picked up again.
The German government wants Greece to stay in the euro zone and there are no contingency plans to the contrary, Vice Chancellor Sigmar Gabriel had said on Sunday, responding to a media report that Berlin believes the currency union could cope without Greece.
European shares shrugged off an early selloff on Monday and the FTSEuroFirst 300 index of leading shares was last up 0.3 per cent at 1367 points, Britain’s FTSE up a quarter of a per cent at 65,63 points, France’s CAC40 up a fifth of a per cent at 4,262 points and Germany’s DAX up at 9,763 points.
Also underscoring the pressure on central banks to implement more stimulus, business surveys last week showed factories struggled to maintain growth across Europe and Asia.
Asian shares excluding Japan fell 0.8 per cent and Japan’s Nikkei dipped 0.25 percent.
Chinese shares, however, maintained their bullish tone since last year on hopes of more stimulus and added 3.6 percent to hit a fresh 5-1/2 year high.
US futures pointed to a steady open on Wall Street, with the main three indices all called to open broadly flat.
All this political and monetary policy uncertainty in Europe helped support major government bond markets. Euro zone yields were anchored near record lows with Germany’s 10-year yield at 0.5 per cent and US Treasury yields were steady at 2.12 per cent.
Greece was the outlier, its benchmark yields up 7 basis points to 9.33 per cent.
Oil prices, whose decline of more than 50 per cent from peaks in June last year rattled many energy producers, hit a 5-1/2-year low as global growth concerns fanned fears of a supply glut.
Brent crude futures dropped as low as $55.36 a barrel, also its lowest since May 2009, before edging back to $55.42, still down around a dollar.
“Oil demand is unlikely to be robust this year when we look at the state of economies in China, Japan and Europe,’’ said Yusuke Seta, a commodity sales manager at Newedge Japan.
The US dollar rose broadly, extending a recent bull run as markets wagered a relatively healthy US economy will lead the Federal Reserve to raise rates in the middle of this year.