Mixed reaction to weak euro zone inflation data

Mon Mar 31, 2014 6:57am EDT
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By Jamie McGeever

LONDON (Reuters) - European stocks trimmed gains on Monday while government bond yields and the euro rose after weak euro zone inflation data cemented expectations the European Central Bank will ease policy but also prompted investors to take profit on these bets.

Inflation across the 18-nation bloc fell to 0.5 percent in March, according to preliminary estimates. That is the lowest level in over four years and likely to support expectations the ECB could act to counter the deflationary threat as early as this week when it holds its next policy meeting.

But the low number was not a major shock. So after stocks briefly popped higher and the euro slipped in anticipation the ECB will soon act, traders shifted their focus to the looming end of the first quarter and reduced their positions.

"It is only a matter of time before the (ECB's) Governing Council will conclude that it needs to take further policy action to prevent a worsening of the medium-term inflation outlook," wrote Capital Economics in a note to clients.

"Action later this week cannot be ruled out," it said.

As the second quarter looms, investors are drawing comfort from expectations of further stimulus from the ECB and Chinese authorities, which they hope will mitigate the gradual withdrawal of stimulus from the U.S. Federal Reserve.

At 1015 GMT the FTSE EuroFirst 300 index of leading shares was up 0.1 percent at 1,333 points .FTEU3. Britain's FTSE 100 .FTSE was up 0.2 percent at 6,627 points, Germany's DAX .GDAXI was down 0.1 percent at 9,574 points and France's CAC 40 .FCHI was down a similar amount at 4,405 points.

U.S. stock futures pointed to gains of between a third and half of one percent across the three major U.S. indices.   Continued...

The euro sign landmark is seen at the headquarters (R) of the European Central Bank (ECB) in Frankfurt September 2, 2013. REUTERS/Kai Pfaffenbach