July 27, 2012 / 11:00 AM / in 5 years

Europe's risk assets bolstered by ECB action hopes

A red London bus passes the Stock Exchange in London February 9, 2011. REUTERS/Luke MacGregor

LONDON (Reuters) - European equities rose and peripheral bond yields fell on Friday on growing expectations of ECB action to bring down Spanish and Italian borrowing costs, but concerns about possible German opposition to such a move kept risk appetite in check.

Euro zone governments and the European Central Bank are preparing to intervene on financial markets, French daily Le Monde reported, citing unnamed sources.

The report came a day after ECB President Mario Draghi boosted risk assets across the globe with his pledge do whatever it takes within the bank’s mandate to defend the single currency.

“Now all of a sudden everybody thinks he (Draghi) is going to start printing. He has backed himself into a corner, if he doesn’t come up with anything then he could be in trouble,” said Ioan Smith, strategist at Knight Capital.

“You wouldn’t want to be short (equities) at the moment given the market’s reaction, the market is very skittish.”

Expectations for the U.S. Federal Reserve to potentially open the door for a third round of quantitative easing at a meeting next week - following a run of weak data - also supported appetite for risk assets.

The FTSEurofirst 300 .FTEU3 was up 0.3 percent at 1,045.89 points at 6:27 a.m. EDT (1027 GMT). Copper prices rose 1 percent and oil also edged higher.

The euro traded around $1.2267, in sight of a two-week high hit on the back of Draghi’s comments on Thursday.

Ten-year Italian government bond yields reversed an earlier rise and were down 3 basis points on the day at 6.0 percent, helping to narrow their spread over equivalent German Bunds to 466 basis points.

However, risk appetite was somewhat tempered after Germany’s Bundesbank said it viewed “in a critical fashion” the dormant Securities Market Programme (SMP) under which the ECB had bought bonds issued by weaker euro zone governments on the secondary market. The SMP was seen by analysts as one possible tool to be used this time.

The report weighed on the euro and briefly sent equities into the red. Analysts said the onus was now on policymakers to follow words with actions, and the market had set the bar high.

“There remains a fair degree of skepticism among investors about whether and how they will move,” Steven Englander, strategist at Citi, said in a note.

“If the ECB meeting comes and goes with nothing done - at least via announcement of concrete future action - we will see the euro sold, very likely to new lows. The reason is that the failure would reinforce the view of a dysfunctional policy process. So, no move, or an obviously token move would be very poorly received.”

The chances for any action from the Fed, meanwhile, may be affected by the strength of U.S. second quarter gross domestic product (GDP) data due at 1230.

Reporting By Toni Vorobyova; Editing by Peter Graff

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