Euro Renaissance Shines as Confidence Returns
Greek borrowing costs dropped to the lowest since 2010, Portugal sold bonds for a second straight month and European equities rose for a fifth day as confidence in the 18-nation euro area returns.
European stocks were boosted by a Goldman Sachs Group Inc. forecast for higher car sales in western Europe. The euro has appreciated 13 percent against the dollar from its 2012 low and is more than 14 U.S. cents above its lifetime average. Portugal, nurtured toward financial recovery with the backing of its European neighbors, raised funding from debt markets for a second straight month. The country didn’t sell bonds for almost two years after getting a bailout in 2011.
Just three years ago, Greece and Ireland also required bailouts, while economists and investors including Pacific Investment Management Co. Chief Executive Officer Mohamed El-Erian and Roubini Global Economics LLC co-founder Nouriel Roubini predicted the currency bloc would splinter. While Greek yields are still 2.7 times those of U.S. Treasuries, euro-area manufacturing is growing at the fastest pace in more than 2 1/2 years and investor confidence is the strongest since 2011.
“We’ve seen evidence of investors returning to these markets after years of absence,” said Mark Dowding, a money manager at London-based BlueBay Asset Management LLP, which oversees $57.8 billion. “It’s really a good sign.”
The yield on Greek 10-year bonds fell for a seventh day, declining 21 basis points, or 0.21 percentage point, to 7.40 percent at the 5 p.m. close of trading in London. It declined to 7.38 percent, the lowest since May 2010 and down from more than 44 percent in March 2012. The 2 percent bond due in February 2023 rose 1.125, or 11.25 euros per 1,000-euro ($1,365) face amount, to 72.63.
Greece, which sparked the region’s debt crisis in late 2009, auctioned 1.3 billion euros of 91-day bills today at a yield of 3.60 percent. That’s the lowest for three-month securities since January 2010 and compares with a rate as high as 4.68 percent in December 2011.
Portugal, which is due to exit its bailout program in May, got 9.8 billion euros of bids for the February 2024 bonds it was selling, according to the nation’s debt management agency. It sold 3 billion euros of the securities, with 83 percent going to overseas investors, the agency said.
Portugal’s five-year note yield was little changed today at 3.98 percent after dropping to 3.77 percent on Jan. 15, the lowest level since August 2010. The yield surged to more than 23 percent in January 2012 as the debt crisis pushed the euro region to the brink of rupture.
Greece’s bonds returned 8.9 percent this year through yesterday, the best performer out of 34 sovereign debt markets, according to Bloomberg World Bond Indexes, followed by Portugal’s 6.7 percent. German bonds lagged their high-yielding peers, gaining 1.9 percent in the same period.
Greek stocks posted the second-biggest rally among 24 developed markets tracked by Bloomberg this year, after Denmark, with the ASE rallying 7.2 percent. Telecommunication company Intracom Holdings SA jumped 32 percent in 2014, and MLS Multimedia SA and Hellenic Telecommunications Organization SA climbed 26 percent each.
The Stoxx Europe 600 Index climbed 1.3 percent today. Its five-day gain is the longest streak this year. Goldman Sachs raised its car-sales growth forecasts for western Europe, citing improved consumer confidence in the region. PSA Peugeot Citroen (UG) advanced 4.5 percent after the New York-based bank recommended buying the stock. Michelin & Cie. gained 3.3 percent after maintaining its 2015 earnings projection.
Companies in the peripheral nations were among the top advancers this year. CaixaBank SA (CABK), Spain’s third-largest lender, rallied 28 percent and Banco Popular Espanol SA jumped 24 percent. Italian arms company Finmeccanica SpA advanced 23 percent, and Fiat SpA gained 22 percent. Greece’s Hellenic Telecommunications Organization SA climbed 26 percent.
Total mergers and acquisitions are “set to accelerate” this year because companies have “firepower” of $2.3 trillion and cash-financed acquisitions and buybacks can boost earnings per share, according to a Jan. 27 report by analysts at Credit Suisse Group AG. Takeovers in eastern and western Europe rose 9 percent to $972 billion last year from $894 billion in 2012, helped by favorable financing and equity markets, according to data compiled by Bloomberg News.
The extra yield investors demand to hold non-financial corporate bonds from Greece and other countries in Europe’s periphery instead of government debt narrowed five basis points this month to 144 basis points, according to Bank of America Merrill Lynch index data. That compares with an average spread of 182 basis points for the past year.
European Central Bank President Mario Draghi who declared he would do “whatever it takes” to protect the euro in July 2012, said last week that the recovery is beginning to show “more encouraging signs.”
“The demand side is getting stronger, not weaker,” he told reporters in Frankfurt. “As I have said many times, we’ve got to be extremely cautious with this recovery, because it’s still fragile and it’s still uneven and it really starts from low levels of activity. But, so far, it’s proceeding.”
Still, Draghi said policy makers are willing to act with more stimulus as soon as next month if needed. Inflation (ECCPEST) unexpectedly slowed to 0.7 percent in January, the level that triggered a surprise rate cut in November and less than half the ECB’s goal of just under 2 percent.
European markets are rallying in 2014 in an endorsement of the region’s return to growth, offering stability in the face of emerging-market volatility that led Argentina and Kazakhstan to devalue their currencies.
Growth in the 18-nation economy doubled to 0.2 percent in the fourth quarter, according to a Bloomberg News survey of economists. Eurostat, the European Union’s statistics office will publish data on Feb. 14.
The euro, which has averaged $1.2199 since Jan. 1, 1999, has strengthened 5.2 percent in the past year among a basket of 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. It was at $1.3652 today.
Italy’s 10-year yield fell to as low as 3.676 percent, matching the least since 2006.
“It’s part of an improved confidence story in the euro periphery market,” said Luca Jellinek, head of European rates strategy at Credit Agricole Corporate & Investment Bank. “Peripheral bonds are holding up well despite the recent emerging-market issues. Perhaps investors are looking beyond that.”