World Economy

Eurozone Sentiment Dips

Eurozone Sentiment DipsEurozone Sentiment Dips

Southern Europe’s borrowing costs fell sharply for a third straight day and French bond yields hit record lows on Wednesday, as expectations grow that central banks will act to shore up confidence and the economy after Britain’s Brexit vote.

Spanish government bond yields, down almost 40 basis points so far this week, tumbled to their lowest levels in more than a year and Portuguese yields slid 11 bps to a one-month low, Reuters reported.

Yields on Germany’s top-rated bonds were a tad higher but within range of last week’s record lows as the uncertainty triggered by British voters’ decision to leave the European Union kept safe-haven debt in demand.

France’s 10-year bond yield hit a record low of 0.23%, while Dutch yields also touched a new low of 0.114%.

“In the weeks ahead investors are likely to shift between stimulus hopes and concerns about the fallout from Brexit,” said Martin Van Vliet, senior rates strategist at ING.

European Central Bank President Mario Draghi said on Tuesday that Britain’s decision to leave the European Union could reduce eurozone growth by a cumulative 0.3 to 0.5% compared to previous estimates over the next three years.

Investors now fully price in a rate cut in Britain and the eurozone by the end of this year.

  Less Optimism

+Eurozone economic sentiment dipped in June as industry gains were outweighed by less optimism among service firms and consumers, while inflation expectations rose, data from the European Commission showed on Wednesday.

Economic sentiment in the 19 countries sharing the euro fell to 104.4 this month from a downwardly revised 104.6 in May, against market consensus of a 104.7 reading.

All the data were collected before the results of the British EU referendum were known, the European Commission said.

The decline was due to decreased optimism among consumers and managers in services, retail and construction. Confidence in the industrial sector improved slightly.

Separately, the commission’s business climate index, which points to the phase of the business cycle, dipped to 0.22 in June from 0.26 in May.

Consumer expectations of price trends over the next 12 months rose for a third straight month to 5.1 in June from 3.4 in May, although they remained well below the long-term average of 19.2.

Companies’ expectations of developments in producer prices also increased for a fourth consecutive month to 0.7 from -0.7 in May, the first positive reading since October 2014 and the highest level since January 2014, although still below the long-term average of 4.8.

  Effects on US economy

The Brexit vote could also be a drag on the US economy, Federal Reserve governor Jerome Powell said on Tuesday—a comment that reinforced market expectations the Fed will no longer be able to hike rates this year and may even be forced to cut if the domestic economy falters.

Japan’s Prime Minister Shinzo Abe meanwhile on Wednesday pledged to use all available policy tools to keep the wheels of the economy turning.

Analysts said investors were also moving into lower-rated southern European debt in an environment where German bonds out to a maturity of 10 years have negative yields—meaning investors pay to lend to Germany.

They warned that the outlook for southern European markets remained uncertain given concerns about economic growth following Brexit.

“Things have calmed down a little after the Brexit outcome but still there is huge risk in the market given that the forecasts for economic growth figures not only in the UK but across Europe are being reversed downwards,” said DZ Bank strategist Daniel Lenz.

“This will have an effect on the EU, including peripheral countries, and weighs very much on the negative side.”

Last week’s referendum has wiped out a record $3 trillion off the value of global shares and sent sterling sliding to its lowest level in 31 years before recovering slightly.