Yields fall ahead of first major post-Brexit euro area data

LONDON: Euro zone bond yields fell on Wednesday ahead of the clearest measure yet of how Britain's shock vote to leave EU is likely to spill over into the bloc's economy at large.

The initial reading of euro zone consumer confidence for July is due at 1400 GMT after a survey on Tuesday indicated the mood among investors in the bloc's biggest economy, Germany, had plunged this month due to post-Brexit uncertainty.

Further signs that the outlook for the euro zone economy is dimming will only raise expectations that the European Central Bank, which meets on Thursday, will be gearing up another round of monetary easing.

"It remains unclear how large a hit the European economies will be taking following the Brexit vote -- and that uncertainty is likely to linger," said RBC's chief European macro strategist, Peter Schaffrik.

The German 10-year bond yield -- the bloc's benchmark -- fell 1 basis point to minus 0.10 percent, while all other euro zone equivalents fell by a similar amount.

Economists polled by Reuters expect a slight deterioration in the EU commission's consumer confidence indicator to minus 8 from minus 7.3 in June.

Yet the dire reading from Germany's ZEW sentiment index on Tuesday suggests even this may be optimistic. The ZEW fell from plus 19.2 to minus 6.8, the lowest since 2012 and far worse that any one of 40 economists polls by Reuters had foreseen.

Markit's June euro zone purchasing managers' index, released on July 5, indicated that business growth was holding steady -- but it was largely conducted before Britain's vote on June 23.

There was also a survey published in early July by the private Frankfurt-based research group Sentix, which showed a steep fall in euro zone sentiment, although that survey is heavily skewed towards German investors.

Citing uncertainty over Britain's looming exit from the EU, the International Monetary Fund (IMF) cut its global growth forecasts for the next two years on Tuesday. It lifted its euro zone forecast slightly for 2016, but cut its 2017 outlook by 0.2 percentage point to 1.4 percent.

"The UK referendum outcome has significantly changed the near-term outlook for Europe," Barclays said in a note after marking down its 2017 euro zone growth forecast sharply to just 0.6 percent.

Also on Wednesday, Germany sells a new five-year bond, which could set a new record low yield in the wake of a debt rally since the Brexit vote.