Euro, German bond yields drop as surveys signal slowing growth

LONDON: The euro fell and the euro zone's government bond yields dropped on Wednesday after data showed business growth in the single currency area lost more momentum than expected, as trade tensions and worries over Italy overshadow the economy.

Euro zone business growth decelerated faster than expected as the final quarter of 2018 began, dragged down by waning orders that dented confidence, according to a purchasing managers survey released on Wednesday.

"The flash PMI for October gives a first glimpse on where the euro zone economy is heading. And the picture is not terrific," ING economist Peter Vanden Houte said in a note.

The data for the euro zone came after French and German business surveys released earlier also undershot expectations.

The euro extended its losses after the PMIs, falling half a percent to $1.1408, its lowest since Aug. 20. It was already down about 0.4 percent after the German and French surveys.

Germany's 10-year bond yield pulled back from the day's low of 0.39 percent and was last seen at 0.4 percent. Other high-grade euro zone bond yields also fell. France's 10-year yield hit a five-week low of 0.77 percent.

"It's true that the wider euro zone figures were below expectations, and the fact that the services sector is falling as well is a bit troublesome," said Natixis strategist Cyril Regnat.

"We keep having downside risks on growth ... I do feel the ECB will say the trade war issue and global downside risks are gently weighing on confidence, but their statement about growth should probably remain unchanged," Regnat said.

The European Central Bank is due to meet on Thursday, when its president, Mario Draghi, may hint at how concern over Italy's budget and equity market downturns will affect monetary policy.

"Besides risk sentiment, economic sentiment should be key today as both can influence the tone at tomorrow's ECB meeting," Commerzbank analysts said in a note to clients.

DIFFICULT PERIOD  Italian government bonds edged off the previous day's highs as a recovery in European stocks improved risk sentiment, though analysts warned the country has a difficult period coming up.

Italian yields fell as much as three basis points across the curve, down from the weekly highs they reached on Tuesday after the European Union rejected Italy's draft budget for 2019. ,

Analysts attribute the recovery to improved risk sentiment after a late rally in Wall Street and a corresponding boost for European shares Wednesday.

"The slight improvement in risk sentiment in equity markets could be feeding through, but it's going to be a tough week for the (Italy/Germany) spread," said ING strategist Martin Van Vliet. "Many investors are going to remain on the sidelines until the S&P decision."

S&P Global is due on Friday to review Italy's credit rating, currently at BBB with a stable outlook.

Analysts expect a downgrade, but are divided on whether this will only be lowering the outlook to "negative", or whether Italy's credit rating will be cut to BBB-, the lowest investment-grade rating.