Strong euro rattles eurozone markets

Eurozone share markets were set for their first monthly decline this year, while government bond yields continued rising on Thursday as investors exited markets that had prospered from aggressive monetary stimulus.

The selling across equities and bonds was accompanied by a rising euro, with the single currency climbing to $1.1250 against the dollar, heralding a test of the European Central Bank's recently launched quantitative easing programme.

The ECB's aggressive bond buying formally began in early March, and investors poured money into bonds and equities ahead of such action. That pulled a quarter of the government bond market into negative-yielding territory, while propelling share markets sharply higher against the backdrop of a weaker euro.

As April drew to a close on Thursday, investors have experienced a pronounced reversal in this market dynamic, with trading also influenced by sustained selling of the dollar in the wake of first quarter weakness for the US economy, seen delaying the start of tighter monetary policy by the Federal Reserve.

Traders said positions in popular trades linked to the ECB's QE had become crowded and were thus vulnerable to a sudden reversal. The ECB's €60bn-a-month bond-buying programme, which runs until September of next year, however, is seen capping the rise in bond yields and the single currency, bolstering the appeal of eurozone equities.

''With European borrowing costs among the world's very lowest with strong visibility that this would be maintained, the euro has become a key funding currency for leveraged risk or "carry" trades,'' said Citi Private Bank. ''Thus, the inverse correlation between the euro and risk assets has picked up, exposing some hedgers to an adverse near-term trend of both falling equities and a rising euro.''

The yield on the 10-year German Bund climbed another 6 basis points early on Thursday to 0.36 per cent, the highest level since ECB president Mario Draghi launched QE on March 9. Just two weeks ago the benchmark yield was flirting with zero per cent.

The bond sell-off has spread across the region, with French 10-year yields up 6.5bps to 0.628 per cent, while the Portuguese 10-year yield was 3.2 basis points higher at 2.13 per cent.

For equities, the sustained advance of the euro, since the single currency plumbed a 12-year low of $1.05 against the dollar last month, has proven problematic.

The FTSE Eurofirst 300 index, a broad measure of the region's share markets, was on course to drop 0.7 per cent this month, while Germany's Dax index was set for a slide of 4.5 per cent for April. Equities performed strongly during the first three months of the year, buoyed by record investment fund flows into the region.

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