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Euro stocks erase gains as ECB hopes dim

Friday, August 29 15:13:29

European shares were poised to end a positive August on a softer note today after euro zone inflation data slightly cooled market speculation about fresh monetary stimulus by the European Central bank.

Euro zone inflation dropped as expected to a fresh five year low in August, data showed on Friday, but it was not likely to force the ECB into immediate policy intervention next week.

Dovish comments by ECB's President Mario Draghi last week had fueled market bets that the central bank was preparing to pump more into the system, possibly via purchases of government or corporate bonds, a measure known as quantitative easing (QE).

"I think what people realize is that for the ECB to engage in public-sector QE...the ECB has to see the whites of the eyes of deflation," Wouter Sturkenboom, investment strategist at Russell Investments, said.

"As the numbers come through, those condition are not being met so...they have to reassess their case."

Sturkenboom still expected the ECB to be ready to act if needed but argued the central bank would first wait to see the impact of its new long-term loan program, which is due to start in September and aims to give banks an incentive to lend more to the real economy.

At 1353 GMT, the FTSEurofirst 300 index of top European shares was down 0.1 percent at 1,367.93 points, having traded as high as 1,376.58 points earlier. The euro zone blue-chip Euro STOXX 50 was down 0.2 percent.

The indexes turned negative after a subdued start for shares in the United States, where data showed U.S. consumer spending unexpectedly fell in July and savings rose to their highest level in more than 1-1/2 years, indicating that households remain cautious despite an acceleration in economic growth. ,

Both the FTSEurofirst and the Euro STOXX 50 were still on track for their first monthly gain since May thanks to a bounce over the past two weeks.

Speculation about the ECB's next move had temporarily diverted the market's focus from events in eastern Ukraine, where a total of 2,593 people have been killed in fighting since it erupted in mid-April, according to a senior U.N. human rights official.

Yet the Ukrainian crisis remained a major headwind for European equities. Ukraine's president said on Thursday Russian troops had entered his country in support of pro-Moscow rebels who captured a key coastal town.

U.S. President Barack Obama spoke by phone on Thursday with German Chancellor Angela Merkel. The White House said the two agreed the United States and Europe should consider more sanctions against Moscow. (Reuters)

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