Europe Stocks Stay on Downward Course--Update

By Tommy Stubbington 

European stocks continued to fall Thursday ahead of the European Central Bank's monthly policy announcement.

The Stoxx Europe 600 was 0.8% lower midmorning, deepening Wednesday's 0.8% decline.

The move was sparked by weaker-than-expected economic data in the euro zone, including an unexpected contraction in Germany's manufacturing sector.

U.S. stocks stumbled Wednesday as the selloff spread to Wall Street, pulling the S&P 500 1.3% lower. Futures contracts indicated a further 0.2% loss for the index at Thursday's open. Changes in futures aren't necessarily reflected in market moves after the opening bell.

In Asia, Japan's Nikkei dropped 2.6% as a stronger yen exacerbated investors' concerns.

Investors are now looking to the ECB to shore up the euro zone's shaky recovery, although most think Thursday's policy meeting is too soon for fresh action given September's announcement of unexpected interest rate cuts and a program to buy private-sector debt.

"We expect the ECB to reveal details today of its new asset-purchase program, with no change to policy at this juncture," said Barclays analysts.

"However, under our scenario of still weak economic activity and inflation in the coming months, we expect the ECB to ease policy further and extend the scope of asset purchases to government bonds by the beginning of 2015," they said in a note to clients.

Expectations of further ECB measures have weighed on the euro in recent weeks, but the currency picked up slightly early Thursday amid a broader pullback for the U.S. dollar. The euro was 0.1% higher against the dollar at $1.2642, still not far above the two-year low hit earlier this week.

The euro's relatively mild reaction to Wednesday's disappointing data could point to further losses for the currency, according to a note to clients from Citigroup.

"This is healthy for the greater move lower. I think the market is underestimating [ECB President Mario] Draghi's ability to be dovish during this meeting," said a Citigroup currency trader in London.

Bonds in the euro zone have also been boosted by hopes of further ECB action. German 10-year yields traded at 0.90% Thursday, close to August's all-time low of 0.86%. Yields fall as prices rise.

In commodities markets, gold was steady at $1,215.50, and Brent crude oil was 1.3% lower at $92.97 a barrel.

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