Euro, bond yields rise on report ECB officials agree need for stimulus cut
ECB officials generally agreed that their next step would be to cut their bond purchases and discussed four options, said two sources with direct knowledge of the discussion.
Possibilities discussed by the ECB included - but are not limited to - cutting assets purchases to 40 billion euros a month or to 20 billion euros, with extension options including six months or nine months, said the sources, who asked not to be named.
The euro jumped around 20 ticks to $1.2069 <EUR=>, close to a 2 1/2-year high of $1.2092 it had hit earlier in the day, putting it on track for its biggest weekly gains since end-June.
"Policy withdrawal remains very much on the cards," said Kit Juckes, a strategist at Societe Generale in London.
Government bond yields rose, reversing earlier declines, as the report led bond investors to reassess their expectations for ECB tapering.
Germany's benchmark 10-year bond yield rose 2 basis points to 0.32 percent <DE10YT=TWEB>, having fallen to its lowest level since late June in early trade at 0.286 percent.
Southern European bond markets, cheered on Thursday by the ECB's cautious stance, bore the brunt of the selling.
Portugal's 10-year bond yield <PT10YT=TWEB>, rose 6 bps to 2.80 percent. It slid 13 bps on Thursday and hit 13-month lows early on Friday at 2.70 percent.
Italian and Spanish bond yields were up around 5 bps each <IT10YT=TWEB> <ES10YT=TWEB>.
"It's all a matter of expectations," said Mizuho rates strategist Antoine Bouvet.
"We think the market consensus is that the ECB reduces monthly purchases to 40 billion euros for six months, but the fact that 20 billion euros is on the table could be potentially scary for markets."
European stock markets, meanwhile, were whipped around by euro strength and gains in the banking sector.
The pan-European STOXX 600 <.STOXX> index initially dipped as the euro bounced, but erased losses as banking stocks extended their gains following the Reuters ECB report.
Euro zone banks <.SX7E>, which benefit from higher interest rates and yields, extended gains to hit a session high, up 1.3 percent.
Analysts say a strong euro could hurt bank earnings, although that could be mitigated by a boost to their capital adequacy ratio, while strength in the currency accompanied by strong economic growth is seen as positive.
Mediobanca Securities said on Friday that Spanish lenders BBVA (>> Banco Bilbao Vizcaya Argentaria) and Santander (>> Banco Santander) were among the most hit in terms of earnings but were also expected to get a good capital boost. Deutsche Bank (>> Deutsche Bank) was seen benefiting both on core capital and earnings.
"The euro zone economy is looking healthy to us," said Iain Stealey, senior fixed income manager at JPMorgan Asset Management. "Euro zone trend growth is supposed to be around 1 percent and we're growing double that at the moment."
(Additional reporting by Jemima Kelly, Kit Reese and Danilo Masoni; Editing by Larry King)
By Dhara Ranasinghe and Saikat Chatterjee