Hopes of fresh ECB action help European stocks extend rally

Fri Mar 28, 2014 12:15pm EDT

* FTSEurofirst 300 up 0.7 pct, Italy's MIB up 1.4 pct

* Expectation of further ECB action boosts sentiment

* Europe equities snap streak of 38 weeks of inflows

By Blaise Robinson

PARIS, March 28 (Reuters) - European stocks rallied on Friday, with Milan's benchmark index hitting a near three-year high, lifted by mounting expectations that the European Central Bank will ease policy next week to support the region's fragile economic recovery.

Speculation that China could step in to stimulate its economy also helped lift sentiment, boosting shares of metal and mining stocks, with Anglo American up 2.6 percent and Glencore Xstrata up 2.4 percent.

At 1535 GMT, the FTSEurofirst 300 index of top European shares was up 0.7 percent at 1,331.02 points, while Milan's FTSE MIB index was up 1.4 percent, hitting a level not seen since May 2011.

Banco Popolare rose 6.1 percent and was the biggest gainer on the index, the day after the lender set the price for a planned capital increase, while Telecom Italia was up 2.2 percent.

The MIB is up 13 percent so far this year, strongly outpacing other big European markets such as the UK's FTSE 100 , down 2 percent in 2014, and Germany's DAX, flat on the year, as well as Wall Street's S&P 500, up 0.8 percent.

"What's behind the recent euro zone peripheral stocks' outperformance is the expectation that the European Central Bank will soon unveil new measures, negative interest rates, or quantitative easing, there are many tools available," said David Thebault, head of quantitative sales trading at Global Equities.

"Expectations are quite high, so Draghi needs to deliver next week otherwise we'll have a correction on the market. But following the recent comments from ECB officials, the bank should announce something."

CATALYST

A surprise fall in inflation for Spain and Germany on Friday raised pressure on the ECB to take additional measures to ward off the threat of deflation. Annual inflation in the euro zone has been in what ECB President Mario Draghi has called the "danger zone" below 1 percent for five months.

ECB Governing Council member Jens Weidmann said earlier this week that negative interest rates were an option, and that buying loans and other assets from banks to support the bloc was not out of the question. The comments surprised investors, given the long-held resistance to quantitative easing of the powerful German central bank headed by Weidmann.

ECB President Mario Draghi also said earlier this week that the central bank stood ready to act if inflation slipped lower than it expected.

Despite the recent strong gains in European stocks, investment flows coming into the region stalled this week.

"We're seeing more and more investors moving to the sidelines, waiting for a big positive catalyst, such as new measures from the ECB, or a resolution to the Ukrainian crisis," said Guillaume Dumans, co-head of research firm 2Bremans.

After a brisk start to the year, investment flows to the region turned negative recently, data from Thomson Reuters Lipper showed, with some investors booking profits ahead of the end of the quarter, rattled by simmering tensions between the West and Russia over Ukraine as well as concerns over the pace of growth in China.

A Lipper poll of 114 U.S.-domiciled funds invested in European stocks, which include exchange-traded funds' (ETFs) holdings, showed redemptions of $355 million in the seven day period ending March 26, snapping a streak of 38 consecutive weeks of inflows.

Europe bourses in 2014: link.reuters.com/pap87v

Asset performance in 2014: link.reuters.com/gap87v

Today's European research round-up

(Editing by Pravin Char)