March 7, 2018 / 8:29 AM / 15 days ago

Euro zone yields dip on US tariffs threat to ECB policy

* Trump adviser resignation could increase trade war threat

* ECB may rethink policy as tariff threat looms

* Euro zone yields lower 1-3 bps across the board

* Euro zone periphery govt bond yields

By Abhinav Ramnarayan

LONDON, March 7 (Reuters) - Euro zone government bond yields dropped on Wednesday on worries that United States tariffs on European goods could impede the European Central Bank’s plan to withdraw post-crisis stimulus, analysts said.

U.S. President Donald Trump’s top economic adviser, Gary Cohn, resigned on Tuesday in a move that could ramp up protectionist measures that risk igniting a global trade war.

This fuelled demand for safe-haven government bonds, and U.S. Treasury yields dipped overnight.

In Europe, demand for government bonds stepped up at Wednesday’s opening, one day ahead of a key meeting at which policymakers are expected to provide more detail on when the ECB will wind up its massive stimulus scheme.

But analysts said the message could be complicated by events in the United States.

“The fear in the market is that a global trade war could influence economic growth in Europe, and if growth is lower there is more danger of a recession and the ECB might be forced to be slower in reducing accommodation,” said DZ Bank analyst Pascal Segesser.

Commerzbank analysts also flagged this possibility in a note, saying the Cohn resignation increases chances for a more dovish message from the ECB after Thursday’s meeting.

As a consequence, euro zone government bond yields were lower 1-3 basis points across the board. The yield on Germany’s 10-year government bond, the benchmark for the region, was lower by 1 basis point at 0.66 percent.

France’s 10-year borrowing cost dipped 2 bps to 0.91 percent, well off February’s high of 1.06 percent.

Though final 2017 euro zone GDP numbers are due at 1000 GMT, the focus will shift back to the United States later on Wednesday, with private employment data from the ADP Research Institute due to be released at 1315 GMT.

The U.S. Federal Reserve’s Lael Brainard said that she has greater confidence that gradual rate hikes are needed.


Meanwhile, the Italy-Germany 10-year government bond yield spread tightened further to 139 bps and was approaching pre-election levels on Tuesday, as investors appeared to put this weekend’s vote behind them.

Silvio Berlusconi said in a newspaper interview on Wednesday he will support the leader of Italy’s eurosceptic party the League in attempts to form a government.

Yet the effect on spreads and on the euro was minimal; the single currency was actually higher at $1.2415.

“Spreads more broadly may have some more breathing room as the actual government formation discussions in Italy do not look set to kick off for real until later this month when parliament convenes for the first time,” ING strategists said in a note. (Reporting by Abhinav Ramnarayan Editing by Catherine Evans)

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