European shares closed fractionally higher yesterday after a late bounce when European Central Bank sources told Reuters it was considering setting yield band targets.
The move will be part of a new bond-buying programme aimed at keeping the ECB’s strategy shielded and avoiding speculators trying to cash in, the sources said.
The report lifted the FTSEurofirst 300 index, which closed 0.1 per cent higher at 1,090.38 points, having traded as low as 1,083.10 points – 0.5 per cent lower – earlier in the session.
The index closed the week with a 1.8 per cent loss, snapping its longest winning streak in seven years, which had seen it gain 14.7 per cent in an 11-week rally.
“Markets are fairly priced so I think the recent drift down is healthy given that we had such a quick run,” said Colin Lunnon, a fund manager at Octopus.
“A lot of it was done on talk (of central bank intervention). Now we need to see a bit of walk. If we don’t get that we think the market could drift a bit further.”
Investors were looking for hints of new quantitative easing by the Federal Reserve when chairman Ben Bernanke takes part in a central bankers’ get-together at Jackson Hole on August 31.
The market will have to wait until September 6 to see whether ECB chairman Mario Draghi fulfils his pledge to “do whatever it takes” to save the euro.
Some are speculating he may put off any decision until after a German constitutional court rules on the legality of a new eurozone bailout mechanism on September 12.
Signalling uncertainty over these decisions and their potential to upset markets, the main gauge of European investor’s concerns, the Euro STOXX implied volatility index, or VSTOXX, rose one per cent yesterday.
The VSTOXX gauges option prices on the Euro STOXX 50 index and rises when investors snap up options to protect themselves against future share price swings.
Nick Xanders, who heads up European equity strategy for brokerage firm BTIG, said he thought volatility was still too low given the raft of central bank and political risk events slated for early September.
Given the low liquidity at the moment and the potential for spikes in the market in either direction, he believes realised volatility on Germany’s DAX could reach as high as 28 to 29, compared with 21.76 at the close on Friday.
Implied volatility on the index fell 0.3 per cent to 20.90, as the underlying index rose 0.3 per cent and was up around five per cent since Mr Draghi’s euro pledge on July 26.
Technical charts showed the Euro STOXX 50 index, which rose 0.2 per cent to 2,434.23 points on Friday, had fallen from “overbought” territory and may have enough momentum to stage a new bounce in the short term.
The euro zone blue chip index’s seven-day relative strength index closed at 51.6 yesterday, where 70 or more indicates “overbought” and 30 or less “oversold” conditions, having hit a seven-week peak of 76.6 on Tuesday.