European bond yields, shares slip as ECB's Draghi signals downside growth risk

LONDON: Euro zone bond yields tumbled on Thursday and share prices erased earlier gains after ECB President Mario Draghi said economic risks had moved to the downside, and that near-term growth momentum would likely be weaker than anticipated.

The euro however rose off session lows as Draghi played down deploying a fresh round of cheap loans (TLTRO) to banks.

Germany's 10-year government bond yield fell to two-week lows at 0.184 percent, while French yields touched their lowest since June 2017 just after Draghi started speaking, but pulled back as his subsequent comments suggested the central bank was not about to take any immediate action.

The euro traded flat on the day at $1.13790 by 1500 GMT , having bounced off session lows of $1.13065. Against the pound too it recovered off earlier lows of 86.830 pence to trade around 87.18 pence.

"This is classic 'buy the rumour sell the fact' - the euro was under pressure ahead of the meeting with the market expecting something dovish," Rabobank FX strategist Jane Foley said.

"And while they got it with Draghi saying there are downside risks to growth, he also wasn't overtly dovish - he said we still have upward pressure on wages and that they talked about TLTROs but decided not to act on. Clearly no panic at the ECB."

Weak data earlier on Thursday showing continued deterioration in business activity across the euro bloc had fuelled speculation the ECB may be getting closer to another round of TLTROs.

While Draghi acknowledged the programme had been discussed, he said no decision had been reached.

Disappointment at the lack of detail on TLTROs weighed on southern Europe's bond markets in particular.

Italy's two-year bond yield was down 5 basis points at 0.31 percent, but well off the day's low's of 0.28 percent.

The ECB left its policy stance unchanged as expected, keeping a rate hike later this year on the table even as the euro zone economy suffers its biggest slowdown in half a decade.

"While there was no TLTRO announcement now, I didn't expect one anyway," said Arne Petimezas, analyst at AFS Group in Amsterdam. "And it doesn't matter, because the ECB has no choice but to do new ones, so they will come anyway, but markets will have to wait."

The comments kept a pan-European equity index trading around flat by 1445 GMT while banking stocks fell  more than 0.7 percent.

Draghi's downbeat assessment of the economy -- ING Bank analysts noted it was the first time since April 2017 that he had used the phrase "downside risks" on growth -- forced money markets to further trim expectations of a rate rise in 2019.

Markets now price a 38 percent chance of a rate hike this year as opposed to 45 percent earlier in the day.

Draghi, who had last year guided markets to expect a rate rise towards end-2019, said money markets, which are pricing the first rate rise only in 2020, had understood the ECB's reaction function.