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Europe Markets

June 6, 2018, 12:42 p.m. EDT

European stocks wobble as ECB officials signal QE’s end is up for discussion

Italian stocks reverse gains

By Carla Mozee and Sara Sjolin, MarketWatch

Like other Italian bond yields, the 2-year has whipsawed in recent sessions.

European stocks ended a choppy day almost flat on Wednesday, as European Central Bank officials indicated policy makers will begin to focus on ending the central bank’s bond-buying program.

How markets are performing

The Stoxx Europe 600 Index (STOXX:XX:SXXP) ended 0.01 point lower at 386.88, after swinging between small gains and losses throughout the day.

FTSE MIB index (BORSA:IT:I945)  ended 0.3% higher at 21,807.59. Italian bond prices fell, pushing the country’s 2-year bond yield (XTUP:BX:TMBMKIT-02Y)  up by 41 basis points to 1.274%, according to Tradeweb. Yields rise when bond prices fall.

Germany’s DAX 30 index (XEX:DX:DAX)  ended 0.3% higher at 12,830.07, and France’s CAC 40 index (PAR:FR:PX1) slipped 0.1% to 5,457.56. The U.K.’s FTSE 100 (FTSE:UK:UKX)  rose 0.3% to 7,712.37.

The euro (XTUP:EURUSD) bought $1.1775. That was up from $1.1720 late Tuesday, when the shared currency advanced following a Bloomberg report that the ECB will use its June 14 policy meeting to discuss an exit from its quantitative-easing program .

What’s driving markets

That report was backed up by comments made Wednesday by two ECB officials, who indicated the central bank will start intense discussions about winding down its massive bond-buying program when policy makers meet next week in Riga, Latvia.

“Next week, the Governing Council will have to assess whether progress so far has been sufficient to warrant a gradual unwinding of our net purchases. In making its assessment, it will consider the underlying strength of the euro area economy and the pass-through to wage and price formations,” said ECB Chief Economist Peter Praet in prepared remarks for a speech in Berlin.

Meanwhile, ECB policy maker Jens Weidmann said market expectations for the central bank to end quantitative easing this year are plausible, according to media reports .

Analysts have said Italy, which is saddled with debt, may have a difficult time finding buyers of its bonds when the ECB eventually stops purchasing debt issued by the eurozone’s third-largest economy. Italy’s debt exceeds roughly 130% of the country’s gross domestic product.

Italian stocks and bond prices were in focus after Giuseppe Conte, Italy’s new prime minister, on Tuesday made his maiden policy speech. He told senators that Italy’s new antiestablishment coalition government wants to cut the country’s heavy debt load by fostering economic growth through welfare spending and cutting taxes.

The 5 Star Movement and League government won a confidence vote in Italy’s upper chamber of parliament on Tuesday. It now faces a similar vote Wednesday in the lower Chamber of Deputies, which is expected to approve the new administration.

Read: Here’s why Italy and financial markets are still headed for a showdown

Also check out: Buy the dip with Italy’s stocks? Why you may want to just say no

What strategists are saying

“To be honest, the next [ECB] meeting by necessity must be ‘live,’ since QE is only slated to continue to run until September, and therefore policy makers will have to use this opportunity to signal whether that is the end of it, or if they plan to extend QE for a little longer. Leaving the market in the dark until July by saying noting is not an option,” said Neil Wilson, chief market analyst at Markets.com, in a note.

“But this hawkish tilt does suggest that volatile Italian bond yields and softer economic data is not going to dissuade the ECB from walking the fine line towards the exit. Markets have pushed back interest-rate-rise expectations until later in 2019, and it is unclear whether QE exit in 2018 equates to a hike in 2019 or 2020,” Wilson said.

Stock movers

Smurfit Kappa Group PLC shares (DUB:IE:SK3) rose 0.2% after International Paper Co. (NYS:IP) abandoned its €8.9 billion bid for the Irish paper and packaging maker.

Shares of Electricite de France SA (PAR:FR:EDF)  fell 2.4% after the utility company said late Tuesday its EDF Nouveaux Business division will invest about 16 million euros ($17.7 million) in McPhy Energy to develop carbon-free hydrogen.

Serco Group PLC (LON:UK:SRP)  jumped 4.6% after the British outsourcing company said it has won a U.S. contract worth up to $900 million.

WH Smith PLC (LON:UK:SMWH) climbed 7.5% as the newspapers- and bookseller said its sales rose 4% in the 13 weeks to June 2, aided by growth at stores at transportation hubs such as train stations and airports.

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