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European Stocks Volatile Ahead Of German Vote

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European stocks were choppy on Thursday ahead of a crucial vote in Germany's parliament that is likely to approve new powers for the euro zone's rescue fund, but also underline deep political divisions that have hindered a quick solution to the region's crisis.

While German opposition votes will ensure the bill is likely to pass, a big rebellion within Chancellor Angela Merkel's own centre-right coalition could weaken her politically and complicate future policy-making at a time when European officials are under pressure to take decisive action.

The euro was higher against the dollar while German Bund futures eased, but overall sentiment remained edgy before the German vote at 0900 GMT.

"There is going to be a lot of volatility until the German vote," Joe Rundle, head of trading at ETX Capital, said. "It is widely expected to go through, the key is how much support Merkel gets in her own party."

"A weak German leader makes decision making very difficult, we need a unified front for the euro zone and any sign of weakness is going to jeopardize that."

The pan-European FTSEurofirst 300 index of top shares was down 0.4 per cent at 924.31 points after falling 1.2 per cent in the previous session. World stocks as measured by the MSCI index were marginally lower.

Portfolio rebalancing was also a factor in play, as money managers switched funds between markets and asset classes as the end of the quarter approached.

German Vote
The euro was up 0.6 per cent to around $1.3618, with dealers citing short-covering, while the dollar fell 0.2 per cent against a basket of currencies.

But the euro has lost nearly 7 per cent against the dollar this quarter, hammered by mounting worries over the prospect of Greek default and constant bickering by European policy-makers over the response to the crisis.

The failure to find a solution to the debt crisis has led to worries about a contagion engulfing bigger euro zone economies like Italy and Spain. Besides, it has triggered concerns about the health of the European banking system.

"Caught between fears of a further meltdown and hopes of policymakers in shining armour, markets are in danger of losing conviction and settling into the pattern of intra-day reversals that characterised trading in June and July," analysts at BNP Paribas said in a note.

Investors will also keep an eye on an Italian bond sale. Italy plans to sell between 5.5 billion and 9 billion euros in three-, five- and ten-year debt. While the sale is seen going smoothly, the country could pay a high premium to lure investors.

German Bund futures were flat, having opened lower. The Bund has sold-off for four consecutive sessions, coming under pressure on hopes that EU officials are planning more decisive action to rein in the crisis.

Still, the 10-year Bund yield looks on track for its biggest quarterly fall since late 2008. It has fallen just over 1 percentage point over the quarter.


(Reuters)