European stocks rebound amid stimulus hopes

London - Europe's main stock markets rallied on Wednesday as falling eurozone inflation stoked hopes of quantitative easing stimulus from the European Central Bank, dealers said.

However, at the same time, the data also sent the European single currency plunging to a fresh nine-year low at $1.1808.

London's benchmark FTSE 100 index rallied 1.21% to stand at 6 443.59 points in afternoon trade.

Frankfurt's DAX 30 won 1.07% to 9 571.20 points and the CAC 40 in Paris rose 1.11% to 4 128.74.

Eurozone consumer prices fell 0.2% in December, entering negative territory for the first time since the financial crisis in October 2009 and raising fears of deflation, EU data showed.

The drop, brought on by plummeting oil prices, heaps pressure on the ECB to take bold action to stimulate price rises in the 19-nation currency zone.

'Overwhelming' pressure on ECB 

"With eurozone figures for December registering a year-on-year fall for the first time in five years, the DAX is riding high on the expectation that the pressure on the ECB to introduce significant QE measures will now be overwhelming," ETX Capital analyst Daniel Sugarman told AFP.

However, he sounded a note of caution over the possible move.

Sugarman added: "Markets are up... not because of any certainty that QE will work, but because there's a strong sense that the ECB should be pursuing all measures to combat the apparently resurgent crisis, and it seems more likely that the central bank will now be forced to do so."

"The lack of effectiveness of more conventional measures - such as reducing interest rates - and the apparent success of QE in strengthening the US economy over the last few years have strengthened the case for QE in the eurozone."

It is the first concrete sign of much-feared deflation, or long-term falling prices, in the eurozone. Deflation is officially defined by prices falling over a longer period.

"Expectations have risen that the ECB will announce a full-scale QE soon, possibly as early as the January 22 meeting," said Forex.com analyst Fawad Razaqzada.

"This is undoubtedly helping to support the markets, even as fears over Greece linger."

Equity market gains were however capped as oil prices plunged to fresh 5.5-year lows on Wednesday, with the price of Brent crude dipping below $50 per barrel briefly, weighed down by plentiful crude supplies, demand worries and the strong dollar.

In foreign exchange activity, the European single currency dived to $1.1808 - the lowest level since January 2, 2006.

The euro had already touched a nine-year nadir in Asian trading hours on Wednesday on lingering worries of a Greek exit from the eurozone.

Euro-dollar parity? 

"There's nothing standing in the way of the nose-diving euro, now that the eurozone has fallen into deflation," Razaqzada told AFP.

"It could reach $1.15 against the dollar soon, but could even hit parity later in the year."

He added: "QE is bad for the euro because it will effectively push interest rates below zero. Yield-seeking investors are thus expected to swap their euros for currencies where the central bank is in a hawkish mode, such as the US and New Zealand dollars."

Elsewhere on Wednesday, Greece's borrowing rate soared above the symbolic level of 10% on Wednesday, as investors shunned the bond over fears that the country could leave the eurozone if an anti-austerity candidate wins January 25 elections.

Shortly after 10:30 GMT, Greek 10-year bonds were fetching yields of 10.070% on the secondary market, up from 9.746% on Tuesday.

Short-term borrowing rates also rose slightly, with Greece paying 2.30% in new six-month bond issues on Wednesday compared with 2.15% in December.

The main stock market in Athens was also trading down more than 1.0%.

Wall Street opened higher, benefitting also from positive US trade and jobs data.

The Dow Jones Industrial Average rose 0.76% in the first five minutes of trading to 17 504.44 points.

The broad-based S&P 500 gained 0.69% to 2 016.48, while the tech-rich Nasdaq Composite Index climbed 0.61% to 17 504.44.

Gulf stocks mostly rebounded despite oil prices sliding further as investors snapped up bargains. Dubai rose 4.4%, Abu Dhabi added 2.4%, the Saudi Tadawul All-Shares Index rose 0.94%, Qatar climbed 0.73% and Kuwait added 0.4%.

Oman dropped 0.41% and Bahrain 0.09%.

Shares in Asia staged a tepid recovery Wednesday.

Tokyo and Seoul were flat, while Shanghai added 0.67% and Hong Kong rose 0.83%. Sydney bucked the trend, sliding 0.21%.