Europe markets 'ahead of themselves' on QE rally

European markets rallied on Thursday morning on expectations of more aggressive stimulus measures in the euro zone, but some analysts warned that investors could be "getting ahead of themselves."

Markets surged on Wednesday on hopes that disappointing data from the euro zone could prompt the European Central Bank (ECB) to implement a U.S. Federal-Reserve-style bond-buying program, in an effort to stimulate the economy.

A bull statue stands outside the Frankfurt Stock Exchange in Germany.
Martin Leissl | Bloomberg | Getty Images
A bull statue stands outside the Frankfurt Stock Exchange in Germany.

The region's inflation rate fell into negative territory for the first time since 2009, Eurostat data showed on Wednesday. Prices fell 0.2 percent year-on-year in December, driven lower by oil prices, which have fallen over 50 percent since June 2014.

Read MoreEuro zone slips into deflation, pressure on ECB

All eyes are now on the ECB, which could announce a bond-buying – or quantitative easing (QE) program – when it meets on January 22.

Markets 'ahead of themselves'

Not so fast, market analysts and economists warned, arguing that markets were extrapolating the wrong conclusions from the data.

"The big concern is that the market may well be getting ahead of itself in its expectations," Michael Hewson, chief market analyst at CMC Markets U.K., said in a note Thursday.

"Given that core prices (that exclude energy, food, alcohol and tobacco), actually rose to 0.8 percent, reinforcing the effect that the volatile nature of energy prices is having on headline prices."

Despite the headline deflationary figure grabbing markets' attention, a senior economist at Schroders, Azad Zangana, said: "There are few signs that the domestic European economy is becoming more deflationary."

"Consumer confidence remains reasonably high, while inflation expectations have not fallen to significantly low levels," he said in a note. "Also, retail sales have held up well, suggesting households are not delaying spending in order to take advantage of falling prices -- the behavioral changes associated with the start of a prolonged deflationary period, like that experienced in Japan."

Read MoreEuro zone deflation: Why it matters

No 'silver bullet' - yet

Given the euro zone's gloomy economic outlook – growth was a meager 0.2 percent in the third quarter – many are calling on the ECB to introduce QE. But there is strong resistance from countries like Germany, which is reluctant to take on the debt of struggling euro zone countries like Greece.

Germany has also argued that government bond purchases would be outside the ECB's remit, which is only to maintain price stability (unlike the Fed which can manipulate monetary policy in an effort to boost employment).

Analysts like Hewson believe the central bank may not push the QE button just yet, however, and warned that markets could be bitterly disappointed by the outcome of the next ECB meeting.

"Given the rise in expectations of investors, the ECB had better not disappoint later this month, or it could get rather volatile," he added. "(But) given the politics at play and the propensity of the ECB to over promise and under deliver, disappointment seems the most likely outcome given the likely inability of the ECB to form a consensus."

Other analysts agreed. Schroders' Zangana said the bank could wait until March before it starts to purchase sovereign bonds, and the Centre for Economics and Business Research's (CEBR) economist Danae Kyriakopoulou said that although the inflation data "undoubtedly raises the pressure on the ECB to act…Given that the ECB has for so long resisted QE, there may be little hope in expecting action now."

Tale of two halves

Although ECB President Mario Draghi has reiterated several times that the central bank is "willing to do whatever it takes" to protect the euro zone from collapse, a full-scale QE program would be a last resort.

Indeed, the ECB has launched a slew of other measures in an effort to calm market nerves over the region's future in the last few years – from the promise of Outright Monetary Transactions (OMT) to the latest move, the purchase of asset-backed securities and covered bonds.

Read MoreEuropean Central Bank is 'out of bullets': Analyst

As well as anaemic growth, the euro zone is also battling dangerously high unemployment in some countries like Greece and Italy, where around half of young people do not have a job.

In Germany, however, joblessness is not an issue; its unemployment rate fell to a record low, according to data published Wednesday.

It highlights the ECB's problem of administering stimulus programs in a two-speed Europe, and could be another reason that that the central holds fire – for now.

- By CNBC's Holly Ellyatt, follow her on Twitter @HollyEllyatt. Follow us on Twitter: @CNBCWorld