European stocks and the euro drop after ECB rate cut
European stock markets posted mixed results yesterday and the euro plummeted after the European Central Bank cut its main interest rate to a record low but did not announce new stimulus measures.
The ECB cut its main refinancing rate to 0.75 per cent in a widely anticipated move.
In London, the Bank of England maintained its main rate at a record low of 0.50 per cent and announced £50 billion (€62 billion) in additional stimulus to boost Britain’s recession-hit economy. That brought the total amount of stimulus provided by the BoE so far to £375 billion.
London’s benchmark FTSE 100 ended a day of choppy trading with a slight gain of 0.14 per cent at 5,692.63 points.
Frankfurt’s DAX 30 index turned lower, meanwhile, to post a loss of 0.45 per cent at 6,535.56 points and in Paris the CAC 40 was down by 1.17 per cent at 3,229.36.
Madrid’s Ibex 35 index plummeted by 2.99 per cent to 6,954.20 points and in Milan the FTSE Mib fell by 2.03 per cent to 14,089 points.
The European single currency plunged to $1.2382 from $1.2527 late Thursday in New York.
In midday stock trading in New York, the Dow Jones Industrial Average fell 0.19 per cent to 12,918.88 points.
The broader S&P 500-stock index lost 0.31 per cent to 1,369.78, while the tech-rich Nasdaq was 0.11 per cent higher at 2,979.34.
In China, a second interest rate cut in less than a month surprised markets and analysts suggested that the world’s second-biggest economy might be slowing more quickly than expected.
With the anticipated ECB rate cut and BoE stimulus boost already priced in, markets had expected more from Frankfurt and London and were left wanting. “Investors had built their hopes up too high ahead of today’s central bank meetings and there are growing concerns that the apparent consensus reached at last week’s EU summit is not as game-changing as first thought,” noted GFT analyst David Morrison.
Eurozone leaders agreed last week to allow emergency rescue funds to recapitalise commercial banks directly, taking pressure off the national accounts in their host countries.
With the exception of also establishing a eurozone banking supervisory body and putting official creditors on a par with private investors, other measures were relatively minor or remained a question of interpretation.
They notably included the conditions under which the funds could buy sovereign bonds to help out heavily-indebted countries like Greece and Italy.
Investors had, therefore, looked to the ECB for some additional support. But ECB president Mario Draghi told a press conference after the rate cut was announced that he and eurozone central bank governors “didn’t discuss any other non-standard measures.”
He referred to previous massive cash injections into the banking system and a dormant ECB programme of buying sovereign bonds issued by heavily indebted countries.
The interest rate, or yield, on Italian 10-year bonds promptly jumped back above six per cent, a level that is considered unsustainable over the long term.
Spanish 10-year bonds traded at 6.773 per cent and Spain’s risk premium, which measures the extra yield demanded in comparison with safe-haven German 10-year bonds, remained high at 5.03 percentage points.
And in Greece, the new Finance Minister Yannis Stournaras warned that the country’s recovery plan was “off-track” and said Greece faced “difficult years ahead” as sensitive talks with EU-IMF creditors began.