Stock markets rose and the euro sank yesterday after the European Central Bank unexpectedly cut ultra-low interest rates even further and said it would start buying loans and bonds next month to prop up the continent’s struggling economy.
Faced with signs of further deterioration in the eurozone’s economic prospects, the ECB cut major interest rates that were already at record lows by another 10 basis points, putting its deposit rate further into negative territory.
The eurozone economy flat-lined in the second quarter, and the Ukraine crisis is weighing heavily on business confidence.
A benchmark index of European shares jumped more than one per cent to its highest level since 2008, and on Wall Street both the Dow and the S&P 500 touched record highs.
The euro sank to a 14-month low against the dollar, hitting $1.2957 and breaking below the key technical resistance point of $1.30. Although the euro later pared losses to trade at $1.2971, it was still off 1.4 per cent.
ECB President Mario Draghi told reporters the bank would buy broad portfolios of simple and transparent asset-backed securities and of euro-denominated covered bonds from October.
The ECB also cut its main refinancing rate to 0.05 per cent from 0.15 per cent previously and drove the overnight deposit rate deeper into negative territory, now charging banks 0.20 per cent to park funds with it.
Spanish, French and Portuguese stocks all gained over a full per centage point , while Germany’s DAX rose one per cent.
The FTSEurofirst 300 index of top European shares hit its highest level since early 2008, at 1,403.63 points, before provisionally closing up 1.1 per cent to 1,401.07.
Wall Street equities were also supported by US economic data that showed continuing improvement in the world’s largest economy. US government bond prices fell.
The Dow Jones industrial average rose 63.77 points, or 0.37 per cent, to 17,142.05, the S&P 500 gained 9.42 points, or 0.47 per cent, to 2,010.14, and the Nasdaq Composite added 27.09 points, or 0.59 per cent, to 4,599.65. The dollar index, which measures the greenback against six major currencies, was up nearly one per cent to a peak for 2014 of 83.6767.
Benchmark 10-year US Treasuries traded down 10/32 of a point in price, lifting the yield to 2.448 per cent. The 30-year Treasury was off 28/32 in price, pushing the yield up to 3.202 per cent
The Federal Reserve is on the verge of halting its own programme of bond-buying, encouraged by a steady stream of encouraging signs on jobs and growth in the US.
But the jury is still very much out on when the Fed can raise interest rates. The ADP jobs report yesterday showed private payroll growth of 204,000 for August, a bit less than forecast by economists, but in line with expectations for today’s US broader jobs data out of the Labour Department. Economists are expecting payroll growth of 225,000 jobs.