European stocks rallied yesterday, with one index closing at a seven-year high, after the European Central Bank announced it would begin buying government bonds in a bid to revive the region’s economy and stave off deflation.

Banks and automakers were among the best performers, since they would benefit from cheap borrowing rates and a weaker euro.

Raiffeisen Bank International rose 6.7 per cent and Credit Agricole 3.4 per cent. PSA Peugeot Citroen gained 4.9 per cent and Renault 3.8 per cent.

The FTSEurofirst 300 index of top European shares ended 1.6 per cent higher at 1,453.37 points, its highest close since early 2008.

The benchmark index has surged 6.2 per cent so far this year, outperforming Wall Street, where the S&P 500 is down 0.6 per cent in 2015.

Europe’s outperformance over the United States is expected to continue in 2015. European equities are ripe for a catch-up rally after years of underperformance.

Southern European stocks also featured among the top gainers yesterday, with both Italy’s MIB index and Portugal’s PSI 20 index rising 2.4 per cent. The two indexes are up 7.7 per cent and 9.9 per cent respectively in 2015.

Germany’s DAX rose 1.3 per cent yesterday, after reaching a record high during the session.

The gains came after ECB President Mario Draghi said the central bank would embark on quantitative easing – printing money to buy government bonds. Together with existing schemes, the programme will pump €60 billion a month into the eurozone economy from this March until at least September next year.

“The size of the programme comes at the high end of what the market had been expecting, so it’s quite a positive surprise,” said Jeanne Asseraf-Bitton, head of global cross-asset research at Lyxor Asset Management. “Now, all eyes will be on the eurozone inflation expectations. That’s where we’ll see if the programme is a success or not.”

The euro fell to an 11-year low against the dollar following the announcement, reaching $1.1408 after rising to $1.40 in May. A weak euro should boost European corporate earnings this year, particularly for exporters. Strategists say a 10 per cent fall by the euro translates into a six to eight per cent rise in earnings for eurozone companies.

But despite the market enthusiasm over the ECB plan, some fund managers and analysts doubt it will succeed.

“I still believe that this will have little real impact on the eurozone economy as government bond yields are already at rock-bottom and investment-grade corporate bond yields in Europe are on average one per cent or below,” said Edmund Shing, global equity fund manager at BCS Asset Management.

“Automakers should benefit and certain aerospace companies like Safran and Zodiac are obvious beneficiaries, too. However, the real question is whether lending to eurozone small- and medium-sized companies will take off in the next six months, given that we have QE and given that the ECB’s bank capital adequacy tests are now passed.”

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