10th Mar 2016 17:06
LONDON (Alliance News) - European Central Bank President Mario Draghi delivered fireworks Thursday as the central bank announced a bumper stimulus package, but then rained on his own parade when he dampened prospects for future rate cuts.
Market expectations for ECB stimuli were high, but Draghi and the ECB delivered with a cut to all three of its interest rates and an expansion to its asset purchase programme.
In its policy session in Frankfurt, the 25-member Governing Council lowered its benchmark interest rate, the main refinancing rate which the bank uses to boost liquidity, by five basis points to a record low 0.0%. Economists had expected the rate to be left unchanged.
The already-negative deposit rate was cut by 10 basis points to -0.40%, in-line with economists' expectations, while the ECB made a surprise five basis point cut to its marginal lending facility rate to 0.25%. The new rates will take effect on March 16, the bank said.
Furthermore, the bank expanded the monthly purchases it makes under the asset purchase programme by EUR20 billion to EUR80 billion starting in April, coming slightly ahead of expectations for a EUR10 billion expansion. The ECB also decided to include investment grade euro-denominated bonds issued by non-bank corporations in the euro area in the list of assets that are eligible for regular purchases.
Additionally, the bank outlined a new series of four targeted longer-term refinancing operations (TLTRO II), each with a maturity of four years, starting in June. Borrowing conditions in these operations can be as low as the interest rate on the deposit facility, the bank said.
Overall, after disappointing the market with underwhelming stimulus measures in December, Draghi over-delivered and sent European equities shooting higher and the euro plunging in the immediate aftermath of the decision.
"As with the Bank of Japan, the ECB is trying to use innovative monetary policy tools given that the conventional tool kit is empty. The initial positive market surprise suggests investors still believe in Draghi. The longer term question is whether inflation expectations increase with an improving underlying economy," said Shilen Shah, bond strategist at Investec Wealth & Investment
In the introductory statement to his post-decision press conference Draghi said: "This comprehensive package will exploit the synergies between the different instruments and has been calibrated to further ease financing conditions, stimulate new credit provision and thereby reinforce the momentum of the euro area's economic recovery and accelerate the return of inflation to levels below, but close to, 2%."
However, when responding to questions from the media, Draghi said rates are likely to remain at low levels for an extended period of time but said he does not anticipate the need for further rate cuts.
The euro sprang higher as stocks moved in the opposite direction following Draghi's comment. The euro moved higher against the dollar for the day and at the London stock market close traded the greenback at USD1.1161, higher than the USD1.1017 at the close on Wednesday.
"The post-announcement reaction suggests that, however much Draghi has compensated for December's disappointment, there are still more than a few doubters out there. For whilst the measures revealed are admirably broad, there is no guarantee they will produce results," said Connor Campbell, financial analyst at Spreadex.
The pound also appreciated against the dollar trading at USD1.4293 at the close Thursday, versus 1.4226 on Wednesday.
The FTSE 100 ended the day down 1.8%, down 109.62 points, at 6,036.70. The FTSE 250 ended down 1.2%, or 206.45 points, at 16,385.16, and the AIM All-Share fell 0.2%, down 1.71 points, to 697.64.
European shares tumbled after having risen around 3% following the ECB decision. The French CAC 40 closed down 1.7% and the German DAX 30 ended down 2.3%.
On Wall Street at the London close, the Dow 30 and the Nasdaq Composite were both down 0.7% , and the S&P 500 was down 0.6%.
Stocks in the UK were also hit by a renewed slide in oil prices. The commodity fell after Reuters reported, citing sources familiar with the matter, that a meeting between oil producers to discuss a global pact on freezing production is unlikely to take place in Russia on March 20.
OPEC officials including Nigeria's oil minister have said a meeting would take place in Moscow on that date, potentially as the next step in widening an agreement to freeze output at January levels struck by OPEC members Saudi Arabia, Venezuela and Qatar plus non-member Russia last month, Reuters said.
But the biggest roadblock to a wider deal, OPEC delegates say, is Iran. Tehran feels it should be exempt from the agreement as it wants to recover market share it lost under Western sanctions.
Following the report Brent crude fell and was quoted at USD39.78 a barrel at the London stock market close, versus USD40.95 at the same time on Wednesday.
Gold moved higher as the dollar declined. The metal traded at USD1,265.21 an ounce at the London close versus USD1,254.01 an ounce on Wednesday.
On the London Stock Exchange, Aviva closed as one of the best FTSE 100 performers, up 1.4%. The insurer reported higher operating profit in 2015 and boasted a capital position at the top end of its working range under new Solvency II insurance rules across the EU.
Operating profit increased 20% to GBP2.67 billion in 2015, beating company-supplied analyst expectations of GBP2.49 billion, driven by the group's life insurance and fund management operations. Aviva increased its total dividend for 2015 by 15% to 20.8 pence from 18.1p, slightly below analyst expectations of a 21.2p payment, and said it expects dividend increases to "moderate" in future.
Fahad Changazi, an analyst at Nomura, said that Aviva's balance sheet was stronger than expected, reinforcing dividend expectations. Aviva will consider making capital returns to shareholders, Chief Financial Officer Thomas Stoddard said, depending on economic conditions, financial markets, and having excess capital and liquidity. "We are not there yet," Stoddard said.
Ashtead Group was also one of the worst performers in the index, down 7.9% to 785.00 pence, after Deutsche Bank started coverage on the equipment rental company at Sell with a price target of 660p. The bank was bearish on the stock due to its cyclical nature, which is currently on the downward curve, and US macroeconomic fears, which are likely to hit the domestic non-residential construction market.
In the FTSE 250, real estate advisor Savills closed as the best mid-cap performer up 5.2% after it recorded a surge in pretax profit, boosted by strong revenue growth from its US business.
The company recorded GBP98.6 million pretax profit for the year ended December 31, 16% higher than GBP84.7 million in 2014, after revenue came in at GBP1.28 billion, up 19% from GBP1.08 billion in 2014.
It said the strongest revenue growth was in its US business Savills Studley, where it completed three bolt-on acquisitions in the year. As such, US revenue was up 71% to GBP192.5 million from GBP112.3 million in 2015.
Savills recommended a final dividend of 8.0 pence per share, meaning total dividend for the year will be 26.0 pence per share, up from 23.0p for 2014.
Wm Morrison Supermarkets trimmed its dividend payout and warned its turnaround will take time, but said that its sales performance improved towards the end of its financial year and that it was confident on its outlook.
The grocer experienced a difficult 2015, with sales coming under pressure from the challenge of German discounters Aldi and Lidl in the UK market, which drove significant price deflation and caused the big four supermarkets, of which Morrisons is the smallest, to invest heavily in price cuts to keep customers.
For all of 2015, total revenue slipped to GBP16.1 billion from GBP16.8 billion, while like-for-like sales for the year, excluding fuel and VAT, dropped 2.0%.
Morrisons declared a final dividend of 3.50 pence per share, taking its total dividend to 5.00p, down from the 13.65p it paid out a year earlier. The company's shares ended down 4.5%.
The economic calendar on Friday kicks off with German inflation numbers at 0700 GMT. The Bank of England's survey of consumer inflation expectations is released at 0930 GMT, at the same time as UK trade balances.
In the afternoon is the US import and export price index at 1230 GMT, a preliminary reading of the Reuters/Michigan Consumer Sentiment Index at 1400 GMT and Baker Hughes' US oil rig counts at 1700 GMT.
In the UK corporate calendar, the only scheduled release from a FTSE 100 company are full-year results from Anglo-South African financial services company Old Mutual.
There are also full-year results from Circassia Pharmaceuticals, lock paving manufacturer Marshalls, retirement products providers Just Retirement Group and Partnership Assurance, which are due to merge, and IT services provider Computacenter. Pub operator JD Wetherspoon and staffing group SThree.
By Neil Thakrar; [email protected]; @NeilThakrar1
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