22nd Jan 2015 17:04
LONDON (Alliance News) - Stocks across the UK, Europe and the US rose Thursday, after the European Central Bank announced a larger-than-expected sovereign bond buying programme to address the threat of entrenched deflation in the eurozone area and to give its ailing economy a boost.
ECB President Mario Draghi said combined monthly purchases of public and private sector securities, which includes the bank's existing covered bonds and asset-backed securities buying programme, will amount to EUR60 billion a month, more than the EUR50 billion that had been expected after recent press reports.
The news lifted stocks, but weighed on the euro. Oil was little moved, but euro area bond yields were volatile, with periphery yields sinking while German and French yields rose.
Draghi said the programme will begin in March, and the central bank intends to finish it at the end of September 2016. However, it is effectively open-ended, as the bank also said it will continue until there is a "sustained adjustment in the path of inflation which is consistent with" the ECB's aim of achieving inflation rates below, but close to, 2% over the medium term.
Eurozone inflation turned negative in December for the first time in more than five years in December with consumer prices falling 0.2%. Falling oil prices are set to make the picture murkier in the short term, Draghi admitted, adding that the new programme will help push inflation gradually higher towards the end of 2015 and over 2016.
Reflecting concerns among several eurozone member states, led by Germany, that taxpayers in one nation could be liable for losses run up in other parts of the currency bloc, only about 20% of the credit risk of the ECB's asset purchases will be shared by the euro system. The remaining risk is to be taken over by the eurozone's 19 national central banks.
"While the ECB will coordinate purchases, the purchases themselves will be decentralised, only agency asset purchases will be risk shared, and issuer and issue limits will apply. Reluctance to share risk has resulted in a package that many may look upon as demonstrating fundamental weakness in the European project," said Ewan McAlpine, senior fixed income portfolio manager at Royal London Asset Management.
"The reduction in full risk sharing highlights the compromise that the ECB has arrived at to maintain collectively as a principal and the need to water down the risk sharing to accommodate the objections which may have been raised by the likes of Germany, in our view," said Shore Capital analyst Gerard Lane.
The Shore analyst also cast doubts about whether the ECB's measures will create more lending amongst banks, as Draghi maintains.
"We are sceptical regarding the impact that QE has on bank lending, given the experience in the UK, a feature explicitly revealed by the Bank of England’s own research," Lane said.
CMC Markets chief market analyst Michael Hewson agrees that there is no certainty that quantitative easing will work.
"While there is no question that this programme appears to have beaten market expectations there remains no guarantee that it will have the required effect in boosting inflation, and encouraging banks to start lending," said CMC Markets chief market analyst Michael Hewson.
However, Berenberg's chief economist Holger Schmieding said the policy will be effective to some extent.
"Monetary policy works through various channels. Most importantly, it shapes expectations. If a central bank credibly signals that it will not permit the economy to fall into recession and deflation, companies feel more confident to invest. I expect to see some such confidence effect, probably more outside Germany than in Germany where the ECB decision is more controversial than anywhere else," Schmieding said.
The euro slumped against other major currencies, hitting an 11-year low against the dollar at USD1.1411, while the pound reached a near seven year high against the euro at EUR1.3213.
In response to the euro's fall, the Danish central bank cut its deposit rate for the second time this week. The certificate of deposit rate was reduced by 0.15 percentage point to negative 0.35%, Danmarks Nationalbank said in a statement. The lending rate remains at 0.05%.
The FTSE 100 closed up 1.0% at 6,791.00, and the FTSE 250 closed up 0.8% at 16,387.33, meaning both indices have closed higher for five consecutive days. However, the AIM All-Share index closed down 0.4% at 696.77.
In Europe, the CAC 40 in Paris closed up 1.7%, and the DAX 30 in Frankfurt ended up 1.4%. When the European markets closed, the DJIA was up 0.8%, while the S&P 500 and the Nasdaq Composite were both up 0.8%.
On the corporate front, RSA Insurance Group, up 3.5% was one of the strongest performers in the FTSE 100 after Credit Suisse raised the insurer to Outperform from Neutral.
Royal Mail, up 3.3%, was also amongst the best-performing big blue-chips. The mail and parcels delivery company said it is confident it will meet its own full-year expectations, after reporting that group revenue was up just 1% in the nine months to December 28, whilst revenue was flat in both its parcels and letters businesses. The slight overall revenue growth marks a deterioration from the position half way through the mail operator's financial year, when revenue growth had stood at 2%, although parcel revenue improved and analysts said the figures met market hopes.
Oxford Instruments, down 28%, was by far the worst performer in the FTSE 250. The technology tools and systems provider issued a profit warning as its orders were hit by Russian sanctions, it saw weaker trading in its Industrial Analysis business, and the recovery it had forecast for the Japanese market failed to occur. The company now expects to post a pretax profit adjusted for acquisition and related costs of around GBP35 million for the year to end-March, compared to an adjusted pretax profit of GBP47.1 million a year before.
Card Factory was the second-worst performer in the index, falling 6.8%. The cards and gifts retailer is trading lower after its like-for-like sales rose 1.8% in the 11 months to the end of December, compared with a 3.1% increase in like-for-like sales last year. The company said it is trading in line with its expectations for the year on the back of a rise in revenue in the first eleven months.
In the economic calendar Friday, there are Markit Manufacturing purchasing managers' index readings from Germany at 0830 GMT, the eurozone at 0900 GMT and the US at 1445 GMT. There will also be eurozone Markit composite PMI at 0900 GMT, and UK retail sales at 0930 GMT.
In the corporate calendar, merchant banking group Close Brothers Group will release a trading statement and FTSE SmallCap-listed Premier Foods will issue a fourth quarter interim management statement.
By Neil Thakrar; [email protected]; @NeilThakrar1
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