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September 04, 2014 at 10:38 AM
European stocks rose with bonds while the euro weakened to its lowest level in more than a year against the dollar as the European Central Bank unexpectedly cut interest rates and announced a bond-buying program.
The Stoxx Europe 600 Index climbed 0.8% at 9:31 a.m. in New York and the Standard & Poor’s 500 Index advanced 0.1%. The euro weakened against all of its major counterparts. The yield on Germany’s 2-year debt dropped 5 basis points, while 10-year rates in Italy and Spain lost as much as 7 basis points. Benchmark Treasury yields rose 2 basis points to 2.42%. Nickel increased 2.2%, while crude oil fell 1% after rallying 2.9% yesterday.
The ECB will start buying securitized debt and covered bonds, potentially easing the flow of bank funding for the region’s faltering economy. The central bank reduced all three of its main interest rates by 10 basis points. Ukrainian President Petro Poroshenko said he’s ready to declare a cease- fire if peace talks with pro-Russian rebels take place as scheduled tomorrow.
“The ECB put a twist on what everyone was thinking, cutting the main rates and deposits, the type of policy easing that’s positive for the market,” Stephen Carl, principal and head equity trader at New York-based Williams Capital Group LP, said in a phone interview. “It should pump in liquidity and give people a reason to put money to work.”
Asset Purchases
The eurosystem will “purchase a broad portfolio of simple and transparent securities” and euro denominated covered bonds, ECB President Mario Draghi said in a press conference in Frankfurt. In committing cash to the market for asset-backed securities, Draghi is making good on his pledge to help rekindle an asset class that can funnel loans to the real economy and ease funding conditions for the region’s banks.
The ECB reduced all three of its main interest rates by 10 basis points, dropping the benchmark rate to 0.05% and the deposit rate to minus 0.2%. A reduction in the benchmark rate was predicted by just 6 of 57 economists in a Bloomberg News survey. The Bank of England held its benchmark interest rate at a record low.
Euro-area inflation languished at 0.3% last month, far below the ECB’s 2% target. Draghi said details of the program will be announced after the October rate-setting meeting.
The euro weakened 0.9% to $1.3026, its lowest level versus the dollar since July 2013.
“The rate cuts have clearly taken the market by surprise judging by the immediate euro reaction,” said Peter Kinsella, a senior currency strategist at Commerzbank AG in London. “It’s clear the ECB wants a weaker euro and they are prepared to do what is necessary to get it.”
Bond Yields
The yield on Italian sovereign debt slid 7 basis points to 2.38%. The rates on French and Spanish 10-year bonds declined 4 basis points to 1.30% and 9 basis points to 2.18%, respectively.
Forty-five percent of all government bonds yield less than 1%, Bank of America Corp. said, as central bankers in Japan, Europe and the U.K. decide on how to support their economies. Speculation that the ECB would start buying debt in the year ahead had pushed the yield spread between U.S. 10-year Treasuries and German bunds toward a 15-year high and German 10- year yields to a record low of 0.866% last week.
Stocks Rebound
European equities reversed an earlier decline as insurance companies rose. Standard Life Plc jumped 6.2% after agreeing to sell its Canadian business to Manulife Financial Corp. for C$4 billion ($3.7 billion). Iliad SA advanced 5.3% after Nomura Holdings Inc. said that the French telecommunications operator’s bid for T-Mobile US Inc. presents Deutsche Telekom AG with its best opportunity to exit the U.S. before an auction of spectrum.
