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FTSE swings into red as Draghi draws line under cuts
FTSE gives up gains and euro swings higher despite QE boost as ECB president says today's interest rate cut will be the last.
Update: The FTSE 100 has swung into the red as European Central Bank president Mario Draghi sparked disarray in markets by boosting the bank's stimulus efforts but then telling reporters today's interest rate cut was likely to be the last.
The UK blue-chip index had jumped towards the 6,200 mark as the ECB cut deposit rates from -0.3% to -0.4%, meaning banks will have to pay more to park their cash, and trimmed its main rate to zero, from 0.05%. A hike to the amount of bonds it would buy each month under its 'quantitative easing' (QE) programme, from €60 billion to €80 billion, added to the cheer.
But those gains were reversed after Draghi said in the press conference following the announcement that he did not anticipate cutting interest rates further. The FTSE 100 fell 31 points, or 0.5%, to 6,115. The euro, which had been falling against the dollar, swung into gains and breached the $1.11 mark.
Eurozone markets meanwhile retreated from their earlier highs, having rallied as much as 3% when the rate cuts and QE boost were announced. The DAX 30 was trading just 0.1% higher and the French CAC 40 up 0.2%.
'The initial reaction of markets was very clear, the euro fell sharply and equities rallied,' said Ian Kernohan, economist at Royal London Asset Management. 'Draghi's comment at the press conference that he thought further rate cuts were now unlikely, reversed this initial reaction. Looking through these very short term reactions, however, the proof of the pudding will be a rise in eurozone inflation expectations and a further pick-up in lending growth.'
Draghi said the measures provided 'substantial monetary stimulus to counteract heightened risks to the ECB's price stability objective'.
'While very low or even negative inflation rates are unavoidable over the next few months, as a result of movements in oil prices, it is crucial to avoid second-round effects,' he added.
Laith Khalaf, senior analyst at Hargreaves Lansdown, said the ECB was 'plumbing the depths of monetary policy' in its fight against deflation.
'Mario Draghi will be pleased with the immediate fall in the euro, as a weaker currency is a nice way to impart a little inflation and make exports more competitive at the same time,' he said.
Toby Nagle, head of multi-asset at fund group Columbia Threadneedle, said the extension of quantitative easing to include corporate bonds from companies other than banks could have a big impact.
'This decision gives the ECB the potential to become the most significant participant in the €900 billion European non-financial corporate bond market,' he said. 'While the ECB's actions are unlikely to transform the economic outlook, they are in keeping with the central bank's ambition to cheapen funding costs for companies that seek to invest, and reduce the incentives to save rather than spend.'
Draghi renewed his call on eurozone governments to address issues of high structural unemployment and low output, and Ian Tabberer, global equity fund manager at fund group Henderson, agreed that monetary policy on its own was unlikely to lift the eurozone economy.
'It is anaemic demand for credit rather than the cost of supply that appears to be the fundamental issue and is creating the low inflation environment in Europe,' he said.
Neil Williams, chief economist at fund group Hermes pointed to the ECB's own figures showing credit supply at a five-year high but not being met by demand. 'A big problem with quantitative easing is it provides cash to lend, but cannot force consumers and firms to borrow,' he said.
Alex Dryden, global market strategist at JPMorgan Asset Management, said the ECB's moves took monetary policy 'close to its realistic limit'.
'Draghi cannot drive the region forward alone, however. Fiscal policy will, at some point soon, have to step in to assist regional growth,' he said.
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by Gavin Lumsden on Oct 28, 2016 at 16:26