Shares, euro slump as Draghi disappoints

• Markets drop back sharply as ECB disappoints
• Investors cheer Smith & Nephew dividend boost
• Bank of England holds interest rates at 0.5%, no increase to QE scheme
• RBS shares rise then fall after full nationalisation report
• UK construction activity shows minor improvements

16.14: Some more responses to the comments from Mario Draghi that have erased today’s earlier market gains.

Bill Gross, who manages $1.7 trillion for Pimco, said on Bloomberg TV: ‘The ECB and other policy makers have been all about promises and inviting others to take the first step and it appears that we are seeing much of the same thing this morning. Draghi is saying Spain and Italy should take the first step, make a request, and then something might happen.

 

Some investors are coming round to the fact that Draghi effectively foretold a European quantitative easing scheme, as explained by Capital Economics: ‘Admittedly, the President stated that the ECB might start to purchase bonds in future and that those purchases might not be sterilised by the Bank taking deposits from commercial banks as they have in the past – this means that they would amount to full-blown quantitative easing.

‘Crucially, though, the Bank stressed that none of this will happen until the troubled governments have applied to the EFSF to purchase their bonds.’

Azad Zangana of Schroders said: ‘Though at first glance Draghi appears to be announcing the start of quantitative easing, closer inspection of his opening statement and follow-up comments show that the ECB is merely considering the idea of creating a framework that could allow such action.’

US follows European markets lower

14.41: US markets have opened lower, following losses in Europe, as the trio of central banks that have announced policy decisions in the past 24 hours – the US Federal Reserve, Bank of England and most importantly today, European Central Bank – failed to provide any comfort.

The Dow is down 0.6%. In Europe Britain's FTSE 100 is 0.6% lower at 5,675 and Spain's Ibex is 4.5% lower. The euro remains down, at $1.22, having shed earlier gains after Mario Draghi's comments (see posts below).

Spanish benchmark 10-year bond yields spiked, climbing close to the 7% level, as shown in the chart.

14.20: Will investors, who have sent markets reeling in the past hour or so, belatedly realise that Draghi's comments today herald the implementation of a new programme that could significantly boost markets?

A few commentators are sticking their heads over the parapet to suggest this:

Referring to the ECB's LTRO bank-lending scheme, Owen Callan, a fixed income dealer at Danske Markets commented on Twitter: 'It took ppl 2-3 wks to realise how important LTRO was in Dec. I think same happening 2day re seniority & new non-std measures (not LTRO).'

John Hardy of Saxo doesn’t seem to agree: ‘Mr. Draghi was basically trying to buy time until as we wait for the impossibly slow EU politicians as the ugly process of the ESM ratification – or not – approaches in September. And as we can see from the market reaction, “time” has become very expensive, indeed.’

14.10:  Draghi is backtracking on his comments last week, when he said the ECB was ready to do 'whatever it takes' to save the euro – remarks which sustained a market rally until Draghi started speaking again today.

'There is not one word of these remarks that had not been discussed in the previous governing councils. There has not been one word that surprised my colleagues,' he said.

Gavin Nolan of Markit commented on Twitter: 'Draghi rowing back on London speech - focus on governments'.

13.59: The euro is sliding lower and lower as Draghi talks – now at $1.222. Equity markets too: Spain's Ibex is down nearly 5%.

In fact a journalist has just told him that the markets have responded badly to his comments so far at this crucial ECB press conference.

Spanish borrowing costs have also spiked to 6.67% after the ECB head (who is keeping up his sense of humour) said that the eurozone's permanent bailout fund, the ESM, is 'not a suitable counterparty to receive ECB financing'. That dampens hopes that the fund could be awarded a banking licence to be able to tap ECB money.

13.45: Markets have sunk back as the ECB's Mario Draghi disappoints them. He says the central bank 'may undertake outright open market operations of a size adequate to reach its objective' and is considering non-standard measures. But he does not commit to a bond buying programme immediately, as had been hoped. Says 'concerns of private investors about seniority will be addressed'.

'Over the coming weeks, we will design the appropriate modalities for such policy measures' says Draghi, speaking at the much-anticipated Frankfurt press conference.

The FTSE 100, which was higher at 5,740 before the press conference, is now down 0.7% at 5666.The euro has dropped back to $1.2234, from a pre-conference $1.320

Draghi adds that the 'euro is irreversible'.

'Policymakers need to push ahead with fiscal consolidation… with great determination'

The ECB's governing council has discussed policy options regarding peripheral countries' high bond prices, he says, noting that 'risk premia that are related to fears of the reversibility of the euro are unacceptable, and they need to be addressed in a fundamental manner.'

'Economic growth in the euro area remains weak. Heightened uncertainty is weighing on confidence'.

12.48: The European Central Bank has left its interest rates unchanged, as widely expected, with the benchmark refinancing rate at 0.75%. There was a brief flurry of activity on stock screens, but the real action is in Mario Draghi's press conference at 13:30 GMT, where he could announce new measures to help fix the eurozone crisis.

Bank of England pauses: lost opportunity?

12.04: The Bank of England has joined the US Fed in refraining from taking action to boost the economy this month. The UK's central bank has held interest rates at 0.5%, while keeping its quantitative easing programme at £375 billion after last month's extension. 

The reaction is already flying in (the decision was as expected so economists pre-wrote their responses) - here is a snapshot:

Philip Rush, Nomura:

'The deterioration in the outlook over recent months has clearly rattled the MPC, but it has already responded aggressively by launching QE3 and measures that increasingly make it the lender of first resort. The downside surprise in the notoriously unreliable first estimate of GDP was not enough to interrupt the momentum behind the MPC's pre-existing response.'

Alan Clarke, Scotiabank:

'The consensus expectation was that QE will be expanded in November. Ours was – why wait? Why wait when next week’s Inflation Report projections are likely to provide a compelling case for further policy ease?'

Chris Williamson, Markit:

'Hopes are clearly pinned on the economy bouncing back from the second-quarter weakness caused by wet weather and the extra bank holiday in June, but the disappointing PMI data and growing doubts that the Olympics will bring a growth spurt to London suggest that such hopes may prove over-optimistic.'

David Page, Lloyds:

'With a high degree of uncertainty surrounding the global outlook, current domestic conditions, the degree of spare capacity and the impact of previously announced policy measures, the MPC will use the period between now and the expiry of the current QE programme to assess developments in the economy and gauge the extent of recent economic distortions'.

RBS nationalisation 'would be nuts'

11.24: A politically-charged reaction from analysts at Oriel Securities to the news that the government may fully nationalise RBS:

‘Maybe the government should just get on and do what is was elected to; fix the economy and stop telling world-class operators such as Stephen Hester, how to do their job.’

Shares in the poorly-performing bank spiked today to the top of the FTSE 100, before shooting down to become the biggest loser on the index in mid-morning trading, 1.6% lower at 211p. Investors were digesting an FT report that ministers are discussing taking full ownership of the bank to get it lending.

‘Driving a bank by loan and earnings targets is arguably what sunk HBOS and RBS in the first place. So endless government and Bank of England sponsored lending programmes are simply not the answer,’ say Oriel analysts Mike Trippitt and Vivek Raja in a note.

Waiting game for troubled Spain

10.04: Spain’s financial press has been describing today as a sort of judgement day, with an auction of Spanish bonds, which is a key test of market sentiment; the European Central Bank’s decision on monetary policy, which could see it start to buy up Spanish debt; and a meeting between Spanish leader Mariano Rajoy with his counterpart in Italy, Mario Monti.

The country appears to have passed its first test, with the bond auction deemed a small success by traders as more bonds were sold than expected, but at the cost of a higher yield.

Spain’s 10-year bonds are this morning yielding 6.6%, while the Ibex stock index is 0.1% lower on generally little changed European markets. The euro is up nearly 0.5% to $1.228

Meanwhile, data for the broader eurozone showed industrial producer prices (factory gate prices) dropped 0.5% in June, slightly more than expected.

A cat bounces as the UK construction industry improves

09.58: The UK’s construction industry was a serious drag on economic growth in the second quarter of the year, contributing to that 0.7% contraction in GDP. In July though, a few more builders donned their hard hats, helping the Markit construction PMI back into positive territory.

A reading of 50.9 in July, up from June’s two-and-a-half-year low of 48.2, puts the index into expansion territory (below 50 signifies contraction), though well below its long-term average. Tim Moore of Markit described it as a ‘meagre post-Jubilee expansion of activity levels’, while economist Howard Archer described it as the 'bounce of a dead cat'.

 

Investors cheer Smith & Nephew dividend boost

08.51: Shares in medical technology business Smith & Nephew (SN.L) have climbed to the top of the FTSE 100 as investors give an emphatic cheer to a 50% interim dividend hike and promise of a new ‘progressive dividend policy’.

The the artificial hip and knee maker’s second quarter results were generally slightly better than expected. Second quarter revenues were up slightly at $1.029 billion, ending what chief executive Olivier Bohuon was a ‘good’ first half even amid the ‘continuing challenging economic environment across Europe’.

Ingeborg Øie of broker Jeffries, which has a buy rating for S&N, said of the company’s new dividend policy: ‘This will not constrain the ability of the company to grow, but could put it among the more high-yielding medtech companies in Europe.’

Mike Mitchell of Seymour Pierce said: ‘Overall, the second quarter performance appears to offer few surprises in the context of the wider market, and management makes no changes to full-year guidance.  We stay with BUY.’

Shares, which have made gains during the market turmoil as fund managers including Neil Woodford and Derek Stuart buy in, are up 2.5% at 676p. Smith & Nephew is a Citywire Top Stock.

RBS shares gain amid nationalisation reports

08.22: Senior cabinet officials are in talks to fully nationalise Royal Bank of Scotland (RBS.L), according to the Financial Times.

In a report today the newspaper says the government is considering spending £5 billion on the outstanding 12% stake of RBS that is not under its control amid growing frustration at the lack of business lending by British banks. Calls for full nationalisation have grown since the UK's dire second-quarter economic growth figures and amid the ongoing problems RBS is having clearing up its balance sheet.

The paper also reported that people close to the talks dismissed the prospect of full nationalisation as unlikely. They also questioned how the government would force the bank to lend more to small businesses without saddling the taxpayer with excessive risks.

RBS is expected on Friday to announce pre-tax losses of about £1.5 billion in the first six months of the year, after a swing in the value of its own debt and a provision for paying back customers hit by its recent IT systems collapse, the FT said.

Shares in the bank are up 1.49% today to 218p, the top riser on the FTSE 100.

Investors await action from the ECB