Traders see upside in ECB’s stimulus package

London Stock ExchangeFri close: London bounced back today following a steep sell-off yesterday on the back of the European Central Bank’s decision to cut all three of its interest rates and expand its asset-buying.

The FTSE 100 closed up 101 points at 6,139 regaining its 109 point loss last night after comments by ECB president Mario Draghi.

The bank cut three rates including its marginal lending rate – used by banks to borrow from the ECB overnight – fell from 0.3% to 0.25%.

It had been expected to increase monthly bond purchases from €60 billion to €70bn, but instead hiked this to €80bn.

The euro initially fell 1% against the dollar and then rose as analysts absorbed Mr Draghi’s comments that rates would not go any lower.

He told a news conference: “Rates will stay low, very low, for a long period of time and well past the horizon of our purchases.”

He added: “From today’s perspective and taking into account the support of our measures to growth and inflation, we don’t anticipate that it will be necessary to reduce rates further.”

London stocks also took their cue from positive turns on Wall Street and in Asia overnight.

AJ Bell investment director Russ Mould said: “JD Wetherspoon’s first half pre-tax profits came in ahead of analysts’ forecasts but the results and its calls for a more level tax playing field for pubs will be overshadowed by chairman Tim Martin’s backing for a withdrawal from the EU.

“Martin was a spokesman for the ‘No’ campaign 15 years ago which argued against the UK’s entry into the euro. He’s now pinned his colours to the Brexit mast and argues that leaving the EU and returning power to the national parliament will increase the level of democracy and accountability. Wetherspoon’s revenues rose but its pre-tax profits fell as operating margins were hit due to increases in pay.

Old Mutual’s shares were up in early trading after it unveiled plans to split itself into four separate companies following a strategic review. The Anglo-South African financial services group admitted the current structure was too costly and inefficient. The new strategy aims to unlock value currently trapped within the group structure.

“Just Retirement was another early riser after the group’s total new business sales rose by 50% in the first half driven by increases in defined benefit de-risking and guaranteed income for life sales. Its merger with Partnership Assurance is due to complete in early April and is expected to bring cost savings of at least £40m, with the full run-rate being achieved in 2018.”

Commenting on Mr Draghi’s statement, Matt Richardson, founder of the foreign exchange broker betterFX, said: “The markets had expected a repeat dose of monetary policy medicine. What they got was more like shock therapy – with Mario Draghi simultaneously attaching electrodes to the patient’s heart, dousing it with cold water and administering smelling salts.

“The prospect of the ECB’s money presses kicking up a gear has sent European stock markets soaring, but the Euro has been yo-yoing as markets digest the prospect of an extra €20bn a month flooding into the Eurozone economy.

“Mario Draghi once famously pledged to do ‘whatever it takes’ to save the Euro. Now he has done it, we wait to see whether it will be enough.

“In more normal times, such a massive injection into the Eurozone economy would spark growth and drive inflation back up towards the ECB’s target of 2%.

“But with Eurozone economy close to stagnation and teetering on the edge of deflation, these times are far from normal.

“The Euro’s initial plunge was reversed by Mr Draghi’s announcement that he didn’t anticipate any further rate cuts. The ECB has fired its big bazooka, but there’s a sense that it did so in the Last Chance Saloon.”

Mihir Kapadia, CEO of Sun Global Investments, said: “Today’s bold announcements by the ECB was a far more extensive programme than what was expected, and just shows the immense pressure on Draghi to demonstrate the ECB has got to grips with what is an increasingly worrying economic picture.”

“The stimulus should theoretically boost economic activity, however investors are understandably reluctant about making this presumption given low global growth, global deflationary pressures and poor demand for credit in Europe.”


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