The European Central Bank announced its bond-buying plan on Thursday. Bloomberg reports:
European Central Bank President Mario Draghi said policy makers agreed to an unlimited bond- purchase program to regain control of interest rates in the euro area and fight speculation of a currency breakup.
The program “will enable us to address severe distortions in government bond markets which originate from, in particular, unfounded fears on the part of investors of the reversibility of the euro,” Draghi said at a press conference in Frankfurt after the ECB held its benchmark rate at a record low of 0.75 percent. “Under appropriate conditions, we will have a fully effective backstop to avoid destructive scenarios with potentially severe challenges for price stability in the euro area.”
The ECB also released a new GDP forecast for the euro area. It now sees the economy contracting 0.4 percent this year, worse than the previous estimate of 0.1 percent contraction.
Still, investors mostly focused on the bond-buying plan and were happy to push markets up. The STOXX Europe 600 surged 2.3 percent on Thursday while the S&P 500 jumped 2.0 percent to hit a four-year high.
Indeed, Edward Harrison says that the latest announcement amounts to an ECB monetisation of debt.
That’s very euro bank bullish. Not for Spanish and Italian banks, mind you, because their domestic economies are in a world of hurt. But German, French and Dutch banks just got a Draghi put on their sovereign bond assets – and that’s bullish.
Less upbeat on the ECB's move is Doug Kass, who says he plans to sell/short the news.
Not only is Europe slipping more rapidly into a deeper recession but the implementation of serious and effective longer-term policy responses remains unlikely. Band-Aid policy measures of providing liquidity (which aids the transmission of monetary policy) remain the operative palliative, and they will likely continue for some time to come. Easing and the temporary purchase by the ECB of sovereign debt from peripheral countries will not durably counter insolvency but, ultimately, the solvency problem will be addressed by a painful debt restructuring.
Another central bank in action on Thursday was Sweden's Riksbank. It cut its repo rate by a quarter point to 1.25 percent.
In contrast, the Bank of England's monetary policy meeting on Thursday ended uneventfully. The BoE's bond purchase programme was left unchanged, as was its interest rate, which was left at 0.5 percent.
While the ECB was probably the prime mover of markets on Thursday, positive economic data also probably provided a further boost.
In the US, the Institute for Supply Management’s non-manufacturing index climbed to a three-month high of 53.7 in August from 52.6 in July. ADP Employer Services reported that private employment increased by 201,000 in August, the most in five months. Claims for jobless benefits fell 12,000 last week to 365,000, the fewest in a month.
Even Europe had positive data to report. While eurozone second quarter contraction was confirmed at 0.2 percent, German factory orders rose 0.5 percent in July after having fallen 1.6 percent in June.
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