While you were sleeping: ECB cuts rates, starts QE

Friday 5th September 2014

Equities advanced in Europe after the European Central Bank lowered three key interest rates and announced plans to start buying assets next month in an effort to bolster the euro-zone economy.

After opening higher, shares on Wall Street reversed and were lower in late trading amid concerns about falling oil prices.

The ECB’s moves, however, marked a turning point in President Mario Draghi’s fight to bolster growth and stir inflation in the euro zone. The policy decisions are expected to have a longer-term impact on the outlook for the global economy too.

"Following four quarters of moderate expansion, euro-area real GDP remained unchanged in the second quarter of this year compared with the previous quarter,” Draghi said in a statement.

“While it partly reflected one-off factors, this outcome was weaker than expected. With regard to the third quarter, survey data available up to August indicate a loss in cyclical growth momentum, while remaining consistent with a modest expansion.”

The ECB now predicts the region’s annual real GDP will grow by 0.9 percent in 2014, 1.6 percent in 2015 and 1.9 percent in 2016. Both the projections for real GDP growth for 2014 and 2015 have been revised downwards and the projection for 2016 has been revised upwards from the ECB’s previous estimates in June.

“The Governing Council sees the risks surrounding the economic outlook for the euro area on the downside,” Draghi said. “In particular, the loss in economic momentum may dampen private investment, and heightened geopolitical risks could have a further negative impact on business and consumer confidence. Another downside risk relates to insufficient structural reforms in euro-area countries.”

Equities rallied on the move. Europe's Stoxx 600 climbed to finish the day with a 1.1 percent gain. Germany’s DAX climbed 1 percent, France’s CAC 40 jumped 1.7 percent, while Spain’s IBEX 35 Index advanced 2 percent. The UK’s FTSE 100 Index inched 0.06 percent higher, held back by BP, which lost a key US court ruling over its responsibility for the Gulf of Mexico oil spill.

"The last time the ECB president made such a strong statement back in 2012, when he said he would take whatever action necessary to support the economy, it stabilised risk assets across the globe," Anwiti Bahuguna, senior portfolio manager for Columbia Management in Boston, told Reuters. “I think this is a very similar moment.”

Wall Street, after opening higher, was lower in late trading. The Dow Jones Industrial Average slid 0.24 percent, the Standard & Poor’s 500 Index shed 0.22 percent and the Nasdaq Composite Index fell 0.11 percent. Earlier the S&P 500 reached a record high 2,011.17. The selling was linked to energy producers, following a slide in the price of oil.

Here, the latest data showed a cooling in the pace of hiring last month. ADP Research Institute said private-sector payrolls climbed 204,000 in August, following a gain of 212,000 in July. A separate report showed initial jobless claims rose to 302,000 last week.

"The broad evidence is that the labour market continues to improve at a very solid rate," John Ryding, chief economist at RDQ Economics in New York, told Reuters.

Other data showed the Institute for Supply Management’s services index rose to 59.6 last month, from 58.7 in July.

Eyes are now on the Labor Department’s monthly jobs report, scheduled for release on Friday. US companies may have added 230,000 workers last month after 209,000 in the month prior, according to the median estimate in a Bloomberg survey.

BusinessDesk.co.nz

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