While you were sleeping: ECB gives Draghi green light

Friday 7th September 2012

The European Central Bank came through on President Mario Draghi's pledge to do whatever it takes to preserve the euro and detailed new, unlimited bond-buying plans to help keep a lid on borrowing costs of euro zone members.

"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," Draghi told a news conference in Frankfurt following the ECB's monthly meeting.

"No ex-ante quantitative limits are set on the size of outright monetary transactions," he said.

The new measures, targeting government bonds with "a maturity of between one and three years", will provide the European central bank with unprecedented power that will secure its position and provide it with much greater influence in financial markets.

"Over the years, global investors have learned that it does not pay to fight the Fed," Holger Schmieding, chief economist at Berenberg Bank in London, told Bloomberg News. "Those betting on the demise of the euro may now have to realise that the ECB is as mighty as the Fed."

Stocks rose on both sides of the Atlantic.

Europe's Stoxx 600 Index ended the session with a 2.3 percent advance on the previous close. The euro also gained, rising against the greenback and the Japanese yen.

National benchmark stock indexes climbed in all 18 western-European markets, and all 19 industry groups in the Stoxx 600 rose, according to Bloomberg. Germany's DAX gained 2.9 percent, the UK's FTSE 100 increased 2.1 percent and France's CAC 40 climbed 3.1 percent.

In Europe, the focus now turns to Spain and when it will ask for a bailout, even though the yield on its 10-year bonds has fallen on the ECB's bond plan. Prime Minister Mariano Rajoy continues to resist asking for more financial help, seeking to avoid the imposition of fresh austerity measures.

In late afternoon trading in New York, the Dow Jones Industrial Average climbed 1.70 percent, the Standard & Poor's 500 gained 1.94 percent, while the Nasdaq Composite Index advanced 2.09 percent.

Underpinning the mood were favourable data on the US labour market a day before tomorrow's official jobs report.

Jobless claims fell 12,000 to 365,000 in the week ended September 1, according to Labor Department data. A separate report from ADP Employer Services showed that private companies hired 201,000 more workers in August.

Conversely, US Treasuries took a hit as the new ECB measures lowered the appeal of them as safe-haven investments. The 10-year note dropped, pushing its yield seven basis points higher to 1.67 percent in afternoon trading in New York.

Next week the Treasury is set to auction a total of US$66 billion of bonds week maturing in three, 10 and 30 years.

Investors will eye President Barack Obama who tonight is scheduled to detail his plans for revamping the world's largest economy in a speech at the Democratic Party's national convention.

BusinessDesk.co.nz

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