While you were sleeping: Central banks lift mood, stocks

Tuesday 16th February 2016

European equities, notably bank stocks, climbed as European Central Bank President Mario Draghi said the central bank would “not hesitate to act” if needed because of “the recent financial turmoil.”

“In the light of the recent financial turmoil, we will analyse the state of transmission of our monetary impulses by the financial system and in particular by banks,” Draghi told European lawmakers in Brussels.

Draghi also referred to the impact of weakening oil and commodity prices on euro-zone wages and prices. “If either of these two factors entail downward risks to price stability, we will not hesitate to act.”

ECB policy makers next gather on March 10.

“Draghi moved beyond just the economic risks to the ECB’s forecasts—and included financial volatility and weakness of banks as a trigger for policy expansion,” Citi strategist Richard Cochinos told Reuters.

Europe’s Stoxx 600 Index finished the session with a 3 percent gain from the previous close. The UK’s FTSE 100 Index climbed 2 percent, while Germany’s DAX Index rallied 2.7 percent, and France’s CAC 40 Index advanced 3 percent.

Indeed, strategists are optimistic about the outlook for European stocks, with a Bloomberg survey predicting a 23 percent increase from Friday’s Stoxx 600 close through the end of the year.

Draghi noted that the situation in the euro-zone banking sector now was very different from what it was in 2012, adding that banks were more resilient while their capital had also been substantially improved.

“The sharp fall in bank equity prices reflected the sector’s higher sensitivity to a weaker-than-expected economic outlook; it also reflected fears that some parts of the banking sector were exposed to the higher risks in commodity-producing sectors,” according to Draghi. “The bulk of euro area listed banks, although they have relatively limited exposure to emerging markets and commodity producing countries, are currently trading well below their book values.”

The euro weakened against the US dollar following Draghi’s comments.

US financial markets were closed for the Presidents’ Day holiday.

Also helping the mood was the People's Bank of China, which bolstered its currency and said it won't allow speculators to dominate market sentiment.

“We had a very strong statement from the Chinese authorities signalling they are committed to a stable currency and that's helped sentiment ... safe-haven flows have unwound somewhat,” RIA Capital Markets strategist Nick Stamenkovic, told Reuters.

Oil prices rose, building onto Friday’s gains, amid hope that OPEC will reduce output, and the global glut.

“Some traders still think about the chances of an OPEC plus Russia [production] cut and close their short positions,” Frank Klumpp, oil analyst at Stuttgart-based Landesbank Baden-Wuerttemberg, told Reuters.

BusinessDesk.co.nz

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