You are here

Europe: Stocks rise on expected ECB stimulus move

Tuesday, January 20, 2015 - 01:41
REUEUROPESTOCKS.jpg

[LONDON] Europe's main stock markets closed higher Monday, the start of a pivotal week for the region with the ECB forecast to announce fresh stimulus measures and Greece holding a snap election.

In London the benchmark FTSE 100 index climbed 0.54 per cent to end the day at 6,585.53 points compared with Friday's close.

Frankfurt's DAX 30 grew 0.73 per cent to a record high close of 10.242,35 points, while the CAC 40 in Paris gained 0.35 per cent to 4,394.93 points.

"European stock markets are starting the new trading week on a positive note seeing some early follow-through buying after last Friday's steep gains," said Markus Huber, senior analyst at broker Peregrine & Black.

"Increasing optimism that the ECB will finally announce QE (stimulus) during their monthly meeting later this week is continuing to drive investors into stocks. In addition a weak euro combined with low oil prices is stirring hopes that a sustained recovery for the eurozone isn't far off." Stock indices had rallied Friday on fresh signals that the European Central Bank will launch a bond-buying stimulus programme this week, news that has weighed heavily on the euro.

The chronically low level of inflation across the single currency bloc has fuelled concern the region could slip into deflation - a sustained and widespread drop in prices. Britain, which is not part of the eurozone, also risks falling into deflation later this year.

While falling prices may sound good for consumers, deflation can trigger a vicious spiral in which businesses and households delay purchases, throttling demand and causing companies to lay off workers.

Such concerns have fuelled speculation that the ECB could launch a programme of sovereign bond purchases known as quantitative easing or QE when it holds its first policy meeting of the year on Thursday.

The expectation weighed on borrowing costs, with 10-year Spanish and Italian bond rates striking record low levels on Monday. The Spanish note dropped to 1.470 per cent before rebounding to close at 1.513 per cent, and Italy closed at 1.664 per cent after hitting a low of 1.619 per cent.

The euro recovered following its 11-year low against the dollar on Friday. At 1700 GMT Monday, the European single currency bought US$1.1630 compared with US$1.1566 late in New York on Friday.

At one point ahead of the weekend, the single currency tumbled to US$1.1460 - the first time it had traded under US$1.15 since November 2003.

EYES ON ECB

"The main event this week is the ECB's policy meeting and press conference on Thursday," noted Neil MacKinnon, economist at financial group VTB Capital.

"The markets expect the ECB to announce a QE programme of anything up to 600 billion euros (US$696 billion) consisting of purchases of eurozone government bonds." Stocks rallied on a weaker euro, which boosted shares in companies reliant on exports. The single currency is feeling the force of expected ECB stimulus as it reduces the prospect of higher eurozone interest rates any time soon.

Also on the radar this week is a snap general election in Greece on Sunday.

The looming election has raised concerns that a victory by the leftist Syriza party will force eurozone member Greece to renegotiate its bailout with international lenders.

The euro meanwhile has been hit also by a soaring Swiss franc. The franc has jumped by about 20 per cent against the euro since the Swiss central bank stunned markets Thursday with its bombshell decision to abandon the minimum rate of 1.20 francs against the European common currency.

The Swiss National Bank had since September 2011 been defending the exchange rate in a bid to protect the country's vital export industry, including by buying massive quantities of foreign currencies.

Switzerland's main stocks index closed up 3.21 per cent Monday after plunging 14 per cent last week following the central bank's shock decision to scrap its three-year bid to hold down the value of the franc.

Wall Street was closed on Monday due to a US national holiday.

AFP