Equities rally, bond yields drop and euro dives post ECB meeting
European financial markets moved in a predictable manner on Thursday as investors digested the result of the European Central Bank’s meeting in which it revealed details about its upcoming bond-buying programme.
ECB chief Mario Draghi gave a date to the start of the EUR60bn per month bond-buying scheme of 9 March.
He said the monthly purchases will be carried out until at least the end of September 2016, but kept the door open to the possibility of carrying them out for longer as the programme's success depends on how quickly the central bank can create inflation.
Importantly, Draghi said the ECB will be buying bonds bearing negative yields with a minimum set at the current deposit rate of -0.20% and not below.
As expected, government bonds rallied and yields dropped sharply. Late in Europe, Germany’s 10-year Bunds rose to 101.510 in price, with the yield, which moves inversely, dropping four basis points to 0.345%. The UK’s 10-year Gilts rose to 128.650 while the yield dropped to 1.85%.
In the Eurozone periphery, the yield on Italy’s 10-year bonds fell six basis points to 1.32% and that on their Spanish equivalents to 1.29%.
Greece’s bonds rallied sharply after Draghi said the ECB was ready to re-instate the waiver to allow eligibility of securities guaranteed by the Greek government and submitted by the country's lenders as collateral, as soon as conditions would be fulfilled.
These conditions however are based on Greece sticking to its austerity measures rather than rejecting them, as the new Greek government have done so since taking control of the country.
In that sense, the ECB have offered the Greek government fresh incentive to stick to austerity measures, as by doing so, they will result in the central bank snapping up Greek bonds once again.
Financial markets think Greece will take the bait and comply with austerity measures, averting an exit from the Eurozone.
For bond investors, that’s an opportunity to pile into Greek bonds in expectation that the ECB will buy them at a higher rate than they are currently priced.
After the ECB’s meeting, Greece’s 10-year bonds spiked to trade at 63.590 with the yield dropping to 9.18%.
In FX markets, the euro slumped against the US dollar following the ECB meeting, down around 0.6% to change hands at 1.1012 to sit below the 11-year lows it breached in Wednesday’s session. The US dollar meanwhile rose against the Japanese yen by 0.5% to change hands at 120.19 while the British pound fell 0.2% against the US dollar to trade at 1.5225.
Currencies were mostly reacting to the latest upgrade to the ECB’s staff macroeconomic projections with the ECB now expecting GDP to grow by 1.5% in 2015, up from 1% in the December and 1.9% in 2016, up from 1.5%.
The sharp drop in oil prices led the ECB to cut its 2015 inflation forecast to zero percent from 0.7% in December and raised the 2016 forecast to 1.5% from December's 1.3%. Crucially, the ECB sees inflation rising to 1.8% in 2017, just below the central bank’s target of just under 2%.
In the European equity markets, major benchmarks rallied to end the session on a solid footing as the QE details offered stock investors fresh impetus to pile into risk assets amid increased liquidity in the financial system.
By the European close, the UK’s FTSE 100 rose by 0.6% to 6961 while the German DAX added 1% to 11,504 and the French CAC-40 rose by 0.95% to 4964. In the periphery, the FTSE MIB index in Italy gained 1.2% to 22,400 while the IBEX-35 in Spain rose by 0.6% to 11.124.
Meanwhile in the commodities market, spot gold rose 0.2% to $1,201.90 an ounce while Nymex crude futures fell 0.9% to $51.18 per barrel.